Macro Final Exam Review
goods and services that are produced domestically and sold abroad
exports
holding other things constant, an appreciation of a nation's currency causes
exports to fall and imports to rise
the marginal propensity to consume (MPC) is defined as the fraction of
extra income that a household consumes rather than saves
these change the relationship between price and quantity demanded and are not on the x-axis or y-axis therefore when they change we have to draw a new line
factors that shift the demand/supply curve
which of the following explains why production rises in most years?
increase in the labor force, increases in the capital stock, and advances in technological knowledge
when households find themselves holding too much money, they respond by
purchasing interest-earning financial assets and interest rates fall
A theory of exchange rates whereby a unit of any given currency should be able to buy the same quantity of goods in all countries is known as
purchasing power parity
The amount of a good or service that a consumer is willing and able to purchase at a given price is known as _____.
quantity demanded
other things the same, a fall in an economy's overall level of prices tends to
raise the quantity demanded of goods and services, but lower the quantity supplied
contractionary policy would be _______ the discount rate
raising
contractionary policy would be ________ the required reserve ratio
raising
The economy will move to a point on the short-run Philips curve where unemployment is higher if
the inflation rate decreases
Suppose that you were to purchase a new house for your family. Which of the following component of GDP would this transaction affect?
Investment (I)
the sum of currency, travelers checks and checkable deposits (those used to make payments)
M1
the sum of M1, money market deposits at banks, money market mutual funds, and other "near monies"; has been increasingly relative to M1 in recent years because people want
M2
the sum of M2 and large denomination ($100,000 or more) C.O.D.'s or other assets
M3
What are the different factors that shift the demand curve?
change in income/wealth, change in price of complements, change in price of substitutes, change in expectations of future prices, change in tastes or preferences, change in the number of buyers, change in weather, demographic trends, government taxes/subsidies
if the stock market booms, then
aggregate demand increases, which the Fed could offset by selling bonds
which of the following would cause prices and real GDP to rise in the short-run?
aggregate demand shifts right
if the dollar depreciates because of speculation or government policy, U.S.
aggregate demand shifts right. U.S. aggregate demand shifts left if other countries experience a decrease in real GDP
a curve that shows the quantity of goods and services that households, firms, the government, and customers abroad want to buy at each price level
aggregate-demand curve
a curve that shows the quantity of goods and services that firms choose to produce and sell at each price level
aggregate-supply curve
The term ceteris paribus means
all other things constant
the term ceteris paribus means
all things constant
if the purchasing power parity holds then the value of a U.S. dollar is _______ at home and abroad, then the real exchange rate - the relative price of domestic and foreign goods - _______ change
always the same; cannot
Which of the following results in higher inflation and higher unemployment in the short-run?
an adverse supply shock such as an increase in the price of oil
if the quantity of money in an economy increases then it is most likely to be reflected in by
an increase in P
An increase in consumer income will result in __________ for a normal good
an increase in demand
Consider the market for loanable funds in an open economy. Suppose that net capital outflow had been equal to zero but then becomes positive. This would be reflected by ______ in the market for lovable funds.
an increase in demand
which of the following shifts the long-run aggregate supply right?
an increase in either technology or human capital stock
Which of the following shifts long-run aggregate supply right?
an increase in either technology or the human capital stock
reducing the required reserve ratio will cause...
an increase in excess reserves
Which of the following actions by the fed would reduce the money supply?
an increase in the interest rate paid on reserves
In the long-run, which of the following would shift the long-run Philips curve to the right?
an increase in the minimum wage
which of the following policy actions shifts the aggregate-demand curve?
an increase in the money supply, an increase in taxes, and an increase in government spending
which of the following is an example of contractionary monetary policy?
an increase in the required reserve ratio
an increase in the value of a currency as measured by the amount of foreign currency it can buy; currency is strengthening
appreciation
taking advantage of price differences for the same item in different markets
arbitrage
If an economy always has inflation of 10 percent per year, which of the following costs of inflation will it NOT suffer
arbitrary redistribution between debtors and creditors
In the nineteenth century, some countries were on a gold standard so that on average the money supply growth rate was close to zero and expected inflation was more or less constant. For these countries during this time period, we find that increases in actual inflation were generally associated with falling unemployment. These findings
are consistent with Friedman and Phelps's theories, because they argued that when inflation was higher than expected, unemployment would fall
the overall price level for goods and services adjusts to bring money supply and money demanded into _______.
balance
a situation in which exports equal imports
balanced trade
the resources a bank's owners have put into the institution
bank capital
consider the market for money. The supply of money is upward sloping because at higher interest rates
banks are willing and able to loan out more excess reserves
wages tend to be sticky
because of contracts, social norms, and notions of fairness
since the end of WWII, the U.S. has almost always had rising prices and an upward trend in real GDP. To explain this...
both aggregate demand and long-run aggregate supply must be shifting right and aggregate demand must be shifting farther
suppose that the money supply increases. In the short-run, this increases prices according to
both the short-run Philips curve and the aggregate demand and aggregate supply model
A policy that raised the natural rate of unemployment would shift
both the short-run and the long-run Philip's curves to the right
What are the difference factors that shift the supply curve?
change in price of inputs, change in technology, change in the prices of other goods and services produced with the firm's resources, change in the # of sellers, change in weather, expectations of future prices of goods and services and inputs, as ell as taxes and subsidies
Which of the following factors will shift the short-run aggregate supply curve but not the long-run aggregate supply curve?
changes in the expected price level
the theoretical separation of nominal and real variables
classical dichotomy
monetary policy
can be described either in terms of the money supply or in terms of the interest rate
Monetary policy
can be implemented quickly, but most of its impact on aggregate-demand occurs months after policy is implemented
a large and sudden reduction in the demand for assets located in a country
capital flight
a government regulation specifying a minimum amount of bank capital
capital requirement
M2 is the sum of M1 and ________ held by the public
certain near monies
"all else constant" or "all else equal;" the requirement that when analyzing the relationship between two variables - such as price and quantity demanded - other variables must be held constant
ceterus paribus
Think of your supply of your own labor services. If your hourly wage were to rise would you be willing and able to work more or less?
More
The market for currency exchange equation
NCO = NX
measures an imbalance between the amount of foreign assets bought by domestic residents and the amount of domestic assets bought by foreigners
Net Capital Outflow (NCO)
represents the quantity of dollars supplied for the purpose of buying foreign assets
Net Capital Outflow (NCO)
If a country is experiencing a trade surplus, then which of the following is FALSE?
Net Capital Outflow < 0
measures an imbalance between a country's exports and its imports
Net Exports (NX)
Market for 3D TVs: A technological advancement is made in the production of 3D TVs.
Price will drop, but quantity will increase
The market for loanable funds equation
S = I + NCO
the financial system stands between two sides of which identity?
S = I + NCO
Suppose the expected price levels increase. Which of the following best describes the short-run macroeconomic equilibrium?
Stagflation
Which of the following does NOT add to U.S. GDP
The federal government sends a social security check to your grandmother
Trade policies do not affect the trade balance
True
self-sufficient, meaning no imports are brought in and no exports are sent out, the goal being to provide consumers with everything they need from within the economy's borders
closed economy
if expected inflation is constant and the nominal interest rate decreases by 2 percentage points, then the real interest rate
decreases by 2 percentage points
If P is the _______ measured in terms of money then 1/P is the ________ measured in terms of goods and services
decreases the value of money and increases the price level
people are likely to want to hold more money if the interest rate
decreases, making the opportunity cost of holding money fall
Hyperinflations occur the the government runs a large budget _______, which the central bank finances with substantial monetary ________.
deficit; expansion
If the U.S. economy is running a trade ________, Americans are spending ______ on foreign goods and services than they are earning from selling abroad. Some of this spending must be financed by selling American assets abroad, so foreign capital is flowing ______ the united states.
deficit; more; into
a decrease in the overall level of prices
deflation
is often a symptom of deeper economic problems
deflation
a curve (or line) that shows the relationship between the price of a product and the quantity of the product demanded
demand curve
you use the demand schedule to draw the
demand curve
balances in bank accounts that depositors can access on demand by writing a check; non-interest bearing checkable deposits
demand deposits
The nation of Ectenia has long banned the exports of its highly prized puka shells. A newly elected president, however, removed the export ban. This change in policy will cause the nation's currency to ________, making the goods Ectenia imports _______ expensive
depreciate; more
a decrease in the value of a currency as measured by the amount of foreign currency it can buy; currency is weakening
depreciation
a severe recession
depression
The property whereby the benefit from an extra unit of an input declines as the quantity of the input increases is known as
diminishing returns
The ________ is a table that shows the _______ relationship between the _________ of a product and the _________.
discheduled; negative; price; quantity demanded
inflation tends to raise the burden on income earned from savings and thus ________ saving
discourages
An increase in the U.S. real interest rate ________ Americans from buying foreign assets and encourages foreigners to buy U.S. assets. Thus a high real interest rate will _______ net capital outflow
discourages; decrease
trade policies _________ affect the trade balance
do not
if money is neutral, then changes in the quantity of money
do not affect real output
when the price increases the demand curve
does not shift
when the price increases the supply curve
does not shift
in an open economy demand for loanable funds represents
domestic investment and net capital outflow
holding other things constant, an increase in a nation's interest rate reduces
domestic investment and the net capital outflow
A basis for the slope of the short-run Philips curve is that when unemployment is high there are
downward pressures on prices and wages
according to liquidity preference theory, the money-supply curve would shift if the Fed
engaged in open-market operations
quantity is the _________, whereas the quantity demanded is _____________
entire line; point on the line
inflation ________ the size of capital gains and inadvertently increases the tax burden
exaggerates
reserves held above the legal minimum
excess reserves
by influencing the monetary base, the Fed can control...
excess reserves and the potential of the banking system to create money
On a given short-run Philips curve which of the following is held constant
expected inflation
On a given short-run Philips curve which of the following is held constant?
expected inflation
the effects of a higher than expected price level are shown by
moving to the right along a given aggregate supply curve
The law of demand states that the relationship between price and quantity demanded is __________.
negative
the law of demand states that the relationship between price and quantity demanded is
negative
which of the following events would shift money demand to the left
neither an increase in the interest rate nor an increase in the price level
Which of the following leads to a lower level of unemployment in the long-run?
neither an increase in the size of the money supply nor an increase in the money supply growth rate
the purchase of foreign assets by domestic residents minus the purchase of domestic assets by foreigners is known as
net capital outflow
the value of a nation's exports minus the value of its imports; also called the trade balance
net exports
when the dollar appreciates, U.S.
net exports fall, which decreases the aggregate quantity of goods and services demanded
The ________ curve is the between the market for loanable funds and the market for foreign-currency exchange
net-capital-outflow
even though monetary policy is ____________ in the long-run, it has _________ effects on real variables in the short-run
neutral; profound
the income tax treats the ________ interest earned on savings as income, even though part of the nominal interest rate merely compensates for inflation
nominal
the rate at which a person can trade the currency of one country for the currency of another
nominal exchange rates
Real interest rate =
nominal interest rate - inflation rate
demand deposits are
non-interest-bearing checkable deposits
Most economists are _______ that natural resources will eventually limit economic growth. As evidence, they note that the prices of most natural resources, adjusted for overall inflation, have tended to _______ over time.
not concerned; fall
what happens to demand when prices increase?
nothing, it is a movement along the curve
what happens to supply when prices decrease?
nothing, it is a movement along the curve
the goal of monetary policy and fiscal policy is to
offset shifts in aggregate demand and thereby stabilize the economy
the rate at which a person can trade goods or services of one country for the goods and services of another
real exchange rate
Given the nominal exchange rate and domestic and foreign price indicies, how would you calculate the real exchange rate
real exchange rate = (nominal exchange rate x domestic price index) / foreign price index
Nominal interest rate =
real interest rate - inflation rate
Important variables that influence NCO
real interest rates paid on foreign assets, real interest rates paid on domestic assets, perceived economic and political risks of holding assets abroad, and government policies that affect foreign ownership of domestic assets
variables measured in physical units
real variables
The classical principle of monetary neutrality state that changes in the money supply do not influence _____ variables and is thought most applicable in the ______ run.
real; long
two consecutive quarters of declining real GDP and riding unemployment
recession
when we say that economic fluctuations are "irregular and unpredictable," we mean that
recessions do not occur at regular intervals
what would happen to supply of beer if the price of hops and barley fell 75%?
shift right/increase
an institution designed to oversee the banking system and regulate the quantity of money in an economy
a central bank
international trade can raise living standards in all countries by allowing each country to specialize in producing those goods and services in which it has ________
a comparative advantage
which of the following shifts both short-run and long-run aggregate supply left?
a decrease in capital stock
how would an increase in net capital outflow be represented in the market for loanable funds?
a decrease in demand
which of the following would shift the aggregate demand curve to the right?
a decrease in real interest rates
which of the following shifts aggregate demand to the right?
a decrease in the money supply
The period during which at least one input, typically assumed to be capital, is fixed is known as
the short-run
Technically speaking, two consecutive quarters of declining real GDP and riding unemployment is known as
a recession
An event that directly affects firms' costs of production and thus the prices they charge is called
a supply shock
your firm produces both turbo dogs and battle cats from the same inputs. What happens to the supply of turbo dogs when the selling price of battle cats increases?
shift left/decrease
is a global decentralized market for the trading of currencies. This includes all aspects of buying, selling and exchanging currencies at current or determined prices.
the market for foreign-currency exchange
consider the model of real equilibrium in an open economy. Which of the following statements is true?
the market for foreign-currency exchange represents the equality between net capital outflow and net exports
a theory of the market interest rate. According to this approach, the interest rate is determined by the demand for and supply of loanable funds.
the market for loanable funds
If the initial deposit of $200 into a new demand deposit at Wells Fargo creates $2,000 in new money, then
the money multiplier would be 10%
which of the following tends to make aggregate-demand shift further to the right than the amount by which government expenditures increase?
the multiplier effect
The long-run trend is potential real GDP, the amount of output that would be produced if unemployment were held at
the natural rate
The position of the long-run Philips curve and the long-run aggregate-supply curve both depend on
the natural rate of unemployment, but not monetary growth
the ability to produce more of a good or service than competitors when using the same amount of resources
absolute advantage
In the equation, Unemployment rate = Natural rate of unemployment - a x (Actual inflation - Expected inflation), the variable a is a parameter that measures how much
actual unemployment responds to unexpected inflation
consider the market for money. The demand for money is downward sloping because at higher interest rates
the opportunity cost of holding money increases
The lag problem associated with fiscal policy is due mostly to
the political system of checks and balances that slows down the process of implementing fiscal policy
the money supply curve illustrates....
the positive relationship between the quantity of money supplied and the interest rate
which of the following is NOT a determinant of the long-run level of real GDP?
the price level
which of the following adjust to bring aggregate supply and demand into balance?
the price level and real output
If a central bank decreases the money supply in response to an adverse supply shock, then which of the following quantities moves closer to its pre-shock value as a result?
the price level but not output
Suppose that nominal GDP in 2014 was more than real GDP in 2014. Given this information we know that
the price level in 2014 was more than the price level in the base year.
If nominal GDP is $400, real GDP is $200, and the money supply is $100, then
the price level is 2, and velocity is 4
the aggregate demand and aggregate supply graph has
the price level on the vertical axis. The price level can be measured by the GDP deflator
according to classical macroeconomic theory, changes in the money supply affect
the price level, but not unemployment
Suppose that you commercial produce beer for sale. A change in which of the following factors would NOT shift the supply curve?
the price of beer
A graph that shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technology is known as_____.
the production possibilities frontier.
aggregate demand includes
the quantity of goods and services households, firms, the government, and customer abroad want to buy
a theory asserting that the quantity of money available determines the price level and that the growth rate in the quantity of money available determines the inflation rate
the quantity theory of money
a theory asserting that the quantity of money available determines the price level and that the growth rate in the quantity of money available determines the inflation rate is known as
the quantity theory of money
the most important information contained in budget constraints are
the ratio of prices
the fraction of deposits that banks hold as reserves is known as
the reserve ratio
real and nominal variables are highly intertwined, and changes in the money supply change real GDP. Most economists would agree that this statement accurately describes...
the short run, but not the long run
Suppose that reducing inflation by 2 percentage points would cost a country 5 percentage of its annual output. This country's sacrifice ratio is
2.5
If the reserve ratio is 25 percent and the central bank increases the quantity of reserves in the banking system by $120, the money supply increases by _______.
$480
A country will gain from trade if they trade at their opportunity cost
False
the quantity equation is given by
M x V = P x Y
1896 prices were 23 percent lower than in 1880
Panic of 1893
If business leaders in Great Britain become more confident in their economy, their optimism will induce them to increase investment, causing the British pound to _________ and pushing the British trade balance toward _________
appreciate; deficit
an order or decree
fiat
variables measured in monetary units
nominal variables
the classical dichotomy refers to the separation of
real and nominal variables
the key determinant of net capital outflow is the
real interest rate
the sticky-price theory implies that
the short-run aggregate supply curve is upward sloping, an upward fall in the price level induces firms to reduce the quantity of goods and services they produce, and menu costs influence the speed of adjustment of prices
Sticky wages leads to a positive relationship between the actual price level and the quantity of output supplied in
the short-run, but not the long-run
when the Fed buys bonds
the supply of money increases and so aggregate demand shifts right
A decrease in the price level raises the real value of money and makes consumers wealthier, which in turn encourages them to spend more. The increase in consumer spending means a larger quantity of goods and services demanded. The preceeding statement describes
the wealth effect
if taxes decrease...
then consumption increases, and aggregate-demand shifts rightward
Over the past century, real GDP per person in the United States has grown about ____ percent per year, which means it doubles about every ______ years
2; 35
if the MPC = 4/5, then the government purchases multiplier is
5
You deposit $2,000 in a savings account, and a year later you have $2,100. Meanwhile the consumer price index (CPI) rises from 200 to 204. In this case, the nominal interest rate is ______ percent, and the real interest rate is _______.
5;3
Amy the sheep farmer sells wool to Bob the knitter for $20. Bob makes two sweaters, each of which has a market price of $40. Clarise buys one of them, while the other remains on the shelf of Bob's store to be sold later. What is GDP here?
$80
If the consumer price index is 200 in year 1980 and 300 today, then $600 in 1980 has the same purchasing power as
$900 today
when a nation is running a trade deficit _____, it is _____ more goods and services _____ foreigners than it is ______ from them
(NX < 0); buying; from; selling
when nation is running a trade surplus _______, it is _______ more goods and services ___ foreigners than it is ________ from them.
(NX > 0); selling; to; buying
Real exchange rate equals
(nominal exchange rate x domestic price index) / foreign price index
If the Fed reduces inflation 1 percentage point and this makes output fall 2 percentage points and unemployment rise 3 percentage points for six months, the sacrifice ratio is
1
The multiplier for changes in government spending is calculates as
1/(1-MPC)
equation for money multiplier
1/RRR
The world's richest countries, such as Japan and Germany, have income per person that is _____ times the income per person in the world's poorest countries, such as Pakistan and India
12
even though monetary policy is neutral in the _______-run, it has profound effects on real variables in the _______-run
long; short
people hold money primarily because it
serves as a medium of exchange
Suppose that your family were to purchase airline tickets to visit your grandparents. Which of the following component of GDP would this transaction effect?
Consumption (C)
According to the Solow model, capital accumulation can explain long-run economic growth
False
_________ account for roughly 29 percent of U.S. exports
services
Nina wants to buy and operate an ice-cream truck but doesn't have the financial resources to start the business. She borrows $5,000 from her friend Max, to whom she promises an interest rate of 7 percent, and gets another $10,000 from her friend David, to whom she promises a third of her profits. What best describes this situation?
David is a stockholder, and Max is a bondholder
_________ explains quite a bit about why China is now growing so much more rapidly than the United States and why growth in China will slow down
Diminishing returns
the interest rate on the loans that the Fed makes to member banks
Discount rate
who is the chairman of the Fed?
Dr. Janet Yellen
Consider how the following two changes will affect the market for gasoline in the United States. First, the federal government levies additional taxes on consumers of gasoline. Second, petroleum engineers develop an inexpensive technology that can produce gasoline from coal. Which of the following statements about the new equilibrium prices and quantities is TRUE?
Equilibrium price decreases and the change in equilibrium quantity is ambiguous
Consider two bonds, A and B. Both have a face (future) value of $10,000 and both mature in 10 years. The only difference between the two bonds is that bond B also pays an annual coupon of 5 percent. You require a 3 percent rate of return on both bonds, A and B. True of false, you are willing to pay (present value) more for bond A.
False
If domestic net capital outflow is negative, then capital is flowing out of the domestic country
False
If net capital outflow is positive, then domestic residents are buying less foreign assets than foreigners buying domestic assets
False
The nominal exchange rate balances the supply and demand in the market for foreign-currency exchange
False
the central bank of the U.S.; created by congress in 1913 following a series of bank failures in 1907.
Federal Reserve (FED)
Market for cotton: recent flooding in china and pakistan has wiped out many cotton crops
Flooding -> supply curve will shift left -> the prices will rise while quantity falls
France has a higher rate of unemployment then the U.S. This suggests that
France's Philips curve is to the right of that of the U.S., possibly because they have more generous unemployment compensation
Natural Rate of Unemployment =
Frictional Unemployment + Structural Unemployment
is taken as given and is determined by the supplies of the factors of production and by the available technology that turns these inputs into outputs
GDP
Suppose that North Carolina were to widen king street in Boone, NC. Which of the following component of GDP would this transaction affect?
Government Spending (G)
Suppose that your significant other were to buy a case of French Wine. Which of the following component of GDP would this transaction affect?
Imports (M)
an item that serves the functions of money, but also has the value in other uses
commodity money
money that takes the form of a commodity with intrinsic value
commodity money
the ability of an individual, firm, or country to produce a good or service at a lower opportunity cost than competitors
comparative advantage
Suppose that the economy is experiencing a short-run contraction and the classical self-correcting mechanism is taking too long to push the economic back on its long-run trend. What policy might the Federal Reserve engage in to try to eliminate the short-run contraction?
conduct open market purchases
during recessions which type of spending falls?
consumption and investment
which of the following is included in the aggregate demand for goods and services?
consumption demand, investment demand, and net exports
a period of declining real incomes and rising unemployment
contraction
Proponents of rational expectations argued that the sacrifice ratio
could be low because people might adjust their expectations quickly if they found anti-inflation policy credible
in country A specializes in the production of wheat and country B specializes in the production of coal, and if both countries trade and benefit from trade, then it must be true that
country A has a comparative advantage in wheat and country B has a comparative advantage in coal
the change in aggregate-demand that results from fiscal expansion changing the interest rate is called the
crowding-out effect
the paper bills and coins in the hands of the public; approx. 40% of M1
currency
If your marginal grade is lower than your average grade then your grade average will ________
decrease
when the price of a good or service decreases the quantity supplied should ________.
decrease
when the price of a good or service increases the quantity demanded should _________.
decrease
What actions could be taken to stabilize output in response to a large decrease in U.S. net exports?
decrease taxes or increase the money supply
A(n) _________ in the U.S. real exchange rate means that U.S. goods have become _________ expensive relative to foreign goods. This change encourages consumers both at home and abroad to buy _________ U.S. goods and _________ goods from other countries.
decrease; less; more; less
the long-run aggregate supply curve would shift left if the amount of labor available
decreased or Congress made a substantial increase in the minimum wage
suppose the economy is in long-run equilibrium. If there is a sharp increase in the minimum wage as well as an increase in taxes, then in the short-run, real GDP will
fall and the price level might rise, fall, or stay the same. In the long-run, the price level might rise, fall or stay the same but real GDP will be lower
if the central bank decreases the money supply, then in the short-run prices
fall and unemployment rises
stagflation exists when prices
fall and unemployment rises
other things the same, during recessions taxes tend to
fall. The fall in taxes stimulates aggregate-demand
during a recession the economy experiences
falling employment and income
if policymakers decrease aggregate-demand, then in the short-run the price level
falls and unemployment rises
when the price level increases, the real value of people's money holdings
falls, so they buy less
Suppose a central bank takes actions that will lead to a higher inflation rate. The public, however, is slow to adjust its expectation of inflation. Then, in the short-run, unemployment
falls. As inflation expectations adjust, the short-run Philips curve shifts right
The government in an open economy, cuts spending to reduce the budget deficit. As a result, the interest rate ________, leading to a capital ________ and a real exchange rate ________
falls; outflow; depreciation
A decrease in the demand for money might occur due to contractionary monetary policy like open market sales by the Fed
false
Inflation tends to decrease the burden on income earned from savings and thus encourages saving. This tends to depress the economy's short-run growth rate
false
The Solow growth model shows that a country's rate of growth will be _______ the father away a country's capital stock is from its steady-state value
faster
the multiplier effect states that there are additional shifts in aggregate demand from fiscal policy because it
increases income and thereby increases consumer spending
the interest rate at which banks make overnight loans to one another
federal funds rate
money without intrinsic value that is used as money because of government decree
fiat money
if aggregate demand shifts right then in the short run
firms will increase production. In the long-run increased price expectations shift the short-run aggregate supply curve to the left
the one-for-one adjustment of the nominal interest rate to the inflation rate
fisher effect
a banking system which banks hold only a fraction of deposits as reserves
fractional-reserve banking
which among the following assets is the most liquid?
funds in a checking account
an example of commodity money is
gold
the ______ demand for goods and services causes the prices of goods and services to ________
greater; increase
The 3 measures of inflation are:
gross domestic product (GDP) inflation, consumer price index (CPI), and the producer price index (PPI)
Because capital is subject to diminishing returns, higher savings and investment does not lead to higher
growth in the long run
in financial theory, arbitrage refers to a ___________ profit
guaranteed
If households view a tax cut as temporary, then the tax cut
has less of an effect on aggregate-demand than if households view it as permanent
in the aggregate demand and aggregate supply model, sticky wages, sticky prices, and misperceptions about relative prices
have temporary effects
A policy intended to reduce unemployment by taking advantage of a tradeoff between inflation and unemployment leads to
higher inflation and no change in unemployment in the long run
an extraordinary high rate of inflation
hyperinflation
Suppose you deposit $100 into a demand deposit at the beginning of the year at a 10 percent nominal interest rate. Which of the following statements is true at the end of the year?
if inflation is less than 10 percent then the purchasing power of your deposit has increased
Market for housing: Interest rates increase.
if the interest rates are rising, the demand for buying a house will shift to the left on the demand curve
a limit on the quantity of a good produced abroad that can be sold domestically
import quotas
goods and services that are produced abroad and sold domestically
imports
fiscal policy affects the economy
in both the short and long run
which of the following statements is correct?
in the short-run, unemployment and inflation are negatively related. In the long-run they are largely unrelated problems
Keynes explained that recessions and depressions occur because of
inadequate aggregate demand
the change in the quantity demanded of a good that results from the effect of a change in the good's price on consumers' purchasing power
income effect
A politician blames the Federal Reserve for being "soft on unemployment" and claims that a permanently higher money supply growth rate will lead to a permanent reduction in the unemployment rate. The politician's argument is
inconsistent with the long-run Philips curve. Further, the long-run Philips curve implies that such a policy would increase inflation
when the price of a good or service decreases the quantity demanded should ________.
increase
when the price of a good or service increases the quantity supplied should _________.
increase
government budget deficits
increase real interest rate, crowds out domestic investment, causes the currency to appreciate, and pushes the trade balance toward deficit
an increase in the transaction cost of converting near money to money will
increase the demand for money
Suppose households attempt to increase their money holdings. To stabilize output by countering this increase in money demand, the Federal Reserve would
increase the money supply
to reduce the effects of crowding out caused by an increase in government expenditures, the Federal Reserve could
increase the money supply by buying bonds
A shock increases the cost of production. Given the effects of this shock, if the central bank wants to return the unemployment rate towards its previous level it would
increase the rate at which the money supply increases. However, this will make inflation higher than its previous rate
when the fed buys government bonds, the reserves of the banking system
increase, so the money supply increases
Government budget deficits _______ real interest rates, crowd out domestic investment, causes the currency to _________, and push the trade balance toward _______.
increase; appreciate; deficit
an ________ in the U.S. real exchange real interest rate discourages Americans from buying foreign assets and encourages foreigners to buy U.S. assets. Thus a high real interest rate will ________ net capital outflow
increase; decrease
A(n)________ in the price level means a ________ value of money because each dollar in your wallet now buys a smaller quantity of goods and services
increase; lower
according to the misperceptions theory of aggregate supply, if a firm thought that inflation was going to be 5 percent and actual inflation as 6 percent, then the firm would believe that the relative price of what it would produce had
increased, so it would increase production
making loans ________ the supply of money
increases
in the context of aggregate demand and aggregate supply, the wealth effect refers to the idea that, when the price level decreases, the real wealth of households
increases and as a result consumption spending increases. This effect contributes to the downward slope of the aggregate-demand curve
when aggregate demand shifts rightward along the short-run aggregate -supply curve, inflation
increases and unemployment decreases
which of the following shifts aggregate demand to the right
increases in the profitability of capital due perhaps to technological progress
in the _________, money supply and money demanded are brought into equilibrium by the overall level of prices
long-run
the aggregate-demand curve shows that a decrease in the price level
increases the real value of goods and services demanded in the economy
Capital flight from Mexico ______ Mexican real interest rates and _______ the value of the Mexican peso in the market for foreign-currency exchange
increases; decreases
an increase in the overall level of prices
inflation
According to the quantity theory of money and the Fisher effect, is the central bank increases the rate of monetary growth
inflation and the nominal interest rate booth increase
the revenue the government raises by creating money
initiation tax
according to the theory of liquidity preference, which variable to balance the supply and demand for money
interest rate
when households decide to hold more money
interest rates rise and investment decreases
In the short-run, real and nominal variables are highly ________ and changes in the money supply can temporarily push real GDP away from its long-run trend
intertwined
the item has value in and of itself; it would still be available if it were not being used as money
intrinsic value
the _________, but not the _________, aggregate supply curve is consistent with the idea that nominal variables do not affect real variables
long-run; short-run
if economy is initially at long-run equilibrium and aggregate demand declines, then in the long-run the price level
is lower and output is the same as the original long-run equilibrium
in the long-run, inflation
is primarily determined by the rate of money supply growth while unemployment is primarily determined by labor force markets
the interest-rate effect
is the most important reason, in the case of the U.S., for the downward slope of the aggregate-demand curve
The natural rate of unemployment
is the unemployment rate that the economy tends to move to in the long-run
Chloe takes $100 of currency from her wallet and deposits it into her checking account. if the bank adds the entire $100 to reserves, the money supply ______, but if the bank lends out come of the $100, the money supply ______.
is unchanged; increases
Suppose that you are in college to become a doctor of vet medicine and on your way to a microeconomics lecture you hear or read that vet salaries are rising. How does this affect your opportunity cost of coming to class?
it does not affect your opportunity cost
suppose that the price falls from $7 to $10. What direction does the demand curve shift?
it does not shift. It is a movement along the demand curve
What direction does the supply curve shift when the price rises from $7 to $10?
it does not shift. When the value on the x or y-axis changes, it is a movement along the supply curve
What direction does the supply curve shift when the price falls from $5 to $2?
it does not shift. When the value on the x or y-axis changes, it's a movement along the supply curve
Your firm produces both Turbodogs and Battlecats from the same inputs. What happens to the supply of Turbodogs when the selling price of Battlecats increases?
it will shift left or decrease
Market for peanut butter: A study finds that peanut butter eaters tend to live longer than nonpeanut butter eaters. At the same time, there is an exceptionally large yield of peanuts during the harvest.
knowing that peanut butter will live longer, the demand will increase. Supply will shift to the right on the demand curve
Example of a store of value
land
the rule that, holding everything else constant, when the price of a product falls, the quantity demanded of the product will increase, and when the price of a product rises, the quantity demanded of the product will decrease
law of demand
a good must sell for the same price in all locations
law of one price
the rule that, holding everything else constant, increases in price cause increases in the quantity supplied, and decreases in the price cause decreases the quantity supplied
law of supply
an increase in the expected price level shifts short-run aggregate supply to the
left, and an increase in the actual price level does not shift short-run aggregate supply
the use of borrowed money to supplement existing funds for purposes of investment
leverage
the ratio of assets to bank capital
leverage ratio
The money supply curve includes all of the following except
lines of credit accessible with credit cards
the money supply includes all of the following EXCEPT
lines of credit accessible with credit cards
the ease with which an asset cane converted into the economy's medium of exchange
liquidity
changes in the interest rate bring the money market into equilibrium according to
liquidity preference theory, but not classical theory
a time horizon in which all inputs of production are variable
long-run
the sticky price theory of the short-run aggregate supply curve says that when the price level is higher than expected, some firms will have
lower than desired prices, which leads to an increase in the aggregate quantity of goods and services supplied
If the long-run Philips curve shifts to the left, then for any given rate of money growth and inflation the economy has
lower unemployment and higher output
a civil war abroad causes foreign investors to seek a safe haven for their funds in the united states, leading to _________ interest rates, and a ________ U.S. dollar
lower; stronger
expansionary policy would be ________ the discount rate
lowering
expansionary policy would be _________ the required reserve ratio
lowering
Economists reason that the optimal decision is to continue any activity (assume the activity is measured continuously as opposed to in discrete units) up to the point where
marginal benefits equal marginal cost
An arrangement through which buyers and sellers meet or communicate in order to trade goods or services is known as ______.
market
an arrangement through which buyers and sellers meet or communicate in order to trade goods or services; it is a means of communication
market
inflation is an economy-wide phenomenon that concerns the value of the economy's _________.
medium of exchange
the price level can be thought of as a measure of the value of money
medium of exchange
money fulfills which of the following functions?
medium of exchange, standard of deferred payment, unit of account, and store of value
the costs of changing prices
menu costs
one determinant of the natural rate of unemployment is the
minimum wage rate
One determinant of the long-run average unemployment rate is the
minimum wage, while the inflation rate depends primarily upon the money supply growth rate
the model that most economists use to explain short-run fluctuations in economic activity around its long-run trend
model of aggregate demand and aggregate supply
According to classical macroeconomic theory, in the long-run
monetary growth affects nominal but not real variables
The proposition that changes in the money supply do not affect real variables is known as
monetary neutrality
the proposition that changes in the money supply do not affect real variables
monetary neutrality
the setting of the money supply by policymakers in the central bank
monetary policy
The set of assets in an economy that people regularly use to buy goods and services from other people are known as
money
monetary policy conducted by the Fed directly affects the market for
money
the quantity theory of money asserts that inflation is more about the value of _____ than about the value of goods
money
the amount of money the banking system generates with each dollar of reserves
money multiplier
the quantity of money available in the economy
money supply
In order for a resource to be considered scarce we must want _______ of it than currently exists
more
An appreciation in the US real exchange rate means that U.S. goods have become ______ expensive relative to foreign goods. This change encourages consumers both at home and abroad to buy _______ U.S. goods and ______ goods from other countries
more expensive; less; more
When a nation is running a trade surplus (NX > 0), is it selling _______ goods and services to foreigners than its is buying from them. It must be using the foreign currency it receives from the net sale of goods and services abroad to _______ foreign assets
more; buy
In a system of fraction-reserve banking, even without any action by the central bank, the money stock declines if households choose to hold________ currency or if banks choose to hold _______ excess reserves.
more; less
what will happen to the supply of hot tub time machines when the price drops?
movement along the curve
the effect of an increase in the price level on the aggregate-demand curve is represented by a
movement to the left along a given aggregate-demand curve
the aggregate demand and aggregate supply model implies monetary neutrality
only in the long-run
an economy in which there are economic activities between the domestic community and outside
open economy
An example of expansionary monetary policy used by the Fed is:
open market purchases
which of the following activities of the Federal Reserve System would decrease short-term interest rates in the U.S. economy?
open market purchases of government securities
the purchase and sale of U.S. government bonds by the Fed
open-market operations
A _________ NCO means that the country invests outside more than the world invests in it and vice versa.
positive
the law of supply states that the relationship between price and quantity demanded is
positive
Market for disco music in Raleigh: Disco Stu skates through town and a disco craze takes over the NC State.
price and quantity demanded will increase
measures the number of dollars needed to buy a basket of goods and services
price level
nominal exchange rates change when ______ change
price levels
the nominal exchange rate between the currencies of the two countries must reflect the ______ in those countries
price levels
If the government collects more in a tax revenue than it spends, and households consume more than they get in after-tax income, then
private saving is negative, and public saving is positive
the sticky-wage theory of the short-run aggregate supply curve says that when the price level is lower than expected,
production is less profitable and employment fals
expansionary open-market operations are _______.
purchases
a theory of exchange rates whereby a unit of any given currency should be able to buy the same quantity of goods in all countries
purchasing power parity
a theory of exchange rates whereby a unit of any given currency should be able to buy the same quantity of goods in all countries is known as
purchasing power parity
Thomas Robert Malthus believed that population growth would
put stress on the economy's ability to produce food, dooming humans to remain in poverty
the amount of a good or service that a consumer is willing and able to purchase at a given price
quantity demanded
the identity, M x V = P x Y, which relates to the quantity of money, the velocity of money, and the dollar value of the economy's output of goods and services
quantity equation
the primary cause of inflation is growth in the ________________
quantity of money
the amount of a good or service that a firm is willing and able to sell at a given price
quantity supplied
the _____ exchange rate balances the supply and demand in the market for foreign-currency exchange
real
the key determinant of NCO is the _______ interest rate
real
suppose the economy is in long-run equilibrium. If there is an increase in the supply of labor as well as an increase in the money supply, then we would expect that in the short-run,
real GDP will rise and the price level might rise, fall, or stay the same
The rate of which a person can trade goods or services of one country for the goods and services of another is the
real exchange rate
an import quota _____ both imports and exports, but net exports are ________
reduces; unchanged
Disinflation is defined as a
reduction in the rate of inflation
prices are a real variable
relative
when inflation distorts __________, consumer decisions are distorted and markets are less able to allocate resources to their best use
relative prices
because a government budget deficit...
represents negative public saving, it decreases national saving. Thus, the supply of loanable funds decreases, interest rates increase, and investment is crowded out
the fraction of deposits that banks hold as reserves
reserve ratio
regulations on the minimum amount of reserves that banks must hold against deposits
reserve requirement
deposits that banks have received but not loaned out
reserves
aggregate demand shifts to the ________ when consumption, investment, government spending, or net exports increase
right
if banks and speculators in the U.S. decided to exchange U.S. dollars for the foreign currencies of other countries, but foreigners do not desire to increase their holdings of U.S. dollars, then U.S. net exports would
rise and aggregate demand would shift right
if the government raises government expenditures, then in the short-run prices
rise and unemployment falls
other things the same, when the price level rises, interest rates
rise, so firms decrease investment
if the price level falls, the real value of a dollar
rises, so people will want to buy more
Contractionary open-market purchases are _______.
sales
In the long run, fiscal policy primarily affects
saving, investment, and growth. In the short run, it affects primarily aggregate demand
in the long-run, fiscal policy primarily affects
saving, investment, and growth. In the short-run, it affects primarily aggregate demand
if domestic residents are buying more foreign assets than foreigners buying domestic assets, then
savings is greater than domestic investment
if the Federal Reserve decided to raise interest rates, it could
sell bonds to lower the money supply
When a nation is running a trade surplus, it is _________ more goods and services to foreigners than its is _________ from them. It must be using the foreign currency it receives from the net sale of goods and services abroad to buy foreign assets. Capital is flowing _________ the country.
selling; buying; out of
the resources wasted when inflation encourages people to increase their money holdings
shoe leather costs
the time period over which capital is fixed
short-run
investment is a
small part of real GDP, yet it accounts for a large share of the fluctuation in real GDP
gains from trade are possible when we ________ in producing what we have a __________
specialize; comparative advantage
an item that people can use to pay off debts
standard of deferred payment
an item that people can use to transfer purchasing power from the present to the future
store of value
lower interest rate =
stronger U.S. dollar
the change in the quantity demanded of a good that results from a change in price, making the good more or less expensive relative to other goods that are substitutes
substitution effect
a curve (or line) that shows the relationship between the price of a product and the quantity of the product supplied
supply curve
what is the difference between supply and quantity supplied?
supply is the entire line, quantity supplied is a point on the line
the _________ is a table that shows the _________ relationship between the ________ of a product and the ___________
supply schedule; positive; price; quantity of the product supplied
If a popular TV show on personal finance convinces more Americans about the importance of saving for retirement, the ______ curve for loanable funds would shift, driving the equilibrium interest rate ______.
supply; down
taxes on imported goods
tariffs
monetary policy is determined by
the Federal Reserve and involves changing the money supply
The consumer price index (CPI) measures approx. the same economic phenomenon as
the GDP deflator
The short-run relationship between inflation and unemployment is often called
the Philips curve
Which is an example of fiat money?
the U.S. dollar
economic expansions in Europe and China would cause
the U.S. price level and real GDP to rise
Assume that, for Canada, the opportunity cost of producing 1 television set is 2 bushels of wheat. Assume that, for the united states, the opportunity cost of producing 1 bushel of wheat is 2 television sets. All other things being equal..
the US should export televisions to Canada and import wheat from canada
Become consumers can sometimes substitute cheaper goods for those that have risen in price,
the consumer price index (CPI) overstates inflation.
what direction does the demand curve shift when the price falls from $7 to $10
the demand curve does NOT shift, because it is just moving along the line of the demand curve
what direction does the demand curve shift when the price falls from $5 to $2
the demand curve does NOT shift, but it will move to the right of the demand curve
consider the model of the real equilibrium in an open economy. If the purchasing-power parity model were to hold then how would our standard graphs for this model change?
the demand curve for foreign-currency exchange, rather than being downward sloping, would be horizontal at the level of the real exchange rate to ensure parity of purchasing power at home and abroad
according to the theory of liquidity preference
the demand for money is represented by a downward-sloping line on a supply-and-demand graph
which of the following would shift the short-run aggregate supply curve to the right?
the discovery of new mineral deposits
when a fall in the U.S. price level causes U.S. interest rates to fall, the real value of the dollar declines in foreign exchange markets. this depreciation stimulates U.S. net exports and thereby increases the quantity of goods and services demanded
the exchange-rate effect
which of the following effects helps to explain the slope of the aggregate-demand curve?
the exchange-rate effect, the wealth effect, and the interest rate effect
the Employment Act of 1946 states that
the government should promote full employment and production
inflation does not in itself reduce people's real purchasing power
the inflation fallacy
Suppose policymakers take actions that cause a contraction of aggregate-demand. Which of the following is a short-run consequence of this contraction?
the inflation rate decreases, the level of output decreases, and the unemployment rate increases
according to liquidity preference theory, the opportunity cost of holding money is
the interest rate on bonds
a lower price level reduces the interest rate, encourages greater spending on investment goods, and thereby increases the quantity of goods and services demanded
the interest-rate effect
the idea that expansionary fiscal policy has a positive affect on investment is known as
the investment accelerator
Critics of stabilizations policy argue that
the lag problem ends up being a cause of economic fluctuations
shifts in the aggregate-demand curve can cause fluctuations in
the level of output and in the level of prices
a decerase in the price level raises the real value of money and makes consumers wealthier, which in turn encourages them to spend more
the wealth effect
Suppose that nominal GDP were to increase and real GDP were to decrease this year. It can be concluded that
there was an economic contraction this year
what effect do open market purchases have on the money supply curve?
they shift to the right
an increase in the price level reduces the real value of money and makes consumers poorer, which in turn reduces consumer spending and the quantity of goods and services demanded
this statement describes the wealth effect
the value of a nation's exports minus the value of its imports; also called net exports
trade balance
an excess of imports over exports
trade deficit
a government policy that directly influences the quantity of goods and services that country imports and exports
trade policy
ax excess of exports over imports
trade surplus
Scarcity implies that we face _____.
trade-offs
Money is not an input in production
true
an example of an automatic stabilizer is
unemployment benefits
______________ inflation redistributes wealth among the population in a way that has nothing to do with either merit or need
unexpected
________ inflation redistributes wealth from ________ to _________
unexpected; creditors; debtors
the yardstick people use to post prices and record debts refers to the function of money known as
unit of account
when the Fed increases the money supply and creates inflation, it erodes the real value of the __________________
unit of account
according to classical macroeconomics theory, changes in the money supply affect
variables measured in terms of money but not variables measured in terms of quantities or relative prices
the rate at which money changes heads
velocity of money
One way to express the classical idea of monetary neutrality is to draw
vertical long-run Philips curve
higher interest rate =
weaker U.S. dollar
refers to the total of all stores of value, including both monetary and non monetary assets
wealth
The solow growth model illustrates that countries that devote a larger share of output to investment will be _____.
wealthier
money is a good store of value...
when prices are falling
Market for loanable funds: Interest rates increase.
will move up the demand curve, moving out of equilibrium where supply exceeded quantity demanded; moving into a surplus
if output is above its natural rate, then according to the sticky-wage theory
will strike bargains for higher wages. In response to the higher wages firms will produce less at any given price level