Macro Flashcards From the Homework

Real..........growth tends to be more volatile than real.......growth.

investment consumption

Money functions as a medium of exchange when you​ ___________

buy jeans at the mall

Zales in​ Clearwater, Florida, purchased 88 Rado watches for ​$525 each and sold 55 of them for ​$700 each. ​Zales' value-added contribution to GDP is............ ​

$−700. ​

If nominal GDP for 2017 is ​$62 trillion and real GDP for 2017 is ​$46 ​trillion, then the GDP deflator for 2017 is.......

134.78

Which of the following cannot produce a shift in the credit demand ​curve?

A change in the real interest rate.

Aidan, Bianca, Caitlyn and Dmitri want jobs as management consultants. XY Corporation is a management consulting firm in a perfectly competitive market which has advertised a job opening for the post of a management consultant paying the equilibrium salary. Who is voluntarily unemployed based on the information given​ below?

Aidan receives a job offer from XY Corporation but rejects it as the salary offered was below his expectations

Which of the following would be excluded when calculating the Consumer Price Index​ (CPI) but included when calculating the GDP​ deflator?

An ambulance

Which of the following key factors can help explain the Great Recession of 2007-​2009?

An increase in mortgage​ defaults, negatively impacting banks A reduction in new home​ construction, leading to a decrease in labor demand. A fall in housing prices. A reduction in consumer​ wealth, curtailing spending.

Which of the following statements would not be true in a situation where the interest rate falls slightly below the zero lower​ bound?

Banks would earn large profits from the loans issued and would increase their lending operations.

Which of the following is not an example of someone who is frictionally​ unemployed?

Carl, who is currently taking classes full time in order to qualify for a management position.

Which of the following does not cause the labor supply curve to​ shift

Changes in the wage rate paid to workers.

Which of the following shows the correct sequence of events from an initial shock to consumption and the resulting multiplier​ effects?

Consumption​ declines, firms' revenue​ falls, labor demand shifts​ left, unemployment​ rises, and the multiplier effects continue their cycle.

To achieve its target for the federal funds​ rate, the Fed may​ ____________.

Decrease lending from the discount window. Sell Treasury bonds in the open market. Increase the interest rate paid on reserves deposited at the Fed. Increase the reserve requirement.

Which of the following statements are true regarding the quantity theory of​ money?

Growth rate of money supply=Inflation rate+Growth rate of real GDP. Growth rate of money supply=Growth rate of nominal GDP.

Which series of events would result in a decrease in the inflation​ rate?

Increase the reserve​ requirement, which increases the federal funds rate and decreases the demand for​ loans, which in turn reduces money supply growth and reduces the rate of inflation.

Which of the following statements is true about economic​ fluctuations?

Investment and business expansion would show​ co-movement.

Traditional currencies are controlled by central banks. What is a potential problem of restricting the creation of bitcoins to a total of 21 million​ bitcoins

Monetary authorities cannot undertake expansionary monetary policy to stimulate the economy during recessions.

....................provides a better way to convert GDP in domestic currencies into common units because it reflects the differences in the............between countries.

Purchasing power parity cost of living

Money makes a variety of economic transactions possible. In the following three​ situations, determine whether money is involved in the transaction. In prison camps during World War​ II, and in some prisons​ today, cigarettes circulate among prisoners. For​ example, an iPod might cost two cartons of​ cigarettes, whereas a magazine might only cost two cigarettes. Which functions of money are cigarettes fulfilling in this​ case? ​

Store of value. Medium of exchange. Unit of account.

What is the correlation between income per capita and welfare measures like absolute poverty and life​ expectancy? What does this correlation suggest about real income per capita as a measure of​ welfare?

Strong positive correlation. Real income per capita is a reliablelong dash—though not perfectlong dash—indicator of human welfare within and across countries.

Which of the following is likely to be true of the U.S. economy if there is a rapid rise in prices and low interest​ rates

The U.S. economy could experience unsustainable​ expansion, resulting in a sharp economic downturn.

What are the automatic and discretionary components of fiscal​ policy?

The automatic components do not require deliberate action on the part of the​ government, while the discretionary components do.

What policies could the government and the central bank use to achieve the goal of slowing down the economic​ expansion?

The government could raise taxes​ and/or reduce​ expenditures, while the central bank could raise interest rates.

How does the confluence of the zero lower bound and restrictions on the fiscal deficit cause problems for countercyclical macroeconomic​ policy?

The government will not be able to lower tax rates to control recession in an economy.

Why is the rise in housing prices between the late 1990s and 2006 characterized as a bubble by some​ economists?

The large increase in the price of housing assets did not reflect the true​ long-run value of the assets.

Which of the following is not true regarding the natural rate of​ unemployment?

The natural rate of unemployment is 0 percent when the U.S. economy is not in a recession.

What is the difference between nominal and real interest​ rates?

The real interest rate is the nominal interest rate adjusted for inflation. The nominal interest rate is the rate you pay on a loan.

Which of the following is likely to be true if the central bankers were political appointees that could be hired and fired by the​ president?

They would be reluctant to increase the federal funds rate during an economic expansion.

Who bears the risk that a bank faces when​ stockholders' equity is greater than​ zero?

The​ bank's stockholders.

Which of the following explains why a central bank would choose to lower interest rates on reserves below​ zero?

To stimulate the economy

Which of the following are not included in GDP but probably should​ be?

Transactions in the underground economy The value of leisure.

An example of a multiplier is when​ ____________. ​

a drop in consumer confidence reduces household​ spending, causing firms to cut production and lay off​ employees, leading to a greater reduction in household spending. an increase in business confidence causes firms to increase production and hire​ employees, leading to an increase in household​ spending, causing firms to further increase production and employment.

Contractionary monetary policy can lead to an​ economy-wide recession through​ ____________. ​

a reduction in the price​ level, leading to a reduction in employment because of downward wage rigidity. an increase in the real interest​ rate, leading to an increase in production costs and therefore lower demand for labor.

If the level of aggregate expenditure was​ $16.8 trillion in​ 2013, the level of aggregate income in the economy during 2013 was​ ___________.

also​ $16.8 trillion because of the identity between aggregate expenditure and income.

The concept of multipliers was one of the key elements of John Maynard​ Keynes's theory of fluctuations. A multiplier is​ ____________.

an economic mechanism that causes an initial shock to be amplified by​ follow-on effects.

Expansionary monetary policy would include​ ____________.

an increase in the supply of​ reserves, a reduction in the federal funds​ rate, an increase in lending capacity​ (reserves) of the​ banks, and an increase in liabilities​ (bonds) for the Fed.

An economic expansion begins​ ____________.

at the end of a recession.

A​ firm's value added refers to the dollar value of​ ____________

a​ firm's sales revenue minus the​ firm's purchases of intermediate products from other firms.

All of the following are included when calculating M2 as a measure of the money supply except​ ___________

bonds

During an economic downturn of any​ duration, _____________

consumption, investment, and GDP decrease while unemployment increases.

Recessions are periods in which the economy...........while economic expansions are defined as the periods

contracts between recessions

If the economy experiences an unexpectedly highhigh rate of​ inflation, the group that would tend to benefit is​ ___________.

debtors (people or businesses who owe money).

Conducting countercyclical monetary policy is.........in this case because the real interest rate will be....... .

difficult positive and rising

Countercyclical policy that seeks to raiseraise GDP growth and the level of employment is appropriate when​ ____________.

excessively pessimistic sentiments about the economy are prevalent. the economy is experiencing a recession.

The...........method of calculating GDP yields exactly the same answer as the​ production-based method. Even if some of the goods​ don't get​ sold, they are........by a​ firm, and those goods are considered part of the​ firm's inventory.

expenditure owned

Crowding out occurs when..............borrowing displaces.........borrowing. Since expansionary fiscal policy should only take place during times of...........it seems worth the risk for many policy makers.

government private recession

You decide to hire a lawn care company rather than mow your own lawn. As a​ result, GDP estimates will...... .

increase

Partial recovery from recession in the medium run......possible with natural market forces. Recovery.........be possible via a fiscal policy tax cut.

is would

Partial recovery occurs while downward wage rigidity.........in effect. Full recovery​ (full employment) occurs when labor demand shifts to an equilibrium wage that is.........the rigid wage.

is still greater than

Would countercyclical policy still be enacted if central bankers were appointed by popular​ vote?

no

In​ 2005, $320 million of the federal​ government's budget was allocated toward building a​ "bridge to​ nowhere" in Alaska that connected two small towns. In​ 2006, $500,000 was allocated toward a teapot museum in North​ Carolina, $1 million toward a​ water-free urinal initiative in​ Michigan, and​ $4.5 million toward a museum and park at an abandoned mine in Maine. These projects were requested by specific legislators in order to boost their popularity in their constituencies. These types of expenditures are known as​ ___________.

pork barrel spending.

One of the biggest.........GDP and GDP per capita is the..........of detailed information about how economic output is divided up among households.

problems with lack

If a country implements a countercyclical fiscal​ policy, the budget deficit is likely to...........during a recession. If the government borrows money to pay its​ bills, taxpayers are implicitly responsible for paying back the​ government's debts.

rise future

Economic fluctuations are​ ____________.

short-run changes in the growth of GDP.

A central bank is the government institution​ ____________

that runs a​ country's monetary system.

According to the quantity theory of​ money, the inflation rate is

the gap between the growth rate of money supply and the growth rate of real GDP.

According to the quantity theory of​ money, if in a​ year's time, real GDP grew from​ $10 trillion to​ $10.2 trillion, and nominal GDP for the same time period grew to​ $10.5 trillion, then​ ____________.

the growth rate of inflation is 3 percent

An economic expansion is defined as​ ___________.

the period between two economic recessions.

The Federal Reserve influences the long-run real interest rate through​ ____________.

the​ short-term federal funds rate

One of the major functions of banks is to​ ____________.

transform​ short-maturity liabilities into​ long-maturity assets.

In the United​ States, recessions are usually defined as​ ____________.

two consecutive quarters of negative growth in real GDP.

Recessions and expansions have.........​lengths, which explains why they..........a​ repetitive, easily predictable cycle. This is why there is............of turning points

variable do not follow a limited predictability

Which of the following would cause the labor demand curve to shift to the​ right?

An increase in the demand for a product

Which of the following best relays the events of the 2007dash-2009 recession after the bust in housing​ prices?

Mortgage​ foreclosures, a credit​ contraction, a leftward shift in the demand for​ labor, and a strong drop in consumption

................GDP is the total value of production​ (final goods and​ services) using current prices.

NOMINAL

Imagine that the chairperson of the Federal Reserve announced​ that, as of the following​ day, all currency in circulation in the United States would be worth 10 times its face denomination. For​ example, a​ $10 bill would be worth​ $100; a​ $100 bill would be worth​ $1,000, etc.​ Furthermore, the balance in all checking and savings accounts is to be multiplied by 10 as will the balance of all outstanding debts.​ So, if you have​ $500 in your checking​ account, as of the following​ day, your balance would be​ $5,000, etc. Would you actually be 10 times better off on the day the announcement took​ effect?

No, because all prices would increase by a factor of 10 as​ well, keeping the real value of your money constant.

Almost every​ day, many people sign their names to little pieces of paper called​ checks, which are then accepted in exchange for goods and services. Do these checks constitute​ money?

No, because checks simply represent a means of access to​ money, not money itself.

Over the last 50​ years, credit cards have become an increasingly popular way for people to purchase goods and services. Are credit cards​ money?

No, because you credit cards are not assets.

Since government spending increases employment by shifting the labor demand curve to the​ right, is it always a good idea for the government to increase​ expenditure? Explain your answer

No, continual increases in government expenditures will soak up resources that would otherwise be used by households and firms.by households and firms. No, the presence of long and variable lags associated with government expenditures suggests that their use to adjust labor demand with precision will be difficult.adjust labor demand with precision will be difficult. No, continual increases in labor demand may be inflationary if they outpace labor supply growth.

In​ 2011, China revised its poverty line upward to​ 2,300 yuan per​ year, or 6.3 yuan per day. At the prevailing exchange​ rate, this was equal to a little less than a single U.S. dollar. Some commentators felt that​ China's poverty line fell short of the World​ Bank's poverty line of​ $1.25 per​ day, in 2005 purchasing power parity​ (PPP) U.S. dollars.

No, since the Chinese poverty measure is not stated in 2005 PPP U.S. dollars.

You read a newspaper report that compares wages paid to employees at Starbucks in India and in the United Kingdom. At the​ time, 1 pound was equal to 87 rupees. The report says that Starbucks baristas in India are paid a mere 56 pence an​ hour, which is lower than the cheapest coffee that Starbucks sells in the United Kingdom. A friend of yours who read the report is appalled by this information and thinks that Starbucks ought to raise its salaries substantially in India. Is your friend necessarily​ correct?

No, the flaw in the report is that it converts the wages paid in India to pounds using the current exchange​ rate, but does not account for the cost of living​ (or the prices of​ goods) in India.

Which of the following equations is the equation for velocity in the quantity theory of​ money?

Nominal GDP Over Money supply

2011 2012 T-Shirts T-Shirts Q: 80 Q: 96 P: 24 P: 24 Red Bull Red Bull Q: 540 Q: 540 P: 2 P: 3 Pizza Pizza Q: 970 Q: 890 P: 3 P: 6 Nominal GDP in 2011 was ........and nominal GDP in 2012 was ​.......... If 2011 is the base​ year, real GDP in 2011 was..........​and real GDP in 2012 was....... ​Based on your answer​ above, the percentage change in real GDP between 2011 and 2012 was percent............

$5910 $9264 $5910 $6054 2.44

Anthony owns a landscaping business that has 4 employees. His company is able to earn revenue of​ $600 per day. He knows that if he hires another​ worker, he would have to pay that worker​ $50 per day and the company would earn revenue of​ $680 per day if the new worker is hired. Determine the value of the marginal product of labor of the employee that Anthony is considering hiring.

$80

Which of the following will be considered a final good in the calculation of U.S.​ GDP?

. Defense equipment purchased by the federal government Foot massages at spas in California.

Optimizing economic agents use the real interest rate when thinking about the economic costs and returns of a loan. Suppose the average rate paid by banks on savings accounts is 0.9​% at a time when inflation is around 0.9​%. For the average​ saver, the real rate of interest on his or her savings is If banks expect that the rate of inflation in the coming year will be 3.93.9​% and they want a real return of 66​% on a certain category of​ loans, then the nominal rate they should charge borrowers on those loans is

0% 9.9%

Suppose for the year 2013 the economy of Uplandia has a nominal GDP of ​$5,100 billion and a real GDP of ​4,590 billion. For​ 2013, this​ economy's GDP deflator is........ Now suppose the GDP deflator in 2012 was 99.1 Uplandia's year-over-year inflation rate is

111.1 12.1

If the labor force is 195 million and the unemployment rate is 5.0 ​percent, the number of people considered employed is....... If the labor force participation rate is 75 ​percent, the number of potential workers is......

185.25 million 260 million

In the first​ year, inflation is 4.5 percent and the nominal interest rate for both fixed and variable rate loans is 7.5 percent. Given this​ information, the real interest rate for fixed rate loans is......percent and the real interest rate for variable rate loans is.......percent. ​(Round your response to the nearest two​ decimals) In the second​ year, inflation rises to 6.5 percent. Given this​ information, the nominal interest rate for fixed rate loans is.....percent and the real interest rate for fixed rate loans is.........percent. ​(Round your response to the nearest two​ decimals) In the second​ year, inflation rises to 6.5 percent. Given this​ information, the nominal interest rate for variable rate loans is......percent and the real interest rate for variable rate loans is......percent. ​(Round your response to the nearest two​ decimals) Suppose the inflation rate in an economy falls. Given the​ information, the real interest rate for fixed rate loans would.......and the real interest rate for variable rate loans would........ . Suppose you are deciding between a fixed rate loan and a variable rate loan. You dislike risk​ (variability) in the real interest rate you pay. Given this​ information, you should opt for a........ .

3 3 7.5 1 9.5 3 increase remain constant variable rate loan

Suppose that in January there were 4,000,000 workers in the labor​ force, with 3,736,000 employed and 264,000 ​unemployed, implying a 6.6 percent unemployment rate. A month​ later, there were 4,170,000 workers in the labor​ force, with 3,911,000 employed and 259,000 unemployed.​ (Notice the number employed went from 3,736,000 to 3,911,000​, an increase of​ 175,000.) The unemployment rate in February is.........

6.21 percent

Which of the following factors does not cause a shift in the labor demand​ curve

Changes in the wage rate.

Firm A earns​ $200,000 in profits from its production unit set up in Krakozhia. Firm B imports perfumes in wholesale from Krakozhia at​ $25 each and sells them in Islandia for​ $550. A​ third-party retailer, Firm​ C, pays​ $1.50 each for the soaps produced by Firm D and sells them at​ $4.50. Firm E imports blue cheese from Krakozhia at​ $25 per lb and sells it at the same price in Islandia.

Does not add to GDP Adds to GDP Adds to GDP Does not add to GDP

The period from 2007 to 2009 was a time of economic contraction that came to be known as the​ "Great Recession." During periods of​ recession, most firms experience a decline in demand for their​ product, as well as a decline in the​ product's equilibrium price. All other things being​ equal, macroeconomic theory predicts that the wage of most workers should decline in recessionary periods.​ However, this was not the case in the Great​ Recession, or during many other economic downturns throughout recent history. Based on the discussion in the​ chapter, explain why this might be​ so, and what the implications are for unemployment.

During downturns workers are resistant to the lowering of wages and firms try to avoid doing so. This downward wage rigidity keeps the quantity of labor supplied greater than​ demand, causing unemployment.

How does fiat money differ from commodities like gold and silver that were used as​ money?

Fiat money is intrinsically​ worthless, whereas gold and silver have intrinsic value.

If fiat money is intrinsically​ worthless, then why is it​ valuable?

Fiat money is used as legal tender by government decree and other people will accept it as payment for transactions.

Relax Foot Spa gave a foot massage to Abigail. This year, Mark's dividend payment amounted to $4,000. Firm M, a financial consulting company, employs Rachel for her analysis expertise. Alex paid $30 to his hairdresser for a haircut at a local salon.

Firms → Households Firms → Households Households → Firms Households → Firms

Suppose U.S. drivers purchased ​$50 billion of​ ExxonMobil-produced gasoline during a recent​ year, with​ one-half purchased directly from​ ExxonMobil-owned gas stations and​ one-half from independent​ (or third-party) gas stations. Suppose further that ExxonMobil purchased the oil​ (which it refined into​ gasoline) from foreign producers for ​$20 billion and that it receives 60 percent of the sales revenue that independent stations generate from selling ExxonMobil gasoline.

In this​ case, the value added by ExxonMobil to U.S. GDP is ​$20 billion.

Which of the following statements regarding cyclical unemployment are not​ true?

It is the difference between the longdash-term average rate of unemployment and the natural rate of unemployment. It is negative in recessions and positive in economic booms.

In February​ 2014, the United States added​ 175,000 jobs to the economy. Given this​ information, what can we say about the unemployment rate of the​ country?

It may​ increase, decrease, or not change depending on how many people started searching for jobs during the month.

Which of the following would not be an example of someone in the labor​ force

Mark, 45, a​ self-made millionaire, who volunteers​ full-time between several local charities

Sometimes new technology in production reduces the time that a worker takes to complete a task. Technological innovations can also completely replace a factory worker. Does this mean that technological progress will lead to​ large-scale unemployment?

No, some sectors may experience unemployment as a result of the innovations but overall productivity and incomes will​ increase, leading to more employment opportunities.

Which of the following statements about gross domestic product​ (GDP) and the aggregate accounting identity are not​ true?

The aggregate accounting identity states that Production=Income−Expenditure. GDP is a measure of sales to consumers.

In​ August, 1979, the annual rate of inflation in the U.S. was nearly​ 12%, and the U.S.​ short-term nominal interest rate was nearly​ 10%. Over the next 35​ years, both the rate of inflation and​ short-term nominal interest rate tended to fall. By August​ 2014, the rate of inflation was about​ 2% and the​ short-term nominal interest rate was close to​ 0%. How has the real​ short-term interest rate changed from 1979 to​ 2014?

The real rate remained stable at minus−​2%.

Why do the inflation rate and the nominal interest rate tend to move together over the​ long-run?

Their up and down together movement tells us that the real interest rate is relatively stable in the long run. This synchronized movement indicates that credit market conditions have tended to be relatively stable over time.

Which of the following statements are true when a bank is​ insolvent?

The​ bank's stockholders' equity goes to zero. The government bank regulator shuts down this​ bank's operations and makes payouts to its depositors. The bank owes more than it owns.

​Firms, households, and governments use the credit market for borrowing. The credit demand curve shows the relationship between the quantity of credit demanded and the real interest rate. The credit demand curve slopes downward because​ ____________. A shift in the credit demand curve can be caused by​ ___________.

a higher real interest rate reduces a borrowing​ firm's profit and hence its willingness to borrow. changes in perceived business opportunities for firms, changes in household preferences or expectations, changes in government policy.

When there are changes that improve the quality and value of leisure time, the supply of labor will​ ____________.

decrease and shift to the left.

Although GDP per capita........for income​ distribution, statistics show it..........a good indicator of overall life satisfaction.

does not account is

Items are classified as final goods only if they are the............in a chain of production.

end product

Households and firms with savings lend money to banks and other financial institutions. The credit supply curve shows the relationship between the quantity of credit supplied and the real interest rate. The credit supply curve slopes upward because a​ ____________. A shift in the credit supply curve can be caused by​ ____________.

higher real interest rate discourages current consumption and higher real interest rate encourages more saving. an aging population that is​ ill-prepared for retirement, an elevated perception on the part of households that the future may hold many​ "rainy days", a heightened desire on the part of firms to internally fund their future activities.

Explain whether each of these individuals will be counted as a part of the labor force. Alex left his full-time job as a teacher and now works part-time at the library John is a full−time student that works as a waiter on the weekends at Chili's. We know that Alex is​ ____________, and we know that John is​ ____________

in the labor force​ in the labor force

The distribution of GDP between different factions within an economy most closely relates to the.............method of aggregate accounting. The fact that the value of GDP remains equal regardless of whether GDP is measured by what people are earning or what they are producing is referred to as an.............. .

income identity

When there is an increase in population​, the supply of labor will​ ____________.

increase and shift to the right

Failure of an investment bank is typically more serious than failure of a regional bank because​ ____________.

investment banks are not FDIC​ insured, liabilities are​ larger, and bank runs can trigger stock market collapses.

he depreciation of capital equipment...........measured by most governments on their national accounts. That depreciation amount..........subtracted from GDP. Depreciation of human capital..........subtracted from GDP.

is is not is not

The salary paid to a financial advisor would be considered .............income. On a national​ level, the.........of labor income and capital income is equivalent to aggregate expenditure.

labor sum

The value of the marginal product of labor is the​ ____________.

market value of a​ worker's additional output for a firm

Which one of the sets of terms given below would correctly complete the following definition of​ GDP? "Gross Domestic Product is the​ ____ value of the​ ____ goods and services produced​ _____ of a country during a particular period of​ time."

market; final; within the borders.

A key role of banks is to identify profitable lending opportunities. Banks perform this function by​ ____________

matching lenders to the more creditworthy borrowers.

When current marketcurrent market prices are used to determine the value of each unit that is produced in an​ economy, the resulting aggregate is known as​ ____________.

nominal GDP

Economists include the word final in the definition of GDP because we​ ____________

only seek to value the end product in a chain of production. must avoid the error of double counting.

A​ country's gross nationalnational product would exceed its gross domesticdomestic product when the​ ____________

production of domestically-owned factors operating abroad exceeds the production of foreign​-owned factors operating in the United States

In order for comparisons of production across time to be​ meaningful, we must use.........

real GDP

The demand for labor​ ____________

reflects diminishing marginal productivity

By how much would current GDP change in response to each of the following​ transactions? Dell sells a $2,500 computer right off the assembly line to a student. In this​ case, current GDP ......... A homemaker buys a $2 loaf of bread at the grocery store to prepare sandwiches for her family. In this​ case, current GDP..... On the rebound again, a famous rock star marries her butler, whom she formerly paid $50,000 a year. After they are married, her husband continues to wait on her as before, and she continues to support him as before−but as a husband rather than as an employee, that is, not with a regular salary. In this​ case, current GDP.....

rises by $2,500 rises by $2 falls by $50,000

Maturity transformation is a process that transfers........into long-term investments. To avoid maturity​ mismatch, banks hold back some fraction of the deposit pool as........

short-term liabilities reserves

The level of economic activity is calculated using the income method by​ ____________.

summing labor income and capital income. adding together the income payments received by the various agents in the economy. tracking the flow of funds from firms to the owners of the factors of production.

A competitive labor market is in equilibrium when​ ____________.

the quantity of labor demanded and the quantity of labor supplied are equivalent.

According to​ salary.com, the average salary for a software engineer level III​ (a higher-level position in software design and​ implementation) in the Silicon Valley area of California is​ $108,244. However, Google pays its level III software engineers an average salary of​ $124,258. Why does Google pay a salary higher than the equilibrium salary for equivalent positions in the same​ area?

Google is paying an efficiency wage in order to minimize worker​ turnover, increase worker​ productivity, and attract the top talent.

Which of the following statements correctly describes the effects of price​ controls

Imposing these in inflationary times is economically destructive.

Suppose that there are only two small countries in the​ world: Ascot, with a population of 27,300 ​people, and​ Delwich, with a population of 21,000 people.​ Ascot's GDP is equal to ​$150 million while​ Delwich's GDP is ​$225 million.​ Delwich's GNP has been estimated to be equal to ​$265million. The revenue earned by firms that operate in Delwich but are headquartered in Ascot is equal to ​$80 million. Given the data​ above, Ascot's GNP is In​ Ascot, the per capita GDP is In​ Delwich, the per capita GNP is

$110 million $5495 $12619

What important factors do GDP estimates leave​ out? ​

Home production. Capital depreciation. Leisure. The production of illegal professions.

If the anticipated inflation rate is 3.00 percent and the nominal interest rate is 3.25 ​percent, the real interest rate is If expectations about inflation rise and the nominal interest rate remains​ unchanged, the expected real interest rate will

.25 percent. decrease

A representative bundle of commodities costs ​$100 in the United States and 80 pounds in England. The purchasing power parity​ (PPP) conversion factor between U.S. dollars and the British pound is . ​(Round your response to two decimal places.​)

1.25

Suppose that Antegria and Centopia are hypothetical neighboring countries.​ Centopia's GDP per capita was measured to be 53,000 Centopian dollars​ (C$) in 2012.​ Antegria's GDP per capita was measured as 62,000 Antegrian dollars​ (A$) in the same year. The Antegrian dollar to Centopian dollar exchange rate in this year was 1.02 ​A$/C$. Suppose the cost of a representative bundle of commodities in Centopia is ​C$0.51 and in Antegria is ​A$0.66. The PPP conversion factor between the Antegrian dollar and the Centopian dollar is........A$/C$. ​(Round your answer to two decimal​ places.) Centopian GDP per capita in terms of Antegrian dollars is ​A$..........using the exchange rate and ​A$.........using the PPP conversion factor. ​(Enter your answers as whole​ numbers.) Which of the following statements is true based on the answers obtained in the previous​ step?

1.29 54060 68370 Antegria's GDP per capita is greater than Centopia's GDP per capita when compared using the exchange rate and lower when compared using the PPP conversion factor.

Federal funds rate=Long−run target+1.5(Inflation rate−Inflation target)+0.5(Output gap) Suppose the Fed has set the​ long-run target for the federal funds rate at 1.5 percent and its target for inflation at 3 percent. If the economy is currently hitting the​ Fed's inflation target and GDP exactly equals the trend​ GDP, then the Fed will set the federal funds rate at.........percent. ​(Enter your response with no rounding​.) Now suppose the economy heats upheats up​, causing the actual inflation rate to increaseincrease to 4 percent and the economy to rise 1.5 percent above trend GDP. In this​ case, the Fed will seek to set the federal funds rate at..........

1.5 3.75

Long−term interest rates fall Labor demand shifts right Demand for goods and services increases Short−term interest rates fall and access to credit expands Order them

2 4 3 1

Okun's Law is defined​ as: Change in the unemployment rate= (−1/2)x(g−3%) If the unemployment rate is 5.15.1​% and real GDP grows by 5.2​%, the new unemployment rate is

4%

Consider an illustrative economy that produces luxury pens. Assume that in 2013 this economy produced 2020 luxury pens at a market price of ​$200 per pen. In 2014​, the number of luxury pens produced remains the same but the market price has increased to ​$300 per pen. If 2013 is the base​ year, the real GDP in 2014 is The nominal GDP in 2014 has..........by.......percent from what it was the year before

4000 increased 50

According to the quantity theory of​ money, what must the growth rate of the money supply be given the following​ information? The growth rate of real GDP is 4.8​%. The growth rate of nominal GDP is 6.2​%. The nominal interest rate is 1.8​%. The real interest rate is 0.4​%. The money supply​ (M2) is ​$10,612 ​(in billions) According to the quantity theory of​ money, the growth rate of the money supply must be According to the quantity theory of​ money, what is the inflation​ rate?

6.2% 1.4%

Suppose the government enacts a stimulus program composed of ​$600 billion of new government spending and ​$100 billion of tax cuts for an economy currently producing a GDP of ​$15,000 billion. If all of the new spending occurs in the current year and the government expenditure multiplier is 1.6​, the expenditure portion of the stimulus package will add...........percentage points of extra growth to the economy. ​(Round your response to two decimal places​.) If the government taxation multiplier is 1​, the tax cut portion of the stimulus package will add ............. percentage points of extra growth to the economy. ​(Round your response to two decimal places​.) As a result of the stimulus​ program, the​ economy's GDP was increased by ........... percentage points over its value without the program. ​(Round your response to two decimal places​.) If the​ economy's actual growth was 55 ​percent, then without the stimulus​ package, growth would have been negative ...........percentage points. ​(Round your response to two decimal places and use a minus sign if necessary.)

6.46.4 . 67 7.07 −2.07

​Let's assume the U.S.​ dollar/Mexican peso exchange rate is ​1/15 pesos and the price of a Big Mac in the United States is ​$4. ​Mexico's GDP is 16,696 billion​ pesos, and its population is 130 million people. Assuming the countries have purchasing power parity ​, the price of a Big Mac in Mexico is..........pesos. ​(Round your response to the nearest integer​.) Mexican income per capita is.........thousand pesos. ​(Round your response to the nearest integer​.) Mexican income per capita in U.S. dollars is.........thousand USD.

60 128 9

Briefly explain how an increase in the quantity of reserves that commercial banks hold at the Federal Reserve could lead to inflation.

An increase in reserves triggers a multiple expansion of bank loans and​ deposits, which generates an increase in the stock of money. If the money supply grows faster than real​ GDP, inflation will occur.

If nominal GDP​ increases, what might be the cause of this​ increase? If nominal GDP​ increases, this could be caused​ by:

An increase in the price level An increase in real GDP

Which of the following statements is likely to be​ true?

An individual likes variability in the nominal interest rate rather than the real interest rate she faces because she gets paid in nominal dollars.

Which of the following problems is the Fed likely to face if it wants to set its policy by applying the Taylor​ rule?

Applying the Taylor rule would reduce the​ Fed's flexibility to respond to changes in economic conditions.

The Centers for Disease Control and Prevention​ (CDC) has studied the economic impact of a global pandemic. According to its​ estimates, if MERS develops a resistance to current​ treatments, the U.S. population will fall from 315 million to 220 ​million, worst​ case, over the course of a year.​ Consequently, real GDP will collapse due to the pandemic. It is estimated that real GDP will fall from​ $15,000 billion to ​$4,000 billion. Calculate real income per capita before and after the MERS pandemic.

Before the​ pandemic, real income per capita is ​$47.62 thousand. ​ After the​ pandemic, real income per capita is ​$18.18 thousand.

What are the disadvantages of using Big Macs to measure purchasing power​ parity? ​(Check all that apply.​)

Big Macs represent only a very small fraction of​ people's consumption. The Big Mac index simply compares a bundle consisting of only one good.

Two economists estimate the government expenditure multiplier and come up with different results. One estimates the multiplier at 0.8​, while the other comes up with an estimate of 1.2. Explain why these estimates are different in terms of the assumptions that each economist is making.

Compared to the first​ economist, the second economist must be assuming either a larger induced increase in​ consumption, a smaller crowding out​ effect, or both.

What could explain why a decrease in taxes could lead to a​ less-than-proportionate increase in​ output?

Consumers may choose to save much of the tax cut in anticipation of having to pay higher taxes in the future. As a result of diminishing returns to current​ consumption, consumers may choose to spread the extra spending over the long term rather than consuming the proceeds of a tax cut all at once.

Consumption might not rise very much as a result of a tax cut in the short run. Which of the following are reasons for​ this? ​(Check all that apply.​)

Consumers might try to smooth their consumption by spreading the proceeds of a tax cut over the long term. Consumers might recognize that the government will have to raise taxes in the future to pay for the current tax cut. Wealthy consumers​ don't have an urgent reason to consume the tax cut right away.

The European Central Bank​ (ECB) manages monetary policy for the eurozone. Following the financial crisis of​ 2007-2008, the​ ECB, like the​ Fed, lowered interest rates to around zero. Using the concept of the zero lower​ bound, which of the following problems is likely to arise for the Fed while using countercyclical monetary​ policies?

During a recession, the fed will not be able to lower interest rates beyond a certain limite to mitigate unemployment and deflation

Using the concept of the zero lower​ bound, which of the following problems is likely to arise for the Fed while using countercyclical monetary​ policies?

During a​ recession, the Fed will not be able to lower interest rates beyond a certain limit to mitigate unemployment and deflation

How do expansionary policies differ from contractionary​ policies?

Expansionary policies seek to reduce the severity of​ recessions, while contractionary policies seek to slow down the economy when it grows too fast. Expansionary policies seek to increase economic growth and increase​ employment, while contractionary policies seek to reduce the risk of excessive price inflation. Expansionary policies seek to shift the labor demand curve to the​ right, while contractionary policies seek to shift it to the left.

How can expansionary​ expenditure-based fiscal policy lead to crowding out in the​ economy?

Expenditure-based fiscal policy leads to more government​ borrowing, absorbing funds that would have otherwise been borrowed and expended by the private sector.

According to the Taylor​ rule, the Federal Reserve should lowerlower the federal funds rate when the​ ____________. ​(Check all that apply​.)

Fed's inflation rate target rises. output gap falls ​Fed's long-run target for the federal funds rate falls inflation rate falls.

What are some of the issues with bitcoins replacing major​ currencies?

Fiat money is generally worthless without a government decree that it is legal tender. Bitcoin deposits are not insured by the government. The value of a bitcoin is highly volatile and so people that hold them may lose money.

How does the zero lower bound on interest rates affect the working of monetary​ policy?

It complicates the formulation of expansionary monetary policy because it forces the central bank to rely on nontraditional and less familiar tools such as quantitative easing. It makes the implementation of expansionary monetary policy more difficult since it effectively blocks the central​ bank's use of its primary tool. It reduces the effectiveness of monetary policy by impairing the ability of the public​ (including investors) to understand the central​ bank's actions and signals.

How does the Federal Reserve obtain a particular value for the federal funds​ rate?

It finds the point on the demand curve that corresponds to that federal funds rate and makes available the exact level of reserves associated with that point on the demand curve.

How does a bank manage​ risk?

It invests in a diverse set of assets.

Which of the following statements regarding the natural rate of unemployment are​ true? ​

It is the longdash-term average rate of unemployment. It is the rate around which the actual rate of unemployment fluctuates.

Which of the following statements are consequences of lengthening eligibility for unemployment​ insurance? ​(Check all that apply.​)

It supports household spending by increasing the incomes of unemployed workers and shifts the labor demand curve to the right. It partially reduces the incentive for unemployed workers to find new jobs and shifts the labor supply curve to the left. It gives unemployed workers more time to find a job that is a good fit for their skills.

Based on your answers in the previous​ parts, which of the following functions is likely to be true if the central bank works​ independently?

It would be able to control​ short-term interest rates to regulate inflation.

​____________ used the concepts of animal spirits and sentiment to explain economic fluctuations.

John Maynard Keynes

Suppose the market participants expect that the Fed will increase the federal funds rate from 1.25 percent to 1.625 percent. Based on this​ information, which of the following outcomes is likely to be​ true?

Loan origination will decrease.

Which of the following would not likely contribute to business cycle​ fluctuations?

Long-term interest rates that closely follow​ short-term rates

Which of the following is an example of countercyclical monetary policy for controlling​ inflation?

Lower bank reserves and increase interest rates

Which of the following statements correctly describe purchasing power parity​ (PPP)?

PPP-based measures of GDP account for the fact that many commodities are cheaper in poorer countries. PPP constructs the cost of a representative bundle of commodities in each country and uses these relative costs for comparing GDP across countries.

Suppose the government prints and spends new currency. Which of the following statements are true in this​ case

Printing/spending a modest amount of new currency is socially beneficial. The citizens lose because the resulting inflation reduces the real value of the currency that they already hold The citizens gain because their government has more money to spend.

Other than open market​ operations, what tools does the Federal Reserve use to manipulate interest rates in the​ economy?

Quantitative easing. Changing the interest rate paid on reserves deposited at the Fed. Lending from the discount window. Changing the reserve requirement.

In​ 1973, the major​ oil-producing nations of the world declared an oil embargo. The price of​ oil, a key source of​ energy, increased. This led to widespread inflation as costs of production increased steeply. The resulting fall in GDP and employment led the United States into a recession. Which of the business cycle theories explained in the chapter would best fit this explanation of the 1970s​ recession?

Real business cycle theory.

Which of the following will be considered a final good in the calculation of U.S.​ GDP?

School supplies purchased by a local school board Golf outings at courses in North Carolina.

Which of the following mechanisms can the Fed use to implement a contractionary countercyclical monetary​ policy?

Selling government bonds in an open market operation.

Which of the following is true about the equilibrium federal funds​ rate

The Fed can increase the equilibrium federal funds rate by decreasing the supply of reserves.

During the financial crisis of​ 2007-2008, many central​ banks, including the Federal Reserve and the Bank of​ Japan, lowered their federal funds rate​ (or the​ non-U.S. equivalent) to around zero. The Bank of Japan took an​ additional, unusual​ measure: it introduced a negative​ short-term interest rate on excess reserves. Faced with a negative interest​ rate, banks must pay to lend their excess reserves to other banks. Given this​ information, which of the following is likely to happen as a result of this policy​ change?

The demand curve for reserves will shift to the left.

What is​ stockholders' equity?

The difference between a​ bank's total assets and total liabilities.

Though fiscal policies are controlled by individual governments in the​ eurozone, the European​ Union's Stability and Growth Pact places strict limits on​ country-level deficit spending. How does the confluence of the zero lower bound and restrictions on the fiscal deficit cause problems for countercyclical macroeconomic​ policy?

The government will not be able to lower tax rates to control recession in an economy.

Given the following​ information, what is the growth rate of nominal​ GDP? Upper Y 0 real GDP​ = ​$1000 ​(in millions) Upper Y 1 real GDP​ = ​$1100 ​(in millions) Upper Y 0 price level​ = 120 Upper Y 1 price level​ = 130

The growth rate of nominal GDP is 18.33​%

If the inflation rate is negative​, what must be​ true?

The growth rate of real GDP greater than> the growth rate of money supply.

Which of the following would not be counted in a​ nation's gross domestic product​ (GDP)

The hard drive inside your computer

Some economists stress the role of monetary policy in the period leading up to the recession of 2007-2009. Between 2001 and​ 2003, the Federal Reserve lowered the target federal funds rate from​ 6.5% to​ 1%, and kept it there through much of 2004. This resulted in a substantial decline in real interest rates throughout the​ economy, including mortgage rates. Based on the​ chapter's discussion of monetary and financial​ factors, how could the Federal​ Reserve's policies have contributed to the economic​ "bubble" of the​ pre-recession years of 2000-​2006?

The low federal funds rate also lowered mortgage​ rates, driving an increase in demand for​ housing, which in turn drove up real estate prices.

In April​ 2012, the Bazanian​ Daily, a leading newspaper in the country of​ Bazania, carried a report titled​ "20,000 jobs added in the last​ quarter; unemployment rate shoots up from 5 percent to 6.7​ percent." How could the unemployment rate in Bazania increase even when new jobs were​ created?

The new jobs may have made discouraged workers optimistic enough to start applying for​ jobs, thus​ re-entering the labor force and being counted as​ unemployed, which causes the overall unemployment rate to increase.

Suppose you are comparing the income per capita in the United States and Ghana. You try two approaches. In the first​ approach, you convert the Ghana values into U.S. dollars using the current exchange rate between the U.S. dollar and the Ghanaian cedi. In the second​ approach, you also convert both values to U.S. dollars using the purchasing power​ parity-adjusted exchange rate. Which approach is likely to give you a more accurate picture of the living standards in both​ countries?

The second​ approach, because it takes into account the relative costs for each country.

Which of the following statements are true if the government expenditure multiplier is​ zero? ​(Check all that apply.​)

This implies that private investment is fully​ 'crowded out' by government borrowing. Many economists believe this multiplier is close to zero when the economy is already booming.

The former chairman of the Federal​ Reserve, Alan​ Greenspan, used the term​ "irrational exuberance" in 1996 to describe the high levels of optimism among stock market investors at the time. Stock market indexes such as the​ S&P Composite Price Index were at an​ all-time high. Some commentators believed that the Fed should intervene to slow the expansion of the economy. Why would central banks want to clamp down when the economy is​ growing?

To block the formation of unsustainable speculative asset bubbles. To prevent inflationary forces from gathering momentum.

Which of the following statements correctly describe co-movements that are historically observed in the​ data?

Unemployment moves negatively with real GDP. Real consumption moves positively with real investment.

Making generalizations about the welfare of a​ country's citizens based on its income per capita is problematic because​ ____________.

a high per capita income could be poorly distributed.

An old saying​ goes: "Nothing succeeds like​ success." How could this saying relate to​ Keynes's animal spirits view of economic​ fluctuations?

When people​ succeed, they become confident and​ optimistic, which can lead to actions that stimulate further success.

Which of the following best explains why the labor supply curve slopes​ upward

When wages​ increase, the opportunity cost of not working​ increases, leading people to seek more work hours.

You and a friend are debating the merits of using monetary policy during a severe recession. Your friend says that the central bank needs to lower interest rates all the way down to zero. According to​ him, zero nominal interest rates will boost lending and​ investment; consumers and firms will surely borrow and spend when interest rates are zero. Given that inflation in your country is currently 3​ percent, would you agree with his​ reasoning? Explain your answer.

Yes, a zero nominal interest rate coupled with a 3 percent inflation rate yields a negative value for the real​ rate, which is the rate that is meaningful for investment decisions.

Is real income per capita more relevant in understanding differences in international living standards than real income per​ worker?

Yes, as it conveys the conditions of the whole population including children and the elderly.

When nominal interest rates have hit the zero lower​ bound, can central banks use interest rates to stimulate the​ economy? Explain.

Yes, but the mechanism by which central banks manipulate the interest rates that matter for spending must deviate from the​ banks' traditional method. ​Yes, since the zero lower bound applies to nominal​ rates, not real​ rates, and it is real rates that are relevant for investment decisions.

Does the effectiveness of monetary policy depend on inflation​ expectations? Explain

Yes, the central​ bank's ability to influence the​ long-term expected real interest rate is partly determined by the​ public's long-term expectations of the inflation rate.

Quantitative easing is​ ____________.

an attempt by the central bank to more directly impact​ long-term interest rates. the central​ bank's purchase of​ long-term bonds in the open market. a variation on the central​ bank's traditional manner of conducting open market operations.

The supply curve for reserves is​ vertical, or perfectly​ inelastic, because​ ____________.

it is set by Fed policy and does not respond to the federal funds rate.

The Taylor rule states that​ ___________.

central banks should set their policy rates​ (in the United​ States, the federal funds​ rate) according to a formula that incorporates the​ long-term target for the policy​ rate, the output​ gap, and the deviation of inflation from its target.

According to his theory of animal spirits and​ sentiment, changes in sentiment cause economic fluctuations through​ ____________.

changes in household consumption and firm investment.

The​ long-term real interest rate moves..........with the federal funds rate. If the federal funds rate​ falls, the​ long-term nominal interest rate.........and inflation expectations respond..........

directly falls minimally

market participants will form their expectations of the federal funds rate by using

economic news

Real business cycle theory​ ____________.

emphasizes the role of changing productivity and technology in causing economic fluctuations.

Changing corporate tax rates is an example of countercyclical.............policy. If the government lowers corporate tax​ rates, its goal would be a...........shift of the...............curve.

fiscal rightward labor demand

Suppose an economy has been growing for the last five quarters. It is more likely to..........in the next quarter.

grow

According to the quantity theory of​ money, ____________

in the long​ run, the growth in the money supply is directly related to the inflation rate

Given the​ circumstances, the countercyclical monetary policy adopted by the Federal Reserve is likely to result in​ a(n)

increase in the federal funds rate

How did the fall in housing prices cause the entire financial system in the United States to freeze​ up? The fall in housing prices resulted in..........leading to enormous........disrupting the​ banks' ability and willingness to make loans to......... .

increased defaults bank losses consumers and firms

The functions of a central bank are to​ ____________.

indirectly control the money supply. control certain key interest rates. monitor financial institutions.

​Okun's Law​ ____________.

is usually an accurate representation of the data.

An economic expansion begins​ ____________.

just after the trough of a recession

According to the concept of persistence in the rate of​ growth, if the economy grows this​ quarter, it will​ ____________.

likely grow next quarter.

How do wage flexibility and downward wage rigidity affect the extent of unemployment in the economy when the demand for labor​ falls? When the demand for labor​ falls, the fall in employment is.......when real wages are flexible and.........when wages are downwardly rigid.

limited amplified

GDP at purchasing power parity​ (PPP) takes into account variations in....... PPP attempts to work out how much currency will be needed to buy.........quantity of goods and services in different countries. GDP per capita in PPP is the most useful for comparing...... .

living costs the same living standards

The cost to a business from frequently changing its prices due to high inflation rates is called.......

menu cost

Suppose the Fed wants to implement an ​anti-recession monetary policy. For each of the tools listed​ below, indicate the direction the​ Fed's action should take. The Fed should conduct an open market.......of Treasury bonds. The Fed should............the reserve requirement. The Fed should............the interest rate paid on reserves deposited at the Fed. The Fed should...........lending from its discount window.

purchase lower decrease expand

Expansionary monetary policy shifts the labor demand curve to the right by​ ____________.

pushing​ long-term interest rates down​, thereby causing greater private expenditures and inducing firms to want to hire more workers.

Expansionary policy can be achieved through...........in income taxes. This change in taxes............have multiplier​ effects, but will likely have to be..............than​ expenditure-based fiscal policy injections.

reductions can larger

During an economic​ expansion, the demand curve for reserves will​ ____________.

shift​ rightward, as banks make more loans.

When the inflation rate starts to rise above the​ Fed's inflation​ target, the Fed will try to.........the rate of money supply growth When the Fed attempts to reduce the federal funds​ rate, it can do so with the help of the following three​ tools: By..........the quantity of bank reserves through open market operations. By..........the reserve requirement. By.........the interest rate it pays on reserves.

slow down raising reducing reducing

​Okun's Law states that​ ____________.

when growth in real GDP is above​ 3%, unemployment drops and when it is below​ 3%, unemployment increases.

Structural unemployment is the unemployment that arises​ ____________

when wage rigidity creates a persistent gap between labor supply and labor demand.

Central banks undertake quantitative easing programs to​ ____________.

work around the problems when​ short-term nominal interest rates approach zero. more forcefully and directly impact the interest rates relevant for investment decisions