Macroeconomics
In the national income accounts, depreciation is called
"consumption of fixed capital"
The word "economy" comes from the Greek word oikonomos which means
"one who manages a household"
Belarus has a comparative advantage in the production of linen, but Russia has an absolute advantage in the production of linen. If these two countries decide to trade,
Belarus should export linen to Russia
Tom produces baseball gloves and baseball bats. Steve also produced baseball gloves and baseball bats, but Tom is better at producing both goods. In this case, trade could
Benefit both Steve and Tom
If the Apple corporation sells a bond it is
Borrowing directly from the public
Olivia bakes cakes and Andrew grows corn. Olivia and Andrew both like to eat cake and eat corn. In which of the following cases is it impossible for both Olivia and Andrew to benefit from trade?
Both Olivia and Andrew can benefit from trade in all of the above cases; Olivia cannot grow corn and Andrew cannot bake cakes, Olivia is better than Andrew at baking cakes and Andrew is better than Olivia at growing corn, Olivia is better than Andrew at baking cakes and at growing corn
In general, as a person includes fewer stocks and more bonds in his portfolio,
Both risk and expected return fall
Which of the following is correct concerning stock market irrationality?
Bubbles could arise, in part, because the price that people pay for stock depends on what they think someone else will pay for it in the future
Changes in the quality of a good
Can lead to either an increase or a decrease in the value of a dollar
Over time, people have come to rely more on market-produced goods and services and less on goods and services they produce for themselves. For example, busy people with high incomes, rather than cleaning their own houses, hire people to clean their houses. By itself, this change has
Caused measured GDP to rise
A budget deficit
Changes the supply of loanable funds
A surplus or shortage in the money market is eliminated by adjustments in the price level according to
Classical theory, but not liquidity preference theory
Which of the following in included in M2 but not in M1?
Savings deposits
What term refers to the property that society has limited resources and therefore cannot produce all the goods and services people wish to have?
Scarcity
• When a society cannot produce all the goods and services people wish to have, it is said that the economy is experiencing
Scarcity
Most economists use the aggregate demand and aggregate supply model primarily to analyze
Short-run fluctuations in the economy
For the US economy, money holdings are
Small part of household wealth, and so the wealth effect is small
A decrease in the money supply might indicate that the Fed had
Sold bonds in an attempt to increase the federal funds rate
Al, Ralph, and Stan are all intending to retire. Each currently has $1 million in assets. Al will earn 16% interest and retire in two years. Ralph will earn 8% interest and retire in four years. Stan will earn 4% interest and retire in eight years. Who will have the largest sum when he retires?
Stan
After adjusting for inflation, over time the prices of most natural resources have been
Steady or falling, meaning that our ability to conserve them is growing more rapidly than their supplies are dwindling
A U.S. Treasury bond is a
Store of value, but not a common medium of exchange
Sam has no job but keeps applying to get a job with a business that is unionized. He is qualified and he finds the pay attractive, but the firm is not hiring. Sam is
Structurally unemployed. Structural unemployment exists even in the long run
The forces that make market economies work are
Supply and demand
Other things being constant, when a firm sells new shares of stock, the
Supply of the stock increases and the price decreases
One of the differences between the GDP deflator and the consumer price index is
The GDP deflator reflects prices for all goods and services produced domestically and the consumer price index reflects prices for some goods and services bought by consumers
In most societies resources are allocated by
The combined actions of millions of households and firms
Based on past experience, if a country is experiencing hyperinflation, then which of the following would be a reasonable guess?
The country has high money supply growth, inflation is acting like a tax on everyone who holds money, the government is printing money to finance its expenditures
Buyers are able to buy all they want to buy and sellers are able to sell all they want to sell at
The equilibrium price but not above or below the equilibrium price
You may be unwilling to buy a used car because you suspect the last owner found out the car was a lemon. You may treat a car you rented with a little less care than you would use on your own car
The first example primarily illustrates adverse selection; the second primarily illustrates moral hazard
Which of the following is a subject that economists study?
The growth in average income, the fraction of the population that cannot find work, the rate at which prices are rising
Disposable income is
The income that households and businesses have remaining after satisfying their obligations to the government.
According to John Maybnard Keynes
The interest rate adjusts to balance the supply of, and demand for, money.
A decrease in government spending and the enactment of an investment tax credit would definitely cause
The interest rate to increase
A downward-sloping demand curve illustrates
The law of demand
Social security payments are indexed for inflation using the CPI. A recent newspaper editorial claimed that Social security recipients are harmed by years of low inflation because they do not receive as large an increase in their payments as they do in years of high inflation. Which are of the following statements is correct?
The newspaper editorial could be correct if the prices of the goods consumed by Social Security recipients change at a different rate than the prices of the goods in the market basket used to compute the CPI
According to the classical dichotomy, when the money supply doubles, which of the following also doubles?
The price level and the nominal wages
According to the assumptions of the quantity theory of money, if the money supply increases 5 percent, then
The price level would rise by 5 percent and real GDP would be unchanged
Aggregate demand includes
The quantity of goods and services the government, households, firms, and customers abroad want to buy
As the interest rate falls,
The quantity of money demanded rises, which would reduce a surplus
A production possibilities frontier is a straight line when
The rate of tradeoff between the two goods being produced is constant
Which of the following statements is correct about the relationship between the nominal interest rate and the real interest rate?
The real interest rate is the nominal interest rate minus the rate of inflation
A demand curve shows the relationship between
price and quantity demanded
"Other things equal, when the price of a good rises, the quantity demanded of the good falls, and when the price falls, the quantity demanded rises." This relationship between price and quantity demanded is referred to as
the law of demand
"Monetary policy can be described either in terms of the money supply or in terms of the interest rate". This statement amounts to the assertion that
changes in monetary policy aimed at contracting aggregate demand can be described either as decreasing the money supply or as raising the interest rate
Corey deposits $1,000 in a savings account that pays an annual interest rate of 5 percent. Over the course of a year, the inflation rate is 1.7 percent. At the end of the year, Corey has
$50 more in his account, and his purchasing power has increased by $33
Economists have found that union workers earn what percent more than similar nonunion workers?
10 to 20
About what percentage of jobs are destroyed every year, and about what percentage of workers leave their jobs in a typical month?
10% and 3%
Approximately what percentage of the world's economies experience scarcity?
100%
You put money into an account that earns a 5 percent nominal interest rate. The inflation rate is 2 percent, and your marginal tax rate is 20 percent. What is your after-tax real rate of interest? (Tax rate x nominal interest rate, after tax rate x nominal interest rate, after tax nominal interest rate-inflation rate)
2.0 percent
A typical American worker covered by unemployment insurance receives
50 percent of his former wages for 26 weeks
According to the aggregate demand and aggregate supply model, in the long run a decrease in the money supply leads to
A decrease in the price level but does not change real GDP
A decrease in the US interest rates leads to
A depreciation of the dollar that leads to greater net exports
Other things the same, as the maturity of a bond becomes longer, the bond will pay
A higher interest rate because it has more risk
Examples of a nondurable good
A pair of shoes, one gallon of gasoline, a pencil
Any item that people can use to transfer purchasing power from the present to the future is called
A store of value
A basic principle of economics is that a country's standard of living depends on its
Ability to produce goods and services
A decrease in government spending initially and primarily shifts
Aggregate demand to the left
A decrease in the availability of an important major resource such as oil shifts
Aggregate supply left
Trade can make everybody better off because it
Allows people to specialize according to comparative advantage
If Congress increased the tax rate on interest income, investment
And saving decrease
All of the presidents of the regional Federal Reserve banks
Attend each FOMC meeting
The most obvious benefit of specialization and trade is that they allow us to
Consume more goods than we otherwise would be able to consume
Which famous economist developed the principle of comparative advantage as we know it today?
David Ricardo
An increase in the minimum wage
Decreases the quantity of labor demanded but increases the quantity of labor supplied
A decrease in the money supply creates an excess
Demand for money that is eliminated by falling prices
A national chain of grocery stores wants to finance the construction of several new stores. The firm has limited internal funds, so it likely will
Demand the required funds by selling bonds
Which of the following is a characteristic of a perfectly competitive market?
Different sellers sell identical products, there are many sellers, sellers must accept the price of market determines
A leading environmental group recently published a report contending that humans are running a "resource deficit" because we are using natural resources faster than they can be regenerated. The group claims that this means that economic growth will eventually stop, and will even be reversed. An economist would
Disagree with the report, in part because it ignores the mitigating effects of technological change
A Closed economy
Does not engage in international trade of goods and services and does not engage in international borrowing or lending
If a firm sells a total of 100 shares of stock, then
Each share represents ownership of 1 percent of the firm
Policies such as rent control and trade barriers persist in spite of the fact that economists are virtually united in their oppositition to such policies probably because
Economists have not yet convinced the general public that the policies are undesirable
Macroeconomics is the study of
Economy-wide phenomena
According to the quantity equation, the price level would change less than proportionately with a rise in the money supply if there were also
Either a rise in output or a fall in velocity
The National Labor Relations Board
Enforces workers' rights to unionize
Suppose the incomes of buyers in a market for a particular normal good decrease and there is also a reduction in input prices. What would we expect to occur in this market?
Equilibrium price would decrease, but the impact on the equilibrium quantity would be ambiguous
Which of the following defines an annuity?
For a fee, an insurance company provides you with regular income until you die
An economic outcome is said to be efficient if the economy is
Getting all it can from the scarce resources it has available
All Fed purchases and sales of
Government bonds are conducted at the New York Fed's trading desk
Aggregate demand shifts left if
Government purchases decrease and shifts left is stock prices fall
Fiscal policy refers to the idea that aggregate demand is affected by changes in
Government spending and taxes
Historically, as recessions have ended the unemployment rate declined
Gradually to a rate of about 5%-6%
The key determinant of the standard of living in a country is
Growth rate of real GDP
A circular-flow diagram is a model that
Helps to explain how participants in the economy interact with one another and helps to explain how the economy is organized
Wealth is redistributed from debtors to creditors when inflation was expected to be
High and it turns out to be low
A market supply curve is determined by
Horizontally summing individual supply curves
Categories of U.S. consumer spending, ranked from largest to smallest are
Housing, transportation, food & beverages, and medical care
The principle of comparative advantage does not provide answers to certain questions. One of those questions is
How are the gains from trade shared among the parties to a trade?
Economics is the study of
How society manages its scarce resources
Consumer goods that are produced, go into inventory, and are not sold during the current period are
Included in current period GDP as inventory investment
The notion that our ability to conserve natural resources is growing more rapidly that their supplies are dwindling is supported by the fact that
Inflation-adjusted prices of most natural resources have been stable or fallen over time
The concept of present value helps explain why
Investment decreases when the interest rate increases, and it also helps explain why the quantity of loanable funds demanded decreases when the interest rate increases
The inflation tax
Is a tax on everyone who holds money
When a society decides to increase its quantity of physical capital, the society
Is in effect deciding to consume fewer goods and services in the present
For the purpose of calculating the consumer price index, the basket of goods
Is kept the same from year to year so that the effects of price changes are isolated from the effect of any quantity changes that might be occurring at the same time
The risk of a portfolio
Is positively related to the average return of the portfolio
A double coincidence of wants
Is required when there is no item in an economy that is widely accepted in exchange for goods and services, is required in an economy that relies on barter, is a hindrance to the allocation of resources when it is required for trade
A bank has a 10 percent reserve requirement, $36,000 in loans, and has loanded out all it can given the reserve requirement
It has 40, 000 in deposits
If the money multiplier is 3 and the Fed buys $50,000 worth of bonds, what happens to the money supply?
It increases by $150,000
Which of the following is correct concerning diversification?
It only reduces firm-specific risk; much of the reduction comes from increasing the number of stocks in a portfolio from 1 to 30
Janet bought flour and used it to bake bread she ate. ABC Bakery bought flour which it used to bake bread that customers purchased. In which case will the flour be counted as a final good?
Janet's purchase but not ABC Bakery's purchase
A society allocates its scarce resources to various jobs. These scarce resources include
Land, people, machines
A decrease in demand is represented by a
Leftward shift of a demand curve
A reduction in the inflation rate would make relative prices
Less variable, making it more likely that resources will be allocated to their best use
A significant example of a temporary tax cut was the one announced in 1992 by President George H. W. Bush. The effect of that tax cut on consumer spending and aggregate demand was
Likely smaller than if the cut had been permanent
A situation in which the Fed's target interest rate has fallen as far as it can fall it sometimes described as a
Liquidity trap
Economists would predict that, other things the same, the more generous unemployment compensation a country has, the
Longer the duration of each spell of unemployment and the higher the unemployment rate.
In the United States in the late 1970s, nominal interest rates were high and inflation rates were very high. As a result, real interest rates were
Low, and in some years they were negative
In a market economy, scarcity of resources is most clearly reflected in
Market prices
Real GDP
Measures economic activity and income
If people decide to hold less money, then
Money demand decreases, there is an excess supply of money, and interest rates fall
The inputs into production of goods and services that are provided by nature, such as land, rivers, and mineral deposits are called
Natural resources
Cyclical unemployment is caused by
Neither frictional nor structural unemployment
If the prices of all goods and services produced in the economy rose while the quantity of all goods and services stayed the same, which would rise?
Nominal GDP but not real GDP
According to classical macroeconomic theory, changes in the money supply affect
Nominal variables, but not real variables
When all market participants are price takers who have no influence over prices, the markets have
Numerous buyers and sellers
Currency includes
Paper bills and coins
In a simple circular-flow diagram, firms use the money they get from a sale to
Pay wages to workers, pay rent to landlords, pay profit to the firms owners
The Wagner Act of 1935
Prevents employers from interfering when workers try to organize a union
A demand schedule is a table that shows the relationship between
Price and quantity demanded
The one variable that stands out as the most significant explanation of large variations in living standards around the world is
Productivity
A relatively steep demand curve indicates that
Quantity demanded will adjust only slightly to a price change
A relatively flat demand curve indicates that
Quantity demanded will adjust significantly to a price change
The introduction of a union into an industry
Raises wages and lowers employment in that industry
A nation's standard of living is best measured by its
Real GDP per person
The phenomenon of scarcity stems from the fact that
Resources are limited
Economists believe that production possibilities frontiers are often bowed because
Resources are not completely adaptable
A decrease in the expected price level shifts short-run aggregate supply to the
Right, and an increase in the actual price level does not shift short-run aggregate supply
If the efficient markets hypothesis is correct, then
The stock market is informationally efficient
When two countries trade with one another, it is most likely because
The two countries wish to take advantage of the principle of comparative advantage
If net exports is a negative number for a particular year then
The value of foreign goods purchased exceeded the value of goods sold to foreigners during the year
In computing the consumer price index, a base year is chosen. Which of the following statements about the base year is correct?
The value of the consumer price index is always 100 in the base year
If an economy is producing efficiently then
There is no way to produce more of one good without producing less of another good
Suppose that fundamental analysis indicates a particular company's stock is overvalued.
This means its present value is less than its price. You shouldn't consider adding the stock to your portfolio.
A German citizen buys an automobile produced in the United States by a Japanese company. As a result,
U.S. net exports and GDP increase, Japanese GNP increases, German net exports decrease, and German GNP and GDP are unaffected
All US paper dollars read "This note is legal tender for all debts, public and private". This statement represents which characteristic of US currency?
US paper money is fiat money
Wealth is redistributed from creditors to debtors when inflation is
Unexpectedly high
Economics is the study of how society manages its
Unlimited wants and limited resources
Factors of production are
Used to produce goods and services.
Because the CPI is based on a fixed basket of goods, the introduction of new goods and services in the economy causes the CPI to overestimate the cost of living. This is so because
When a new good is introduced, it gives consumer greater choice, thus reducing the amount they must spend to maintain their standard of living
When can two countries gain from trading two goods?
When the first country can only produce the first good and the second country can only produce the second good, when the first country can produce both goods, but can only produce the second good at great cost, and the second country can produce both goods, but can only produce the first good at great cost, when the first country is better at producing both goods and the second country is worse at producing both goods
