Macroeconomics- C719 Western Governors University
What is a visual picture of the relationships between the resource market, in which income is earned, and the product market, in which income is used to purchase goods and services?
A Circular Flow Model (describes a mixed economy)
True or false. The standard of living is lowered when a country has more workers to feed
False Increases in both the size and the quality of the labor force can contribute to economic growth
True or false. Innovations resulting from research and development and investment spending tend to occur at a steady pace
False Innovations do not occur at a steady pace, which leads to some instability. This is the source of real business cycles
Which of the following are benefits of economic growth?
Higher income This enables consumers to enjoy more goods and services, as well as better standards of living
What are the interest-earning assets of a bank?
Loans Loans are the interest-earning assets of a bank
What is one benefit of economic growth?
Lower government borrowing Economic growth creates higher tax revenues and there is less need to spend money on benefits, such as unemployment
Who does the Federal Reserve Board of Governors include?
Seven members appointed by the U.S. president for 14-year staggered terms These governors do not always complete the entire 14-year term. Also, no more than one governor from any of the 12 districts can serve on the board
n 2011, the per capita gross national income was $850 in
Sierra Leone
Which category of transfer programs is least likely to change in response to changing economic conditions?
Social Security Survivor's benefits A family is eligible for a survivor's benefits when a covered employee (parent or spouse) dies; this is not an event that depends on the state of the economy. Other transfer programs that can change are Medicaid, Food Stamps and Unemployment Benefits
What are negative effects that have an impact on everyone to some degree?
Public Bads (Pollution, Global Warming, Animal Extinction)
A good that is nonrival in consumption and not subject to exclusion is called a(n)
Public Goods (Sunsets & Lighthouses)
When price changes, there is an opposite change in what?
Quantity demanded
Which of the following is not one of the reasons why the aggregate supply curve slopes upward in the short run?
Quick responses to information The aggregate supply curve's upward slope results from market imperfections, such as delayed responses to information, not quick responses
Real GDP per capita for the year for a population of 50,000 and the real GDP of 5,000,000 is
Real GDP per capita for the year for a population of 50,000 and the real GDP of 5,000,000 is 100. Real GDP/capita = Real GDP/Population = 5,000,000/50,000 = 100
Which of the following is not one of the original functions of the Federal Reserve System?
Regulating the supply of money and the availability of credit in the United States The Federal Reserve System was intended to regulate banks and serve as a lender of last resort. It would also serve as a banker to the treasury, clear checks, and issue currency. Only later did monetary policy become its major function
In which case would the capital gains tax apply?
Rob purchased stock for $10,000 and later sold it for $15,000 Rob would be taxed on the $5,000 profit he made after selling the stock
Which of the following is included in M2, but not in M1?
Savings deposits Savings deposits are included in M2, but not in M1
The idea that supply creates its own demand is known as
Say's law Say's law states that supply creates its own demand
What happens when foreign investors lose confidence in a nation's ability to repay the loans?
They will no longer want to hold that country's debt When a country's debt is too large, foreign investors find it too risky to hold the debt
True or false. There is an inverse relationship between the price level and the quantity demanded of real GDP
True The aggregate demand curve, like the demand curves for individual goods, is downward sloping
If a tax cut is successful in raising incentives and causing aggregate supply to shift to the right, this supply-side policy will lead to
higher output, income, and employment, but a lower price level Equilibrium output increases and the equilibrium price level falls
The relationship between price level and aggregate supply
is positive At higher price levels across the economy, firms expect that they can sell their final products at higher prices
Transaction demand for money
is positively related to real income Demand for money is positively related to real income
Decreasing money growth leads to
higher interest rates
Higher price levels are associated with
higher interest rates Borrowing usually falls when interest rates go up, so the quantity demanded is reduced
If the economy needs to increase by $800,000 to be at full employment and the marginal propensity to consume is .75, how big an increase in investment would be needed to reach the full-employment output?
$200,000 An increase in investment of $800,000 would be needed to reach the full-employment output. With an MPC of .75, the multiplier is 4, so 4 x $200,000 = $800,000
In Figure 8.2, if current equilibrium income is $3,300, but the target level of income is $3,500, the recessionary gap is
$50, so the expenditure multiplier is 4 The recessionary gap, distance DE, measures how much aggregate expenditure must rise to bring national income up to the desired level. The ratio of the change in equilibrium income ($200) divided by the recessionary gap ($50) is the expenditure multiplier
**Aggregate Demand**
**Aggregate Demand**
**Aggregate Supply**
**Aggregate Supply**
When price changes, one should expect a change in
*quantity* supplied
What are major issues in both political and economic discussions?
1. Deficit spending 2. Debt by the government
Give some reasons why costs tend to increase with output?
1. If firms are using machines and tools more, they wear out faster and break down more often 2. When more entrepreneurs are trying to start or expand businesses, there is greater competition for loans, so interest rates rise 3.In order to raise production with given resources, some labor has to work overtime at higher pay
The Theory of Price Formation is based on 2 propositions
1. Quantity demanded is negatively related to price 2. Quantity supplied is positively related to price
The Federal Reserve has three functions
1. Sets monetary policy through decisions that affect the flow of money and credit 2. Contribute to the safety and soundness of the financial system by supervising and regulating banks 3. Bank for depository institutions and the government and makes sure the payment system works efficiently
What are the three broad types of economies?
1. Traditional economy 2. Command (or planned) economy 3. Market economy
What is an example of a non-economic condition that would increase GDP but not the standard of living?
An outbreak of the SARS virus leading to large increase in the production of health care products to prevent SARS The production of preventive health care products would increase GDP. Citizens would be better off if there was no virus and the resources used to produce these healthcare products could be used to produce something else
The market demand curve is found by adding up the
Individual demand curves
A banknote is
a promise entitling the bearer to an amount of gold on demand at the bank A banknote is a promise entitling the bearer to an amount of gold on demand at the bank
True or false. Full employment means that everyone in the population is employed.
False
True or false. A negative value for net exports causes GDP to increase
False GDP=C+I+G+(X-M), so GDP falls if the last term is negative
True or false. A market demand curve is the same as an aggregate demand curve
False A market demand curve relates to a particular good or service, while aggregate demand relates to all goods and services combined
True or false. A tariff quota means that a tariff is applied to imports up to the amount of the quota, but then the tariff is removed on additional imports
False A tariff quota means that a certain amount of a good from one country is allowed to enter another country without a tariff. For amounts in excess of that limit, a tariff is applied
True or false. All industrialized countries are in tropical climates
False All industrialized countries are in temperate climates
True or false. In the United States, national-level political elections are infrequent and campaigns are brief
False All members of the House of Representatives and one third of the Senate are elected every 2 years, and presidents are elected every 4 years, so the next election is never very far from the mind of anyone in Congress or the White House
True or false. Bank reserves may increase when the Fed buys bonds directly from a bank, but not when the Fed buys bonds from the public
False Bank reserves increase either way
True or false. According to the quantity theory, individuals and private banks find that they are holding smaller money balances than they want when the central bank increases the money supply
False Because individuals and private banks are holding larger money balances than they want, they will react by spending and making more loans
Getting a mandated vaccination that protects you, but also protects others, would be considered
a pure public good
One of the main differences between tariffs and quotas is that
a tariff raises tax revenue, whereas a quota does not A tariff is a tax, so it generates tax revenue as each imported unit is subject to the tax
Fiscal policy is most effective when
a tax cut has a large effect on consumer spending A large change in spending helps the policy have greater impact
Indirect crowding out occurs when
government competes for funds in the credit market, causing interest rates to rise for all borrowers Private sector borrowers, such as a corporation seeking to finance a new factory, are less able to borrow when government borrows available funds and causes higher interest rates
Fiscal policy is
government spending or tax policy passed specifically to affect the economy when it is not at full-employment equilibrium. Fiscal policy is influenced by both Classical and Keynesian economic theory
The U.S. currency that was first issued during the Civil War and not redeemable in gold was called
greenbacks The U.S. currency issued during the Civil War was called greenbacks
Julian Simon, in his book The Ultimate Resource 2e (1998), argues that a
growing population due to high birth rates can have positive consequences Simon argues that an additional person is a productive resource who will ultimately add more to production than society had to invest in his or her care, feeding, and education up to maturity
A rightward shift of supply increases output and causes
growth
Real GDP has been adjusted for inflation and nominal GDP
has not been adjusted for inflation
Discretionary fiscal policy
has primarily supply side effects, but can affect aggregate demand as well through the structure of tax changes or the composition of spending changes Discretionary fiscal policy has primarily supply side effects, but can also affect aggregate demand through the structure of tax changes or the composition of spending changes
The aggregate supply curve
has various shapes, based on the differing economic theories
According to economist Douglas A. Hibbs, Jr., economic conditions at the time of an election
have a definite effect on the success or failure of the incumbent party Evidence reported in 1989 found that incumbents were more likely to win reelection when the economy was doing well
According to James Gwartney, a public choice economist, the characteristics necessary for economic freedom include all of these, except
heavy environmental regulations One of the characteristics identified by Gwartney was a low level of government regulation, not heavy environmental regulations
In 1983, the Social Security system was reformed because
policymakers noted that there would have to be increased outlays in the period after the year 2000, as the baby boomers began to reach retirement age Baby boomers were born between 1940-1960, so they began to retire in 2005. The Social Security Trust Fund was built up to cover the extra payments needed for a larger group of retirees
The relationship between the number of workers and output, with a fixed amount of capital, is
positive and decreasing Every additional worker will produce less output than the previous one with the resources avail
Ceteris paribus, as applied in demand theory, means holding constant all factors that affect demand except one
price
The two variables on a supply curve are
price and quantity
A supply curve has a positive relation between
price and quantity supplied
A key component of the Keynesian model is that
prices are sticky Keynes assumed that prices were sticky
A decrease in aggregate demand will cause
prices to fall, according to classical economists, and unemployment to increase, according to Keynes For Classical economists, the SRAS is upward sloping and a decrease in aggregate demand will cause a fall in prices. For Keynes, a decrease in aggregate demand will only cause an increase in unemployment, since SRAS is assumed to be horizontal and the shift will have no impact on prices
When the Federal Reserve pays with newly created money, some people call this
printing money
Equilibrium output increases when aggregate demand shifts rightward, and firms employ more workers in order to
produce more output
A function of the early goldsmith was to
provide a storehouse for gold and other metals A goldsmith used to provide a storehouse for gold and other metals
Public investment is undertaken by the government operating in the
public sector
The Fed can increase bank reserves by
purchasing bonds
A key assumption in the Classical model is that
pure competition exists In the Classical model, pure competition exists
Automatic stabilizers are
put into place and left to respond automatically to changes in the level of economic activity Automatic stabilizers respond to changes in economic activity without any need for direct action by policymakers
The length of time needed to become aware of an economic problem is called the
recognition lag The first lag is in identifying the problem
Supply-siders believe higher taxes and transfers
reduce incentives to work, save, invest, and innovate High taxes reduce the rewards to these activities and high transfers increase the rewards associated with being poor or unemployed
When the Fed sells bonds to a bank, the bank's reserves are
reduced, so bank loans must fall Sales of government bonds by the Fed reduce bank reserves
When both demand and supply shift to the right, equilibrium output definitely increases, although the effect on equilibrium price level depends on the
relative size of the two shifts
Developing countries are similar in that they all have
relatively low per capita income Although developing countries are diverse, they all have some important similarities. The most obvious characteristic of a developing economy is low per capita income
Market economy
relies on incentives and the self-interested behavior of individuals to direct production and consumption through market exchanges (America)
According to Classical theory, the best strategy for economic development is to
rely on the power of market forces The Classical tradition, following Adam Smith, favors a laissez-faire approach
A multilateral approach to free trade is one where two or more countries
remove their trade barriers
A unilateral approach to free trade is one where a country, acting alone,
removes its barriers to trade
The money supply contracts when the Fed raises the
required reserve ratio
Encouragement of production through reduced taxes or regulations that lower costs to firms will shift the aggregate supply curve to the
right
Equilibrium output increases when aggregate demand shifts to the
right
An increase in the quantity or quality of resources leads to a
rightward shift of long-run aggregate supply
According to the Keynesian view of the monetary process, higher investment spending causes output and national income to
rise and employment rise Increased spending causes aggregate demand to increase, so equilibrium output increases, resulting in more employment
When aggregate demand shifts to the right, output and the price level
rise in the short run, but only prices rise in the long run Aggregate supply is upward-sloping in the short run, but is vertical in the long run
When the Fed bought government bonds during World War II to help finance the war effort, the money supply
rose, creating inflationary pressures The Fed was buying bonds, causing the money supply to increase and creating inflationary pressures
This behavior consists of people trying to get the most of something they want (to maximize some goal) out of available resources
self-interested behavior
The Classical school advocated a laissez-faire approach. That means no government intervention, as the market will
self-regulate Classical economists believed that the market self-regulated and tended back to full employment
In the Classical model, the economy will tend toward full employment because of
self-regulating markets In the Classical model, the economy will tend to full employment because of self-regulating markets
When the price of the dollar rises, exporters find it harder to
sell their goods abroad
The share of services in total output has been rising for at least 2 decades. The United States has become a
service economy
A higher level of investment would
shift both the aggregate demand curve and the aggregate supply curve to the right Investment affects both demand (spending) and supply. Investment is a type of spending, so aggregate demand increases, but it also affects the ability of business firms to produce by providing additional resources (investment in human capital and physical capital) and technology (investment in research and development)
Increased investment spending causes aggregate demand to
shift to the right
Investment spending is expected to increase when interest rates fall, causing aggregate demand to
shift to the right
Fiscal policy is most effective when policy lags are
short Short policy lags mean that policymakers quickly recognize the problem and implement a solution, and that the policy works quickly to improve the economy's performance
Keynesian theory takes a
short-run view of the economy and does not argue that the economy will self-heal. Keynesian theory views aggregate supply as horizontal so it does not worry a great deal about changes in the price level or inflation. It also believes that demand is the driving force of the economy.
The implementation lag is
shorter for monetary policy The FOMC is able to make faster decisions than Congress
The Fed has the most direct control over
the monetary base The Fed controls the monetary base, which consists of currency in the hands of the public plus reserves held by banks
It is not possible for the Fed to target both
the money supply and interest rates
When the Federal Reserve buys government bonds,
the money supply increases The Federal Reserve is able to create new money to pay for bonds, and purchasing bonds puts new money into circulation, so the money supply increases
If most government bondholders are rich, repaying the debt will redistribute income from
the poor to the rich
According to Simon Kuznets, developing countries will not necessarily follow the stages of growth identified by W. W. Rostow, because
the population is growing more rapidly in developing countries than in today's developed countries at a similar stage in their development This is one of many reasons identified by Kuznets that developing countries will not necessarily follow the stages of growth identified by W. W. Rostow
On a policy level, quantity theorists argue that in the long run, ceteris paribus, increases in the money stock cause
the price level to rise Increases in the money stock do cause the price level to rise in the long run
The two primary markets in the circular flow diagram are
the product market (upper flow) and the resource market (lower flow) The labor market is the largest part of the resource market
An example of a leakage from the income stream is
the purchase of imported goods, like wine from countries like Italy, France, or Spain Leakages occur when income is received, but not spent directly on purchases from domestic firms
Spillover benefits to third parties are called
Positive Externalities (Public Education)
The total of all planned expenditures in the entire economy is
aggregate demand The aggregate demand curve is the total planned expenditures in an economy
In the Classical tradition, an increase in the money supply creates excess money balances. As these balances are spent,
aggregate demand shifts to the right, increasing equilibrium prices and output With higher spending, aggregate demand shifts right and equilibrium price and output both increase
The amount of real output that can be produced by various amounts of labor can be represented by a(n)
aggregate production function The relationship between real output and labor is represented by the aggregate production function
The total amount of goods and services that firms are willing to sell at a given price level during a specific time period in an economy is called the
aggregate supply
According to real business cycle theory, economic fluctuations result from changes in
aggregate supply Economic fluctuations result from changes in aggregate supply, according to real business cycle theory
the relationship between the quantity of total real output supplied and the price level when all other factors influencing production plans are held constant is called the
aggregate supply curve
If aggregate demand and nominal GDP increase while the price level is constant, one would conclude that the
aggregate supply curve is horizontal Graphically, if aggregate supply is horizontal, shifts in aggregate demand can only affect the output level
A curved production possibilities curve (PPC) changes the assumption that resources are
alike
If aggregate demand increases and the aggregate supply curve is upward sloping and unchanged,
"P" rises (When the aggregate demand shifts to the right, the new equilibrium will be at a higher price level) and "Y" rises (When the aggregate demand shifts to the right, the new equilibrium will be at a higher real output)
Dannon purchased plastic containers for $20,000 and fruit for $30,000, and then added $40,000 in value by producing individual yogurts. Based on this data, Dannon's activities caused GDP to increase by how much?
$90,000 GDP includes the value of the final good, which includes the value added at each stage of production, or $20,000 + $30,000 + $40,000.
The World Bank has established the threshold for absolute poverty at $1.25 per day in 2005 U.S. dollars. At this level, approximately how many people are living below the extreme poverty line?
1.3 billion people Although all regions have reduced the level of poverty, a large percentage of the world's population still faces extreme poverty
Since WWII the highest unemployment rate during a downturn was
10.8% (occurred in October 1982)
The Fed was established in
1913
According to the rule of 70, the number of years it takes for the population to double is equal to
70 divided by the growth rate
If the labor force is 250,000 and the working-age population is 350,000, what is the labor force participation rate?
71.43% Labor force participation rate = (labor force/working age population) * 100 = (250000/350000) * 100 = 71.43%
Which of the following activities is counted as part of GDP?
A baker purchasing flour to use an an ingredient for cookies to be sold to the baker's customers The value of the final product (cookies) includes the value of intermediate products like flour (nothing illegal or "under the table")
Which of the following decreases aggregate supply?
A decrease in labor supply If there is less input of production, aggregate supply will decrease
Which of the following will not cause a leftward shift in the aggregate demand curve?
A decrease in taxes A decrease in taxes generally does not cause a leftward shift of the aggregate demand curve
What is one of the costs of economic growth?
A deficit on the current account Increased economic growth tends to cause an increase in spending on imports, causing a deficit on the current account
Which of the following is an example of consumption expenditure, which is one of the components of aggregate demand (AD)?
A family's purchase of a durable good, such as a new refrigerator Consumption expenditure includes spending on consumer durables as well as services and nondurables
Which of the following is not a motive for holding money?
Accumulation demand Accumulation demand is not a motive for holding money
Who was the original theorist of economic development?
Adam Smith Adam Smith was the original theorist of economic development. He was also the person who is regarded as the founder of market economics
In 1987, Federal Reserve chair Paul Volcker was succeeded by whom?
Alan Greenspan Greenspan served as Fed chair for the remainder of Volcker's term and was then appointed to his own 14-year term
How does M1 differ from M2?
All the items in M1 are used for transaction purposes, whereas all the items in M2 a are not All the items in M1 are used for transactions purposes, whereas all the items in M2 are not
Which is an example of foreign direct investment (FDI) in the United States?
BMW building a car factory in Spartanburg, South Carolina States in the United States often welcome foreign direct investment and give tax credits and subsidies to foreign companies that create jobs in their cities
Generally, when firms increase output using existing resources, higher costs lead to higher prices, resulting in an upward-sloping supply curve. Which explanation does not help to explain why costs tend to increase with output?
Businesses purchasing more raw materials may be given volume discounts Volume discounts result in a lower cost of materials, so this does not help explain why costs increase with output
In a two-sector economy, planned expenditures equal
C + I In a two-sector economy, planned expenditures equal Consumption + Investment
Which would be counted in GDP, but not in GNP?
Cars produced at a Japanese-owned factory located in Detroit GDP includes the value of output produced by a foreign-owned plant located within the U.S
Which of the following is not one of the Federal Reserve's tools for changing the money supply and interest rates?
Changing the prime rate The prime rate is determined by market forces, so the Fed can try to shift supply and demand to move this interest rate, but the Fed does not set this rate directly
What is the largest liability for most banks?
Checkable deposit accounts A bank's biggest liability are checkable deposit accounts
Since 2010, the most significant demand for natural resources has come from
China China has the most significant demand for natural resources. With nearly 20% of the world's population, China is demanding more and more natural resources, such as energy, oil, and gas
Who is the largest holder of the U.S. debt?
China China holds $1.3 trillion of U.S. debt
The composite aggregate supply is vertical in the
Classical region
Automatic stabilizers DO NOT require further action by
Congress
In the Keynesian view, several things could go wrong in translating changes in the money supply into changes in output. Which of the following is not one of these things?
Consumers may not respond to lower taxes This is a potential problem with fiscal policy rather than with monetary policy
An unexpected reduction in inflation would tend to benefit which of the following?
Creditors When inflation decreases, the value of the dollar increases, making the loan more profitable.
Which of the following will prevent expansion of the money supply from reaching its potential maximum?
Currency withdrawals by the public Currency withdrawals by the public will prevent the expansion of the money supply from reaching its potential maximum
As the price level rises, the purchasing power of financial assets owned by households
Declines If the prices increase, purchasing power is reduced
Which of the following will cause an increase in aggregate supply?
Decreased input prices A decrease in input prices makes it cheaper to produce goods and increases aggregate supply
What is the most basic function of the government in a market economy?
Defining and Enforcing property rights
The relationship between the quantity demanded at the price applied is the
Demand curve
What is the decrease in the capital stock that results from wear and tear and obsolescence?
Depreciation
Which is not one of the major differences between NI (national income) and PI (personal income)?
Depreciation of capital equipment Correct. Depreciation is the difference between GNP and NNP
Which of the following characteristics of money is important for considering how well it will stand up under continued use?
Durability Durability is important for the continued use of money
True or false. Changes in the discount rate bring about large changes in bank reserves, lending, the money supply, and spending, so the discount rate is the Fed's preferred monetary tool
False Changes in the discount rate are used more as a signal of the direction of upcoming policy
True or false. Because changing the required reserve ratio is such a powerful tool, the Fed uses this option most often to bring about desired changes in the money supply
False Changing the required reserve ratio is too powerful and uncertain
True or false. The Federal Reserve System was established in the U.S. Constitution, so Congress cannot take away the powers assigned to it
False Congress passed the Federal Reserve Act in 1913 and created the Fed. The Federal Reserve is aware that Congress has the power to change the laws concerning it and is prepared to lobby for its position on any proposed legislation
True or false. Consumption expenditure refers to spending on goods, but not services.
False Consumption expenditure includes expenditures on consumer durables, nondurables, and services
True or false. Trading allows people, businesses, and countries to consume inside their production possibility curve
False Consumption is inside the production possibilities curve if there is inefficiency or high unemployment
True or false. Actual deficit reduction may be larger than planned because the economy may suffer from slow growth and high unemployment
False Cutting the deficit is a form of contractionary fiscal policy. Out of a lower level of output, tax revenues will fall and transfer payments will rise as the automatic stabilizers kick in
True or false. If government follows a laissez-faire approach, it must not define and protect property rights or discourage monopoly
False Defining and protecting property rights, and discouraging monopoly are important functions for government to perform and are consistent with a reduced role for government, according to the Classical tradition
True or false. The monetary base is equal to deposits made by the public in their bank accounts
False Deposits are larger than the monetary base in a fractional reserve system because of bank loans
True or false. Development economists in the field are more interested in broad theories than in workable strategies
False Development economists in the field are less interested in broad theories than in workable strategies
True or false. Developing countries' development efforts are hampered by foreign direct investment by private firms and individuals
False Direct foreign investment supplies scarce financial capital and aids the development process for many countries
True or false. Discretionary fiscal policy makes an economy more stable when there are lengthy policy lags
False Discretionary fiscal policy combined with lags could actually make an economy less stable
True or false. Disposable income is the income households earned before income taxes are deducted
False Disposable income is the income the household sector has left after taxes. DI can be spent on consumption or saved
True or false. GDP and price indexes are computed the same way in all countries
False Each country develops its own methods for computing national statistics, although the methods are very similar
True or false. Expanding aggregate demand is a way to stabilize the economy when recession threatens, but it is not a strategy for achieving economic growth
False Expanding aggregate demand can be a growth strategy as well as a stabilization strategy
True or false. When the economy is doing well and income and output are rising at a healthy rate, transfer payments for food stamps, unemployment compensation, and social security are likely to rise
False Fewer people will be eligible for these programs when the economy is healthy, so these payments are likely to fall
True or false. Firms often do not purchase inputs at prices that stay fixed for considerable periods of time
False Firms decide how much to produce by comparing their selling prices with their costs of production, and production costs depend, among other things, on input prices
True or false. An equal increase in government spending and taxes will have no effect on equilibrium income
False For example, if government spending and taxes are both increased by $20 billion, equilibrium income will increase by $20 billion
True or false. If actual output is equal to potential output, the cyclical deficit is larger than the structural deficit
False If actual output is equal to potential output, the cyclical deficit is zero
True or false. If people doubt money's acceptability, then they will still using it as a medium of exchange
False If people doubt money's acceptability, they will not use it as a medium of exchange
True or false. If required to choose between imposing a tariff or an import quota with equivalent consequences, most economists prefer quotas over tariffs
False If they have to choose, economists usually consider a tariff less harmful in terms of efficiency than an equivalent quota
True or false. In 2011, $1.5 billion in aid flowed from the developed countries to the 48 developing countries
False In 2011, $133.5 billion in aid flowed from the developed countries to the 48 developing countries
True or false. Currently, loans from the World Bank must be used for such developmental projects as roads, dams, electric power plants, and water systems
False In the 1980s, the World Bank concluded that infrastructure projects for a poorly functioning economy were not getting at the root of the problem
True or false. In the long run, an increase in aggregate demand raises the equilibrium price level and the equilibrium level of real GDP
False In the long run, an increase in aggregate demand only raises the equilibrium price level
True or false. Environmental cost is a benefit of economic growth
False Increased economic growth will lead to increased output and, therefore, increased pollution and congestion. This will cause health problems such as asthma, reducing the quality of life
True or false. If John uses his savings to purchase stock in Coca-Cola, he is making an investment expenditure as defined in the national income accounts.
False Investment expenditure refers to the purchase of plant and equipment, residential construction, and changes in inventory.
True or false. Policies that encourage investment have a negative impact on the economy's future rate of growth
False Investment makes workers more productive and leads to increased output, so the economy's future rate of growth is enhanced
True or false. Keynesian economists advocate using fiscal policy to offset any shift in aggregate demand that will cause equilibrium income to deviate from full-employment income
False Keynesian economists advocate using policy to offset shifts that have substantial and prolonged effects on output, employment, and prices
True or false. Economists disagree on why aggregate supply shifts
False Many economists tend to agree on the reasons for aggregate supply shifts
True or false. The national security argument is used to prevent having specialized military hardware made in a different country, but is never applied to non-military output
False Many industries use this argument when it is not necessary
True or false. The Federal Open Market Committee (FOMC) consists of the 12 Federal Reserve Bank presidents, one from each district
False Membership of the FOMC reflects a compromise between centralized and decentralized power
True or false. Since 1982, the Fed has been committed to a money supply target and has allowed the money supply to grow at a fixed rate each year
False Money supply growth has not been stable during this time period
True or false. Most U.S. output is produced by the government sector, including federal, state, and local government entities.
False Most output is from the business sector, the government produces roughly 20% of GDP in the United States
True or false. The amount of income households receive is equal to the amount of income households earn
False PI is the amount of income households receive and NI is the amount of income households earn
True or false. In the Keynesian view, financial markets are linked to aggregate supply and aggregate demand primarily through changes in planned investment. Additionally, planned investment is the most stable component of aggregate demand
False Planned investment changes when interest rates change, along with other factors
True or false. Say's law explains how long-run real Gross Domestic Product (GDP) stability is achieved in the Keynesian model
False Say's law only states that supply creates its own demand
True or false. In developing countries, foreign direct investment can bring needed expertise and technology, but it creates too much reliance on foreign governments
False Since foreign direct investment is done privately, it is a way for countries to grow without having to deal with other governments
True or false. A shift of the aggregate demand curve to the right will have the greatest impact on the price level if the aggregate supply curve is horizontal
False Since the aggregate supply curve is horizontal, there will be no impact on the price level that remains constant
True or false. To stabilize the economy, fiscal policy should be used to reduce spending during recessions and increase spending during inflationary periods
False Stabilizing the economy means using expansionary policy when spending is too low and using contractionary policy when spending is too strong
True or false. If a worker's job providing technical support in a call center is outsourced to another country, that worker is frictionally unemployed
False Structural unemployment occurs when jobs are lost due to structural changes in the economy, like outsourcing
True or false. Labor force participation has increased recently in the United States, while in other countries, such as Germany and Spain, the rate is declining
False Table 16.1 shows a slight decline for the United States and increases for both Germany and Spain since the year 2000
True or false. Economic growth is not associated with technological changes
False Technological change increases productivity and is associated with economic growth
True or false. An interest rate target requires the Fed to decrease the monetary base when the actual interest rate is higher than the target rate
False The Fed would need to increase the monetary base to cause the actual interest rate to fall in the direction of the target rate
True or false. The Keynesian horizontal short-run aggregate supply curve assumes that there is full employment in the economy
False The Keynesian horizontal SRAS assumes that there is unemployed and underutilized resources
True or false. If a deficit exists, the government must be pursuing an expansionary fiscal policy
False The deficit may simply be the result of automatic stabilizers and recessionary conditions
True or false. The deficits of the 1970s and 1980s were largely due to attempts by the federal government to implement Keynesian policies to combat recessions
False The deficits of the 1970s and 1980s were incurred even during years when the economy was booming
True or false. When the Fed lowered the interest rate to near zero in 2008 through mid-2015, investment spending responding sharply and equilibrium output quickly returned to the full-employment level
False The economy recovered very slowly because reducing interest rates did not have a significant effect on borrowing and spending
True or false. The fact that most countries have become members of WTO provides strong support for the claim that free trade has more costs than benefits
False The fact that the majority of countries have become members of WTO is a reflection of the vast good that comes from free trade and the harm that trade barriers impose
True or false. Economists agree that the short-run aggregate supply curve is vertical
False The long-run aggregate supply is vertical at full-employment output
True or false. Due to the uncertainty created by widespread bank failure, the public began holding more cash relative to bank deposits in the early 1930s, causing the monetary base to contract, but not the money supply
False The money supply fell 25% between 1929 and 1933
True or false. The national debt is the amount by which the federal government's expenditures exceed its revenues in a given year
False The national debt is the cumulative total of all past budget deficits minus all past surpluses. It is the amount owed to lenders by the federal government
True or false. If interest rates are low, the opportunity cost of holding money instead of interest-bearing assets is higher
False The opportunity cost of holding money is lower when interest rates are low
True or false. During a period of inflation, the real value of the debt increases
False The real deficit measures the federal budget deficit as the change in the real (inflation-adjusted) value of the national debt from one year to the next
True or false. If something causes the short-run aggregate supply curve to shift, it will also cause the long-run aggregate supply curve to shift
False The short-run aggregate supply curve can shift without shifting the long-run aggregate supply curve
True or false. If consumers fail to respond to a temporary increase in disposable income by spending a large fraction of it, then fiscal policy will have more of an effect on output
False The size of the multiplier effect depends on the amount of new spending caused by policy. Failure to respond means consumers are not spending in response to the policy, so it will have little or no effect
True or false. If the economy achieves full employment at an income level of $15 trillion, and equilibrium income is currently $14.9 trillion, Keynesian economists recommend using fiscal policy to reduce equilibrium income
False The target income level is $15 trillion, where the economy reaches full employment
True or false. According to the theory of diminishing marginal productivity, additional resources add more and more to total output as an economy grows
False The theory of diminishing marginal productivity suggested that as an economy grew, additional resources would add less and less to total output
True or false. If China's economy is growing at a faster rate than Canada's economy, people living in China are better off than people living in Canada
False There are many reasons why GDP growth may not exactly coincide with individual well-being, including income distribution and economic bads
True or false. Because economic conditions can influence political outcomes, economists are certain that politicians are able to create a political business cycle for their own benefit
False Thus far, no economist has been able to show that politicians are actually able to create a political business cycle for their own benefit
True or false. Total labor supply does not affect the unemployment rate over longer periods.
False Total labor supply *does* affect the unemployment rate over longer periods
True or false. If the price of a washing machine increases because of an improvement in durability, GDP should not reflect this change
False Unless a specific feature can be separated out and assigned a price tag, GDP accountants have no good way of correcting for quality improvements
True or false. Politically, it is much easier to raise taxes than it is to lower them
False Voters are generally supportive of tax cuts
True or false. At lower interest rates, people will not be willing to hold larger cash balances
False When interest rates are lower, people will hold more cash balances
What did goldsmiths develop?
Fractional reserve banking Goldsmiths developed fractional reserve banking
The Keynesian consumption function was first modified by
Franco Modigliani Modigliani hypothesized that spending behavior is different for young families getting started, middle-aged families with higher earnings, and older families who have retired
The total market value of all final products produced within a country during a given time period is
GDP (gross domestic product) GDP is output produced on U.S. soil and includes production by foreign-owned businesses and foreign workers
If rising GDP comes at the expense of leisure time,
GDP may be overstating the increase in well-being Although there is more output, the reduction in leisure time causes the quality of life to fall
Which is the correct formula for GDP?
GDP= C + I + G + (X - M)
Which is a criticism often made against the role of multinational corporations in developing countries?
Good jobs are often filled by foreign nationals, but not local workers Host countries are concerned that the opportunities for local workers are limited
Which of the following is not a component of aggregate supply?
Government spending Government spending is a part of aggregate demand
An increase in interest rates, ceteris paribus, will cause the money demand curve to do which of the following?
It only causes a movement along the demand for money curve A change in interest rates, ceteris paribus, will only cause a movement along the money demand curve
Which of the follow accurately describes the types of production not included in GDP and how the non-included production affects GDP and the economy
It probably does not make a big difference in year-to-year comparisons within a country Changes from one year to the next are not likely to be significant
Macroland's crime rate has dropped significantly and is expected to stay low for the foreseeable future. What effect will this have on the economy?
It will lead to a higher living standards Even if the reduced crime rate had no effect on GDP, people prefer living safely
Which government spending programs are easy to cut?
It's very difficult to find a specific type of government spending program that is easy to cut Every program, every subsidy, every agency has a constituency—the employees, customers, and suppliers that depend on its survival for their economic futures
Import substitution, or self-sufficiency, has been a productive development strategy in a few countries, notably
Japan
Which of the following is not one of the benefits of free trade?
Job gains in both export- and import-competing industries As a country transitions to a free trade equilibrium, export industries are likely to expand, resulting in job creation, but import-competing industries will shrink as consumers are offered cheaper, imported goods
The composite aggregate supply is horizontal in the
Keynesian region
The horizontal portion of the short-run aggregate supply curve in which there is excessive unemployment and unused capacity in the economy is the
Keynesian short-run aggregate supply curve The horizontal portion of the SRAS is from the Keynesian model
The quantity of money demanded is very sensitive to interest rates in the
Keynesian view
Give an example of an unfunded liability of the U.S. federal government?
Medicare payments for those who are retiring this year Government has been using past contributions to Medicare to fund medical expenses for past retirees. The medical expenses of those who are retiring now must be funded out of money that has not yet been collected
A main function of money is to avoid the need for double coincidence of wants. What is the name of this function?
Medium of exchange function As a medium of exchange, money avoids the need for double coincidence of wants
Who said, "It is possible to have economic freedom without political freedom, but it is not possible to have political freedom without economic freedom?"
Milton Friedman Milton Friedman said that famous quote. Friedman wrote such books; some of which were made into a series on PBS
Franco Modigliani's ideas were further developed by
Milton Friedman, who hypothesized that current consumption depends on past income and expected future income and not current income alone The permanent income hypothesis is the view that consumption does not depend on current income alone, but on past income and expected future income as well
The income earned by resources is called
NI (national income) Several adjustments have been made to convert GDP to NI and measure only income payments to resources
GNP minus depreciation is
NNP (net domestic product) GNP includes gross private domestic investment, but NNP includes net private domestic investment. The difference between gross and net private domestic investment is depreciation, or the value of capital that has been used up, worn out, or become obsolete
The vertical axis of the aggregate demand curve represents the
Price level The aggregate demand curve represents the total quantity of all goods and services demanded by the economy at different price levels
What did Classical economists assume?
Prices and wages are flexible According to Classical economists, both prices and wages are flexible
The relationship between the inputs employed by a firm and the maximum output that it can produce with those inputs is the firmʹs
Production function A production functions shows how much a firm can produce with the inputs available
What is a good for which demand increases as income increases, ceteris paribus?
Normal good (meat, you might eat hamburger when you have less money, but you'll still eat steak if you earn a little more money)
The value of the best alternative that is sacrificed to obtain something you want is a/an
Opportunity cost
Which types of workers might cause unemployment to be understated?
Part-time workers who are working fewer hours than they would like and discouraged workers
In sequence, what are the four phases of the business cycle?
Peak, recession, trough, expansion
Who is most likely to be a winner during times of inflation?
People who hold real assets and the government. When inflation increases, the value of real assets increases, making it more profitable to hold them. The government also is a winner because tax revenue increases.
What is one of the criticisms of the CPI?
People's taste and consumption habits change with the introduction of new goods or trends or changes in prices and the basket should be revised more often
The 1964 and 1981 income tax cuts, which were enacted as permanent changes, appear to have had more effect on income and consumption than the 1968 temporary surcharge or the 1975 one-time tax rebate. What is the most probable explanation for this?
Permanent tax cuts increase permanent income, which in turn increases current consumption The permanent income hypothesis is supported by historical experience
Which proposed tax cut is likely to have the largest effect on output, according to the permanent income hypothesis?
Permanently reducing tax rates at all income levels A permanent change in tax rates creates an increase in currency and expected future disposable income
Which of the following is a function performed by a modern society's money?
Store of wealth Store of wealth is a function of money
Suppose you store part of your income in the form of money to be used 1 year from now. Which function of money are those dollars performing?
Store of wealth The dollars are acting as a store of wealth
What effect would taxation have on real consumption spending when government spending is autonomous?
Taxation reduces real consumption spending Taxation reduces real consumption spending by reducing consumers' income
Which event will cause a country's production possibilities curve to shift outward?
Technological advances that improve productivity Technological advances that improve productivity enable a country to produce more output with available resources
The longest contractionary period in the U.S. was
The Great Depression (1929-1939)
The U.S. government must pay interest on the outstanding debt. Which group is ultimately responsible for paying this expense?
The U.S. taxpayers The debt imposes a net interest burden on the U.S. government and, by extension, the U.S. taxpayers
When investment spending increases, the aggregate expenditure line
The aggregate expenditure line increases. AE = C + I + G + (X - M)
What is the consumer price index (CPI)?
The current CPI is a measure of the average of the prices paid by consumers for a fixed market basket of consumer goods and services. The market basket is based on the consumption of the typical urban family of four.
The following are justifications for the allocation function of the government
The existence of public bads The presence of external effects The existence of public goods (NOT the basic instability of the economy)
Which of the following is not included when public debt is reported?
The government debt held in the Social Security Trust Fund Debt owned by non-government groups (the public) is called public debt
Which of the following would cause aggregate demand to decrease?
The government increases personal income taxes When the government increases personal income taxes, consumers' spending plans will decrease as they have less disposable income
This is an indicator of strength or weakness in the national labor markets. It provides information on how many positions need to be filled.
The help wanted index
What is the labor force participation rate?
The labor force participation rate measures the fraction of the adult population that is employed or actively seeking work. The labor force participation formula is Labor Force/Working age population X100
If the aggregate supply curve shifts to the right and the aggregate demand curve shifts to the left, what happens to the price level and real output?
The price level falls, but the effect on real output cannot be determined If both curves shift in opposite directions, in general, we cannot determine the real output without knowing the extent of the shifts
In the first year, the real GDP for a population of 200 people is $50,000 and in the second year, the real GDP for a population of 202 people is $51400. The growth rate of the real GDP from year 1 to year 2 is
This is calculated as follows: (real GDP for year 2 − real GDP for year 1) divided by (real GDP for the year 1) ✕ 100 = 2.8%
What is currently the main function of the Federal Reserve?
To manage the money supply to promote economic growth, high employment, and a stable price level This is now the Fed's most important function, but it was not part of the original design of the system
Why did Congress create the Federal Reserve (the U.S. Central Bank)?
To regulate lending practices and act as a "lender of last resort" The Fed seeks to keep banks from making risky loans that threaten the safety of deposits. A second purpose is to rescue sound banks threatened with failure because of temporary economic conditions
In the United States, GDP is about twice as large now as it was 20 years ago. What does this indicate?
Total spending has doubled, but part of this increase reflects higher prices Increases in GDP reflect both higher output and higher prices
True or false. Although GDP is used as a proxy for living standards or economic well-being, there are reasons why GDP is not a perfect proxy
True
True or false. As a percentage of GDP, the U.S. national debt has been increasing for the past several decades
True
True or false. Unplanned changes in inventories play a very important role in moving an economy toward equilibrium. Sudden increases or decreases in inventories may signal to producers that they need to change their level of output
True Unplanned changes in inventories will cause producers to change their level of output, and this will affect the equilibrium
True or false. A change in the price level will not shift the aggregate supply curve
True A change in the price level does not cause a shift of the aggregate supply curve
True or false. Infant industries may need protection from foreign competition initially, but if they have this protection, there may be little incentive for them to "grow up."
True A company that gets protection or a subsidy has a strong incentive to never "grow up"
True or false. If the government must cut spending programs in order to use tax revenues to repay the debt, the people who would benefit from those spending programs will essentially be "taxed" to pay back the debt
True A cut in government spending could involve a cut in welfare spending programs
True or false. As countries have developed, death rates fell first, as better health care, better nutrition, and higher standards of living lengthened life spans. Then, birth rates fell later
True A nation that has bridged the developmental gap from falling death rates to falling birth rates, thus slowing population growth and reducing the dependency ratio, has made the demographic transition
True or false. The Keynesian short-run aggregate supply curve is horizontal when there are unused resources and prices do not increase when aggregate demand increases
True According to Keynes, when there are unused resources, the SRAS tends to be horizontal, so prices do not increase when aggregate demand increases
True or false. According to Say's law, if a company produces output with a value of $500, then the company also creates incomes for the resources equal to $500
True According to Say's law, the production of goods and services generates an amount of income equal to the value of the products produced
True or false. Aggregate income could be measured to calculate economic growth
True Aggregate income is the component of GDP, which is the measure of a country's economic growth
True or false. Aggregate supply is defined as the total amount of goods and services (real output) produced and supplied by an economy's firms over a period of time
True Aggregate supply represents the ability of an economy to deliver goods and services to meet demand
True or false. Economist Simon Kuznets noted many differences between conditions in developing countries and the pre-industrial phase of developed countries
True Although the stages might describe the development process of the present industrialized nations, critics point out that the present developing countries will not necessarily follow the same sequence
True or false. If taxes increase and the aggregate supply curve is upward sloping, then output falls and the price level increases
True An increase in taxes causes a decrease in aggregate demand. The new equilibrium will show a fall in output and increase in the price level
True or false. Suppose the Federal Reserve increases the money supply. In a Keynesian model, the increase in the money supply will cause an inflationary gap, a demand-pull inflation, and a movement along the short-run aggregate supply curve
True An increase in the money supply will cause an inflationary gap, a demand-pull inflation and a movement along the short-run aggregate supply curve
True or false. Events that shift the aggregate supply curve to the right lead to economic growth
True Anything that shifts the aggregate supply curve to the right is a source of economic growth because it will produce a rise in real output and income
True or false. As the domestic price level rises, the demand for imports increases
True As the domestic price level rises, foreign‐made goods become relatively cheaper, so that the demand for imports increases
True or false. The Fed changes the discount rate to signal the direction of monetary policy rather than as a direct tool for changing the money supply
True Banks have many other options for obtaining reserves, so they will not necessarily alter the amount of reserves they borrow when this rate changes
True or false. Aggregate supply and demand combined with the aggregate production function determine not only the price level and real output, but also the level of employment and, by extension, the level of unemployment
True By extending the AD/AS equilibrium to the production function, you can determine the level of employment and unemployment at every level of real output
True or false. The aggregate supply and demand curves, taken together, determine the price level and the level of real output. Adding an aggregate production function also indicates the level of employment
True By extending the equilibrium line from the AD/AS graph to the production function graph, you can identify the level of employment
True or false. An increase in capital or an improvement in technology will shift the aggregate production function
True Capital and technology are the ceteris paribus factors that will cause a shift of the production function when they change
True or false. Changes in price expectations influence the demand for money because changes in the price level affect the purchasing power of money
True Changes in price expectations influence the demand for money because changes in the price level affect the purchasing power of money
True or false. Checking accounts have many advantages over banknotes. For example, checking accounts are easier to protect from theft than cash, because you can stop payment on checks if your checkbook or checking account number is stolen
True Checking accounts have many advantages over banknotes. One benefit is that they make it easier to protect cash from theft through the use of a stop payment on checks, when your checkbook or checking account number is stolen
True or false. The Classical theory claims that most government economic policies are ineffective, ill timed, or downright harmful, and that the market system works best in macroeconomics, as well as microeconomics, when left alone
True Classical economists assumed that the market is self-regulating and that no government intervention is necessary
True or false. The percentage of the labor force that is 16 to 24 years of age has been declining since 1990
True Correct. The percentage of workers that are 16 to 24 years of age has fallen from about 18% in 1990 to 13.5% in 2010, and is projected to fall further by 2020
True or false. Countries with high levels of economic freedom have longer life expectancy, higher average incomes, lower child mortality, cleaner environments, and less governmental corruption
True Countries with high levels of economic freedom have longer life expectancy, higher average incomes, lower child mortality, cleaner environments, and less governmental corruption. For these reasons, economic freedom is closely associated with economic growth
True or false. The urban population in a dual economy is too small to provide a market for manufacturing and services, or to generate enough saving and investment in human and physical capital
True Dualism can be a major handicap to development
True or false. An annually balanced budget would force Congress to collect taxes to pay for spending programs and, thus, restrict the growth of government
True During the recession phase, when tax revenue automatically falls and transfer programs are more expensive, there is a deficit, which would have to be reduced through higher taxes or lower spending under an annually balanced budget rule
True or false. During the Great Depression, there was support for spending more on social projects during economic downturns and cutting back when the economy returned to full employment
True Economic downturns are often the result of weak spending, so spending more on social projects is a way to prevent a downturn from becoming more severe
True or false. Hotel chains and professionals in need of household help are likely to see immigrants as a major benefit if they are willing to work for lower wages
True Employers benefit when wages are lower
True or false. When all the excess reserves in the banking system have been used up, the money supply stops expanding
True Expansion of the money supply cannot continue when there are no more excess reserves in the banking system
True or false. In the short run, when aggregate supply slopes upward, expansionary policies can stimulate production and job creation
True Expansionary policies cause aggregate demand to shift to the right
True or false. According to Keynesian theory, fiscal policy works by shifting the aggregate demand curve to either increase output and employment or reduce the price level
True Fiscal policy can be either expansionary, shifting AD to the right to increase output and employment, or contractionary, shifting AD to the left to reduce the equilibrium price level
True or false. According to the Keynesian model, there is sometimes a conflict between actions that are in the social interest and actions that are in a person's self-interest
True For example, in a recession, social interest calls for increased spending, but self-interest might best be served by saving more money due to concerns about future job loss
True or false. For most of its history, the United States has had high tariffs and other trade restrictions
True For example, the Smoot-Hawley Tariff Act of 1930 imposed an average tariff charge of 53%
True or false. Fractional reserve banking is the practice of holding a fraction of money deposited as reserves and lending the rest
True Fractional reserve means that not all the money is lent out since a portion is reserved
True or false. Government takes funds out of the stream by taxing households and by borrowing in the credit market
True Government taxes and borrowing are leakages from the income flow
True or false. The basic elements of the development process are the same as those for economic growth in developed countries
True Growth and development go hand in hand
True or false. An increase in energy prices causes aggregate supply to shift to the left
True Higher input prices make production more expensive and cause aggregate supply to shift to the left. When aggregate supply shifts to the left, the equilibrium price level increases, demonstrating that higher costs lead to higher product prices
True or false. According to the Keynesian model, the economy varies from the goal of full employment when aggregate expenditure is too weak
True If aggregate expenditure is too weak, equilibrium income will be less than full-employment income
True or false. The omission of barter, or "under-the-table," transactions understates GDP
True If an accountant trades services with a dentist, production has increased for both of these individuals, yet this would not be reflected in GDP because GDP excludes barter transactions
True or false. If wages do not change, improvements in productivity stemming from improved technology will decrease business costs, improve profitability, and encourage more production
True If the wage of a labor remains the same, the improvement in technology will decrease business costs and improve profitability because the output per hour of work is increased
True or false. In the Keynesian view, the monetary process is longer and more complicated than in the Classical view
True In the Keynesian model, monetary policy may be ineffective if interest rates do not fall or if investment spending does not increase
True or false. A hurricane that destroys businesses can have a positive effect on GDP
True In the short run, destruction can increase GDP because of the rebuilding that occurs. In the long run, it does not create economic growth because of the broken window fallacy, which you learned about in module 1
True or false. Demand-based growth strategy is more effective if the short run is actually a long period of time
True Increasing output by increasing aggregate demand in the short run is possible, so this strategy has more impact if the short run is a significant period of time
True or false. In 2015, the majority of foreign investors are not worried about the United States defaulting. This has allowed the U.S. government to issue government bonds with very low interest rates
True Interest rates in the United States are still very low, thanks also to the confidence of investors
True or false. When budget deficits are not controlled, there is no constraint on the size of the public sector
True It is much easier for everyone to support government spending when they do not have to face the burden of higher taxes
True or false. It is estimated that it takes about 18 to 24 months for the full effect of monetary policy to be felt due to inside and outside lags
True It takes this much time to recognize a problem, implement policy, and wait for policy to have effect
True or false. Keynes challenged the classical school during the Great Depression. He advocated government intervention in the form of fiscal policy to shift aggregate demand
True Keynes advocated government intervention to bring the economy back to equilibrium by shifting aggregate demand while Classical theorists believed the market self-regulated
True or false. One of Keynes' criticism of Classical macroeconomic is based on the belief that neither labor markets nor product markets can be counted on to be self-regulating
True Keynes did not believe that the markets could be self-regulating
True or false. The three fiscal policy lags are the recognition lag, the implementation lag, and the impact lag
True Lags in making policy decisions provide a limitation on discretionary fiscal policy
True or false. Lowering the interest rate to try and get businesses to invest more and people to borrow more money is a common way governments try to stimulate economic growth
True Lowering the interest rates will encourage people and businesses to invest more
True or false. M1, which is often referred to as the money supply, consists of coins, currency in non-bank hands, checkable deposits, and traveler's checks
True M1 is the monetary aggregate with the greatest liquidity
True or false. Comparing current GDP with last year's GDP provides more accuracy than comparing current GDP with GDP 20 years ago
True Many changes have occurred over the past 20 years, such as the introduction of new products. These changes are not always reflected in GDP estimates
True or false. According to the Monetarist view, the Fed should use monetary policy to stabilize money growth and keep the economy on a stable growth path
True Monetarists place less emphasis on interest rates and more on the direct effects of changes in the money supply on spending
True or false. The Fed did not cause the Depression, but perhaps a more aggressive expansionary monetary policy would have made it shorter and milder
True Monetarists, led by Milton Friedman, have demonstrated that the Fed's lack of action may have caused such a prolonged and severe downturn
True or false. Experience suggests that a good candidate for serving as money should be somewhat scarce, portable, durable, divisible, and generally acceptable
True Money should possess all of those characteristics
True or false. A family spending on electricity is a consumer's expenditure
True Money that is spent on maintaining a household is considered a consumer's expenditure. Examples could include food, gas, and clothing
True or false. In the process of producing GDP, income is generated
True National income consists of wages, rent, interest, profit, and proprietors' net income; business owners deduct wages and other expenses from revenue and the amount that is left becomes profit or income to the proprietor (owner) of the business
True or false. A decrease in net export spending caused by an appreciation of the U.S. dollar would cause the aggregate demand curve to shift to the left
True Net exports are one of the components of aggregate demand. If they decrease, aggregate demand will shift left
True or false. Non-Economic conditions can affect the economy both positively and negatively
True Non-economic conditions in the country can have both negative and positive effects on GDP
True or false. The actual deficit is not known until after the fiscal year is over
True One of the problems with taming the deficit is that its size is difficult to predict and control
True or false. In 2014, the target range for the federal funds rate was between 0 and 0.25%
True Rates were kept very low after the financial crisis of 2007
True or false. Remittances sent from workers employed in foreign countries back to their home countries are considered a massive poverty-alleviation program; although not one that leads to economic development
True Remittances sent from workers employed in foreign countries back to their home countries are considered a massive poverty-alleviation program; although not one that leads to economic development
True or false. The first two attempts at central banks were also private banks, but concerns about corruption led Congress to seek a different structure for the U.S. central bank
True The Bank of the United States, established in 1791, was privately owned but chartered by the federal government. Its charter expired in 1811. In 1816, the Second Bank of the United States was created, but its charter was not renewed in 1835
True or false. The Bush and Clinton tax increases in 1990 and 1993 were both intended primarily to control the deficit rather than to influence the level of output
True The Bush and Clinton tax increases in 1990 and 1993 were both intended primarily to control the deficit rather than to influence the level of output
True or false. The Fed's most frequently used monetary tool is buying and selling government bonds in the open market
True The Fed's preferred tool is open market operations
True or false. The United States is divided into 12 Federal Reserve districts, each with its own Reserve Bank
True The Federal Reserve System was designed to allay fears about concentrating financial power at the federal level
True or false. When the Federal Reserve buys federal debt, it is monetizing the debt
True The Federal Reserve is able to pay for government bonds using newly created money, which increases the money supply
True or false. As a result of the Great Depression and World War II, the national debt increased significantly
True The Great Depression caused a sharp drop in output, leading to lower tax revenues and an increase in government borrowing. World War II brought a large increase in output, but an even larger increase in government borrowing
True or false. The benefit of inflation targeting is to reduce uncertainty and reassure the public regarding how the Fed intends to respond when inflation threatens to escalate
True The Taylor Rule is one example of inflation targeting
True or false. In 2011, the United States fell out of the top ten countries ranked according to economic freedom, and for the first time Canada surpassed the United States with a ranking of sixth place
True The United States had been in the top ten for a long time prior to 2011
True or false. The World Bank was created when representatives of the major nations met in Bretton Woods, New Hampshire in 1944 to make plans for international economic coordination in the postwar period
True The World Bank's first charge was to assist Europe in recovering from World War II. The International Monetary Fund was also created at this time
True or false. The points on an aggregate demand curve are equal to the various equilibrium points on the aggregate expenditure graph when the price level changes, but all other components remain the same
True The aggregate demand curve shows the relationship between demand and price levels. Each aggregate expenditure line has a given price level
True or false. The aggregate production function shows how much total real output can be produced by various amounts of labor, given the amount of capital and available technology
True The aggregate production function shows the relationship between the total real output and the inputs available
True or false. Evidence suggests that some recessions or expansions may be triggered by aggregate supply shifts, but fluctuations also result from aggregate demand shifts
True The behavior of the price level over the course of the business cycle provides evidence regarding whether the change in output was caused by a supply shift or a demand shift
True or false. When net exports are negative, imports exceed exports
True The calculation for GDP adds exports and subtracts imports; these two operations are often combined and the difference between them (net exports) is reported
True or false. Reducing the deficit requires raising taxes and/or lowering government spending and both of these have political difficulties
True The deficit can only be reduced if the government raises taxes, cuts spending, or some of each
True or false. Equilibrium values of the price level, and real output is determined by the intersection of aggregate supply and aggregate demand
True The intersection of aggregate demand and aggregate supply determines the equilibrium values for price level and real output
True or false. The ease with which an asset can be converted into the medium of exchange is called liquidity
True The more an asset can be used as a medium of exchange, the more liquid it is considered
True or false. If a country is poor in skilled labor, it has two possible remedies: it can import the goods that require skilled labor to produce, or it can make the effort to raise the level of skilled labor through immigration or education
True The movement of inputs between countries can substitute for free movement of goods
True or false. According to Friedman's permanent income hypothesis, a 22-year-old who is about to graduate from college will likely spend more than a 22-year-old with very little education or job experience
True The permanent income hypothesis is the view that current consumption depends on expected income and the soon-to-be graduate will likely spend more based on higher expected income
True or false. The interest rate is determined where the money market is in equilibrium
True The price of money is the interest rate and that is determined where the money demand curve intersects the money supply curve
True or false. A major shortcoming of the quantity theory of money is that it cannot explain short-run fluctuations in the level of output and employment
True The quantity theory of money cannot explain short-run fluctuations in the level of output and employment
True or false. The most successful form of import substitution for many developing countries has been improving domestic agriculture to reduce dependence on imported food
True The result of this successful strategy has been hard times for farmers in countries like the United States that formerly exported food to developing countries
True or false. Monetary policy is affected by the same kinds of lags as fiscal policy: recognition, implementation, and impact
True These are often called inside and outside lags, but they are essentially the same
True or false. If output falls far below full employment, progressive income taxes and transfer programs will create a deficit, as tax revenues fall and transfer payments rise, but these changes will help increase spending and output
True These automatic stabilizers help to smooth out the ups and downs of the business cycle
True or false. More fuel-efficient cars, alternative energy sources, insulation, modified production methods, and other responses minimized the long-run effect of high energy costs on the economy after 1980
True These changes prevented higher energy prices from having such a negative impact on the economy
True or false. If leakages are greater than injections, the size of the income flow will shrink
True Think of a bathtub; if a lot of water is being drained, but only a little is being added, the water level falls
True or false. The Fed's dual mandate is to maintain both full employment and price stability
True This dual mandate was formalized with legislation passed in the 1970s
True or false. The Keynesian belief that banks are more likely to hold larger amounts of excess reserves during a recession was supported when excess reserves rose from $1.5 billion in September 2008 to above $900 billion in January 2009
True This increase happened when the economy entered recession
True or false. After 40 years of economic growth, average weekly earnings, adjusted for inflation, have only risen about 11.7%
True This is a dismal picture of real gains for U.S. workers
True or false. Congressional legislation over the years, much of it enacted during the Great Depression, has created a system of tax collections and transfer payments that change automatically in response to changes in national income
True This legislation has primarily included changes in income tax collections, Social Security and welfare benefits, and unemployment compensation claims
True or false. Goods and services for export, such as chemicals, entertainment, and financial services, are also a key component of aggregate supply
True Traded goods are the components of aggregate supply
True or false. The value of government expenditure included in GDP is smaller than the true amount spent by government, because it does not include transfer payments.
True Transfer payments are income payments to individuals who provide no goods or services in exchange, such as Social Security or welfare
True or false. The distribution of income in developing countries shows great inequality, making it difficult to save and invest because the wealthy group is so small and most of the rest of the population is at a subsistence level of income
True Typically there are greater extremes of wealth and poverty, with a small wealthy elite, a large mass of people who are poor in both urban and rural areas, and a very small middle class
True or false. If firms' unplanned inventories are increasing, then in a closed, private economy consumers are saving more than businesses anticipated
True When consumers are saving more than anticipated, businesses are left with unplanned inventory
True or false. The slope of the aggregate supply curve depends on how costs change when firms change the level of production or quantity of output supplied
True When costs go up as firms attempt to increase output, the aggregate supply (AS) curve is upward-sloping
True or false. A declining labor force participation rate means fewer workers are supporting an increasing number of non-workers.
True When people leave the labor force, they still consume goods and services, and it is up to the remaining workers to create these goods and services
True or false. A higher price level causes an increase in nominal GDP, but not an increase in real GDP
True When real GDP is calculated, the increase in the price level is removed
True or false. The Fed cannot pursue both an interest rate target and a money supply target at the same time
True When the Fed chooses one target, it loses control of the other
True or false. A recessionary gap occurs when aggregate expenditures intersects the 45-degree line to the left of the full-employment level of output
True When the aggregate expenditure intersects the 45-degree line that is the equilibrium output. Since it is less than full-employment it would be to the left
True or false. If the price level increases net exports, assets, government spending and household wealth all decrease
True When the price level increases the economy will move up and to the left on the aggregate demand curve
True or false. As women entered the labor force, male participation declined partially due to the increased safety net for married men.
True When their wives work more men have the option of leaving the workforce and still having their families provided for
True or false. In a closed economy, equilibrium output occurs where the C + I + G line crosses the 45-degree line
True Where aggregate expenditure crosses the 45 degree line determines the equilibrium output
True or false. The two government groups that own federal debt are the Social Security Trust Fund and the Federal Reserve
True While the Social Security Trust fund owns the majority of the non-public debt, the Federal Reserve owns some of the debt
True or false. Lower unemployment is a benefit of economic growth
True With higher output firms tend to employ more workers creating more employment
True or false. A number of studies have concluded that workers are more productive when offered incentives like profit-sharing or bonuses
True Workers are motivated to work harder or acquire more skills when offered financial incentives
True or false. If Emily puts her son into the local daycare, GDP increases. If she stays home and cares for her son, GDP does not increase
True If Emily pays a childcare provider, this is considered a market transaction and is counted in GDP. If Emily cares for her son herself, this is a non-market transaction and is not counted in GDP
True or false. In the United States, gross domestic produce (GDP) is currently the most widely used measure of total output.
True (we stopped using GNP in 1991)
Which statement about the U.S. political system is false?
U.S. Senators are all elected every 4 years Senators serve 6-year terms and one-third of the Senate is up for election every 2 years
A Federal Reserve note is accepted as money by most Americans because
U.S. law establishes it as legal tender Money is accepted because the U.S. law established it as legal tender
Unit 4: Economic Theory and Fiscal Policy
Unit 4: Economic Theory and Fiscal Policy
In 2011, the per capita gross national income was $48,890 in the
United States
Two types of workers that cause unemployment to be overstated are
Unreported legal workers and reported illegal workers (These problems result from the inability of the BLS (Bureau of Labor Statistics) to verify the truthfulness of the information provided by respondents.)
The difference between GDP and GNP is likely to be what?
Very large, if many foreign citizens are employed within a country Output produced by foreign citizens working within a country is counted in GDP, but is not counted in GNP
As of April of 2015, 161 countries are members of the
WTO (World Trade Organization)
Which two presidential candidates lost their elections due to the public's dislike of tax increases?
Walter Mondale and George H.W. Bush In 1984, Democratic presidential candidate Walter Mondale admitted that, if elected, he would raise taxes. He carried two states and the District of Columbia. In 1988, George H. W. Bush promised no new taxes. He was elected, agreed to raise taxes, and lost the election in 1992
The fifth stage, high mass consumption, describes the present level of development in the United States and
Western Europe
When can running a deficit cause a problem for future generations?
When resources may be diverted away from productive investment If the government increases spending when the economy is at full employment, resources may be diverted away from productive investment
Multilateral organizations involved in assisting developing countries include the
World Bank, United Nations, and the World Trade Organization These organizations are involved in assisting developing countries
The Fed's first challenge was helping the treasury finance the budget deficit during and after
World War I
According to Franco Modigliani, which groups are most likely to engage in dissaving?
Young families and retired individuals Modigliani hypothesized that young families would dissave to acquire their start-up capital of houses and cars while their current earnings were low, but their potential future earnings were high. During retirement years, households would again become dissavers, drawing on their pool of accumulated savings, as their consumption needs exceeded their income
The main cost of active fiscal policy is
a budget deficit The negative effect of using active fiscal policy to combat recession is a budget deficit. Since it is politically difficult to cut spending or raise taxes, there is a bias in favor of deficits
Because the demand for agricultural output is not very responsive to price changes,
a bumper crop will lead to a big price drop A bumper crop means an increase in supply, which causes a large decrease in price if demand is inelastic
NAFTA is
a free trade agreement between Canada, the United States, and Mexico Canada, the United States, and Mexico formed NAFTA in 1993 when Bill Clinton was president
Aggregate supply is vertical in the long run, so a rightward shift of aggregate demand leads to
a higher equilibrium price level
Smith's Classical principles of economic development rested on
a laissez-faire governmental policy of nonintervention toward private industry and commerce Smith is regarded as the founder of market economics
The big push strategy calls for
a major thrust on all fronts in the economy by government or by private enterprise with the government's support Development in all sectors helps create new markets to aid in continued development
The standard of value function of money refers to money as
a method of measurement or comparison The standard of value makes money a method of measurement and comparison
Economists generally believe that the aggregate demand curve has
a negative slope
For the United States, the average rate of growth from 1950 to 2011 has been
about 3.3% The overall (compounded) rate of growth from 1950 to 2011 has been about 3.3% per year
The recognition lag is
about the same for monetary and fiscal policy The time it takes for policymakers to recognize a problem with the economy is independent of the type of policy chosen to combat the problem
The fact that money is legal tender increases its
acceptability
When banks are holding excess reserves,
actual reserves exceed required reserves, and they are not maximizing loans and profit potential Banks are allowed to continue making loans until excess reserves equal zero, when actual reserves are equal to required reserves
Resources flow to certain sectors of the economy, such as real estate, that enjoy tax
advantages
GNP (gross national product) is the total market value of
all final products produced by a nation's citizens during a given time period GNP is output produced by U.S. resources, whether production happens in the United States or in a foreign country
The Classical model uses the assumption that
all wages and prices are flexible Classical economists assume that prices and wages are flexible
The Classical model uses the assumption that
all wages and prices are flexible In the Classical model, all wages and prices are flexible
If the Fed is committed to a money supply target and interest rates increase because of a housing boom, the Fed would need to
allow interest rates to increase, even though investment spending could suffer as a result High interest rates have a negative impact on investment spending
Reduced tax rates give people more disposable income, resulting in
an increase in spending
Increased demand for natural resources causes
an increase in the price of natural resources, which causes aggregate supply to shift to the left Higher input prices cause aggregate supply to shift to the left
Keynesians emphasize the impact of changes in interest rates on investment spending, aggregate demand,
and equilibrium output and employment
An aggregate supply curve shifts to the left when
any non-price-level factor decreases the total cost of production
With all else held constant, suppliers usually will supply less of a good or service
at lower prices
The big push strategy calls for
balanced growth The big push strategy calls for a major thrust on all fronts
If the Fed sells bonds,
bank reserves decrease
If the Fed buys bonds,
bank reserves increase
Monetary policy refers to the Fed's control over
bank reserves, credit, and interest rates
Additional deposits create additional reserves for the
banking system
A document that entitles the bearer to an amount of gold on demand at the bank is a
banknote A banknote is a document that entitles the bearer to an amount of gold on demand at the bank
The federal funds rate is the interest rate
banks charge each other on reserve loans If a bank is not meeting the reserve requirement, it can borrow reserves from another bank in the federal funds market
According to the Keynesian model, contractionary monetary policy is more likely to be effective than expansionary monetary policy because
banks have no choice but to reduce loans when reserves fall, but they can maintain positive excess reserves If the Fed acts to reduce bank reserves, banks may borrow reserves from the Fed on a temporary basis, but will have to contract their loan portfolios to avoid negative excess reserves
In the Keynesian model, monetary policy is effective when
banks lower interest rates and increase lending
When the Fed uses the monetary tools to increase bank reserves,
banks may not increase lending, so the policy is not always effective Banks may choose to hold positive excess reserves if they are not confident that borrowers will repay loans
Import substitution is a strategy of
becoming less dependent on other countries by developing domestic industries to produce goods that had previously been imported Import substitution is a strategy of becoming more self-sufficient
After classifying 115 economies on the basis of political rights, individual rights, and use of a free market, Gerald Scully found that those that most strongly emphasized political and individual rights and the use of markets had
been growing at a rate 2.7 times as fast as those that did not Scully found that countries that emphasized political and individual rights and the use of markets had been growing at a rate 2.7 times as fast as those that did not. Adkins and Savvides confirmed these findings more recently, using data for 73 developed and developing countries
Capitalism is based on the
benefits of competition
In general, when unskilled workers migrate to the United States, business firms and skilled workers are
better off
The composite aggregate supply is upward-sloping in
between the Classical & Keynesian regions
If the interest rate in this market drops below the target rate set by the Fed, the Fed will sell
bonds to adjust reserves and cause the rate to rise Bank reserves are reduced when the Fed sells bonds, so the supply of federal funds decreases, causing the equilibrium price in this market to go up
Aggregate demand shifts to the right when businesses and consumers are able to
borrow and spend more
When government spends more than the revenue it takes in, it must
borrow funds in the credit market to cover the deficit
The transactions demand for money depends on
both the price level and real income The transactions demand for money does depends on both the price level and real income
When money demand is highly sensitive to interest rates, a given expansion of the money supply will
bring about a smaller decline in interest rates
If the Fed is seeking to expand the availability of credit in order to increase aggregate demand, it will most likely
buy bonds in the open market Bank reserves increase when the Fed buys bonds
Bank reserves increase when the Fed
buys bonds in the open market, and decrease when the Fed sells bonds in the open market The Fed creates new money to pay for bonds, causing bank reserves to expand. When the Fed sells bonds, bank reserves are taken out of the system
These two groups will experience higher returns to their past investment in physical and human capital, because unskilled labor is a
complement to these other productive resources
Research has shown that public and private investments can be
complementary
The quantity theory of money states that The quantity theory of money states that
changes in the price level are proportional to changes in the money supply
The M1 money supply includes
checkable deposit accounts The M1 money supply does includes checkable deposit accounts
When a bank lends out a portion of its customers' deposits, it is
called fractional reserve banking Lending a portion of the deposits is called fractional reserve banking
When the economy is in a recession, running a budget deficit
can help end the recession by increasing spending Higher government spending and higher private spending resulting from lower taxes creates a budget deficit, but also helps end the recession
Plants, equipment, and machinery are examples of
capital resources
The initial effect of expansionary policy was a decrease in the interest rate, but inflationary expectations offset this change and
cause interest rates to move in the other direction
Leakages in the circular flow model are
caused by people saving instead of spending When people save, not all the income produced is used to purchase the goods produced
What is the most important assumption in economic models?
ceteris paribus assumption "all else being equal."
The measure of inflation is the
change in the price index. The percentage change in the CPI from one year to the next is the inflation rate.
Real GDP is a more accurate measure of output than nominal GDP because
changes in nominal GDP reflect changes in both output and product prices Nominal GDP is adjusted for changes in the price level to arrive at real GDP
Real GDP is a measure of the value of economic output adjusted for
changes in the price level Nominal GDP is adjusted for changes in the price level to arrive at real GDP
A total fertility rate of 2 keeps the population
constant
Consumption expenditures are divided into
consumer durables, nondurables, and services
A war in the Middle East that affects the U.S. stable economy could cause a
contraction. This means that the economic activity has slowed down.
Cutting the government's budget deficit is a form of
contractionary fiscal policy Contractionary fiscal policy involves reducing government spending and/or raising taxes, both of which lead to a leftward shift of aggregate demand
Based on the Keynesian model, policymakers are able to use
contractionary fiscal policy to reduce inflation
If the Fed attempts to maintain a target interest rate and a recession causes interest rates to fall, the Fed would need to pursue
contractionary monetary policy to raise interest rates, but this would likely worsen the recession This is an argument against using an interest rate target
In the short run, an increase in aggregate demand
creates an opportunity for firms to increase profit if they sell more units of output Assuming there is no change in input prices, an increase in product price creates a larger profit margin on each unit sold. A firm that sells more units of output will earn more profit on each unit as well as more profit in total
The Fed acts as the government's bank to prevent
cronyism
The United States does not export a lot of rice to Japan based on the
cultural heritage argument Japan views rice and rice farming as part of its heritage, and has many programs protecting rice farming from foreign competition
An increase in the interest rate is the correct policy to
cure inflation
The monetary base consists of
currency in the hands of the public plus reserves held by banks The Fed determines the size of the monetary base, the public determines the division between cash and bank deposits
The first stage is the traditional society, in which economic decisions are made on the basis of
custom and obligation
When the economy is in a downturn, automatic fiscal policy creates a deficit. Since this deficit is the result of business cycle activity, it is called a
cyclical deficit
According to the M1 definition, the money supply consists of currency held by the public, plus
demand deposits and traveler's checks Demand deposits and traveler's checks are part of M1 monetary aggregate
Active fiscal policy results in budget
deficits when used to combat recession and in budget surpluses when used to combat inflation
EPA regulations that prevent irrigation of farms in order to protect the smelt fish cause the GDP and standard of living to
decrease Fewer fruits and vegetables are produced, which decreases GDP. This increases the price, leading households to buy less and puts farm workers out of work. Both effects decrease the standard of living
If U.S. spending for foreign-made autos increases while foreign spending for autos made in the United States decreases, ceteris paribus, then U.S. net exports will
decrease If U.S. spending for foreign-made autos increases while foreign spending for autos made in the United States, ceteris paribus, then U.S. net exports will decrease
If two goods are complements, a rise in the price of one will
decrease the demand of the other (if the price of cream cheese goes up, people will eat less bagels)
Used correctly, active fiscal policy should
decrease the ups and downs of the business cycle
A rightward shift of the short-run aggregate supply causes the equilibrium price level to
decrease, and the equilibrium output level to increase Prices fall and output increase when aggregate supply shifts right
The best example of a contractionary fiscal policy, designed to decrease aggregate spending, is
decreased spending on national defense and elimination of tax loopholes Both of these actions result in lower spending
The fracking of oil that occurred after 2010
decreased the price of oil and shifted short-run aggregate supply rightward A decrease in the price of oil will shift the short-run aggregate supply to the right
When interest rates rise, the transactions demand for money usually
decreases When interest rates rise, the transactions demand for money decreases
Economists in the Keynesian tradition argue that the short run is a long period of time. This is the reason Keynesian economists support active
demand-management policies
Economists of the Classical tradition claim that the short run is a short period of time. This is the reason Classical economists do not support active
demand-management policies
Export promotion is a strategy of
developing export industries in order to earn foreign exchange to purchase consumer goods, capital equipment, raw material, and food from abroad This explanation is what is meant by export promotion. Promoting exports is a way to foster growth and development
The leading sectors strategy calls for
developing successful sectors that will then influence other sectors in the chain of production through backward and forward linkages If there is a successful sardine fishing industry, for example, it could be linked forward to a canning operation, which in turn could be linked forward to a packing and shipping industry
The existence of transactions costs means that
different people may pay different prices for the same good or service
In the Classical view, the link between money and spending is
direct
The money supply contracts when the Fed raises the
discount rate
It is important for the Fed to pay attention to interest rates, because letting interest rates rise too high will likely
discourage investment and cause a recession High interest rates cause investment spending to fall and lower spending shifts aggregate demand left, which causes output, income, and employment to fall
People who have looked for work in the past 6 months, but NOT in the past 4 weeks, are called
discouraged workers (not calculated in labor force #'s)
In response to a free trade treaty, a country increases its exports of computer software and begins to import kitchen appliances. As a result of free trade,
domestic jobs are lost in the kitchen appliance manufacturing industry, but jobs are created in the computer software industry Because domestic consumers are importing kitchen appliances from abroad, the number of domestic jobs manufacturing appliances will fall. Jobs in the export sector will increase
Suppose there is a surplus of goods, and firms collectively cut their output. A Classical economist would predict that competition among workers for fewer jobs will drive wages
down A Classical economist would predict that competition among workers will drive wages down
The aggregate demand curve is
downward sloping
Selling a good at a lower price in a foreign country than in the firm's home country is known as
dumping Firms may dump abroad to get rid of surpluses, to take advantage of differences in elasticity of demand (price discrimination), or to establish a foothold in a competitive market
Chile is an example of a country that used export promotion to achieve
economic development
If the economy is experiencing both high unemployment and high inflation, the Fed can use monetary policy to solve
either high unemployment or high inflation, but cannot solve both at once If the Fed pursues expansionary monetary policy, it can reduce unemployment; if it pursues contractionary monetary policy, it can reduce inflation
The second stage develops the preconditions for takeoff. In this stage, an entrepreneurial class of risk takers begins to
emerge
Classical economists thought that the economy tended naturally toward full
employment Classical economists assumed that the economy always tended back to a full employment equilibrium
What are the two major characteristics that governments look at when determining the health of their economies?
employment and inflation
According to the Classical model, the income generated by production is
enough to purchase all the goods and services produced According to Classical economists, production is the source of demand
According to the Classical model, the income generated by production is
enough to purchase all the goods and services produced According to the Classical model, the income generated by production is enough to purchase all the goods and services produced
If a bank sells a bond and uses the proceeds to make a loan, it has
exchanged one asset for another Bonds and loans are both assets
In the Classical view, monetary policy works directly to change the economy because when the Federal Reserve buys bonds in the open market, the money supply
expands and spending increases as well When the Fed increases the money supply, then at the current level of money income, money supply will exceed money demand. People attempt to spend their excess cash balances
According to the political business cycle theory, when inflation is not a problem, a politician seeking reelection is likely to pursue
expansionary fiscal policy prior to the election, so voters will be satisfied with the state of the economy Political business cycle theory suggests that incumbents are more likely to win when economic conditions are favorable immediately before an election
Based on the Keynesian model, policymakers are able to use
expansionary fiscal policy to reduce unemployment
The Fed buys bonds in the open market to pursue
expansionary monetary policy
Goods and services sold to foreign buyers are
exports Exports are injections into the income stream
If an attempt is made to use aggregate supply to increase output, prices should
fall When aggregate supply shifts to the right, real output will increase, but the price level will decrease
When the economy is booming, income is rising
faster than normal, so tax revenues are likely to be higher than anticipated Since the federal government's main source of tax revenue is the federal income tax, higher income results in higher tax revenue
One way for banks to correct a shortage of required reserves is to borrow reserves from each other as well as from the Fed. Loans between banks are made in the
federal funds market Banks borrow reserves from each other in the federal funds market and the interest rate in this market is called the federal funds rate
In the United States, 2% of the labor force produces enough agricultural output to
feed the entire nation
Between August of 1929 and March of 1933, the U.S. money supply
fell by 25%, and there were widespread bank failures The money supply fell by 25% from August 1929 to March 1933, in part because of widespread bank failures
During the Great Depression, the velocity of money
fell significantly During the Great Depression, the velocity of money fell significantly
Microfinancing is when
financial services are offered to small business owners who lack access to traditional banking avenues Microfinancing loans are very small and are most often made to women
Multinational corporations are
firms with headquarters in one country and one or more branch plants in other countries There has been a foreign corporate presence in most developing countries at least since World War II, and in many cases going back to the beginning of the century
Gross private domestic expenditures include
fixed investment (plants and equipment), residential construction, and changes in inventory Investment occurs when someone starts a new business or grows an existing business. Investment activities include building factories or stores, purchasing equipment, and adding inventory. Residential construction is also counted as an investment.
The annual budget deficit is a
flow concept The annual budget deficit is the amount added to the national debt each year
If the Fed follows a money supply target, interest rates will
fluctuate with the ups and downs of the business cycle, causing more volatile investment spending Interest rates are sensitive to the business cycle because the demand for investment funds is stronger when the economy is stronger, and vice versa
Economists use the phrase "business cycle" when discussing
fluctuations in aggregate measures of economic output or income.
If aggregate demand increases, the likely effect in the short run is
higher product prices and increased output In the short run, aggregate supply is upward-sloping, so the equilibrium price level and output level increases when aggregate demand shifts to the right
If a shift in aggregate demand only affects real Gross Domestic Product (GDP), then the short-run aggregate supply (SRAS) curve must be
horizontal A shift in aggregate demand that only affects the real GDP means that SRAS is horizontal
The Keynesian short-run aggregate supply (SRAS) curve is
horizontal For Keynes, SRAS is horizontal in the short run
Keynes challenged the classical school during the Great Depression. He suggested that the aggregate supply curve could be
horizontal Keynes assumed that aggregate supply was horizontal in the short run, or at least very flat in the short run Keynes assumed that AS is horizontal only on the short run because prices are "sticky"
For Keynes, the short-run aggregate supply (SRAS) curve is
horizontal The Keynesian SRAS is horizontal
Everything that is produced in a year must be purchased by
households, business, firms, the government, or foreign entities The sum of spending by the four buying sectors is GDP
Mexico complained that the United States was unfairly banning its tuna after the United States put a requirement on imported tuna that it had to be caught with dolphin-safe nets. The WTO found that the United States had put a
illegal trade barrier up, and the regulation was repealed
The time that elapses between the implementation of a fiscal policy and its full effect on economic activity is called the
impact lag The third lag is waiting for the policy to have an impact
The time it takes after a problem is recognized to choose and enact a fiscal policy in response is the
implementation lag The second lag is implementing the policy
Purchases from foreign firms are
imports Purchases of imports are flows out of the stream (leakages)
Banks are more likely to hold a larger amount of excess reserves when the economy is
in recession and the risk of borrowers defaulting is higher Individuals are more likely to become unemployed and businesses are more likely to fail when the economy is in recession, so this increases the risk of default and motivates banks to extend fewer loans
Suppose there is a surplus of goods, and firms collectively cut their output. A Classical economist would predict that unemployment will
increase When there is a surplus, a Classical economist would predict that unemployment will increase
When money supply increases, interest rates are kept low. The direct effect of an increase in the money supply is to
increase aggregate demand, as people try to spend their excess money balances An increase in money supply increases aggregate demand, as people try to spend their excess money balances
When the interest rate is low, a household might decide to borrow to buy a new car. This will
increase consumption, which increases aggregate demand, which leads to an increase in output
If a politician is seeking to reduce unemployment and increase economic growth prior to an election, the fiscal policies that would most likely achieve these goals would be to
increase government spending and decrease taxes Increased government spending increases aggregate demand, leading to higher equilibrium output and employment Decreased taxes raise disposable income, causing aggregate demand to shift rightward. Stronger spending causes higher equilibrium output and employment
The Fed can buy bonds in the open market to
increase the money supply and lower interest rates
The Taylor rule stipulates that for each 1% increase in inflation, the Fed should
increase the nominal interest rate by more than 1% The benefit of such a rule is to reduce uncertainty about how the Fed would choose to respond to inflation, thereby promoting price stability
During the expansionary phase of the business cycle, it is likely that real income will
increase, the price level will increase, and the unemployment rate will decrease. During an expansionary phase, price level and real income will increase while unemployment will decrease.
One of the biggest benefits of free trade is
increased consumption Numerical examples in the previous section illustrate the potential gains from trade in terms of additional output
One of the main benefits of active fiscal policy is
increased employment Active fiscal policy means raising government spending and/or lowering taxes to combat recession. If successful, this policy increases output and employment
In the 1970s, the labor force changed significantly because of the
increased labor force participation by women and the entrance of baby boomers The labor force grew significantly during the 1970s because of more women joining the labor force and the entrance of baby boomers. However, productivity did not improve because so many new entrants had low skills and experience
The best example of an expansionary fiscal policy, designed to increase aggregate spending, is
increased public spending on infrastructure and a reduction in the income tax Both of these actions result in higher spending
When consumption increases, aggregate demand also
increases
When households buy new goods, consumption
increases
If investment increases in the aggregate expenditure equation, aggregate demand
increases An increase in aggregate expenditure will lead to an increase in aggregate demand
When aggregate expenditures increases the equilibrium output
increases When aggregate expenditures increases the equilibrium output increases. The new AE line intersects the 45-degree at a higher point, leading to a higher equilibrium output
Adding the foreign sector to the Keynesian model,
increases income and output only if net exports are positive The foreign sector increases income and output only if the net exports are positive
Falling prices worsens the position of debtors because it
increases the real value of money
An aggregate demand curve shifts to the right when any non-price-level factor
increases total planned real spending An increase in aggregate demand means the curve has shifted to the right
The quantity theory of money held that, in the long run, the level of output was
independent of the stock of money and the price level The quantity theory of money held that, in the long run, the level of output was independent of the stock of money and the price level
If interest rates fall to a very low level, then
individuals will hold less money If interest rates fall, individuals will tend to hold less money
During the Great Recession (2007 to 2009), the United States experienced increasing unemployment and a low rate of
inflation
The Federal Reserve is able to monetize debt by creating new money. If the Federal Reserve creates too much money, the result is
inflation If too much new money is created, the value of the currency decreases and leads to inflation
In the 1970s, when oil prices increased tenfold, the economy experienced
inflation combined with high unemployment, because aggregate supply shifted to the left Higher input prices cause aggregate supply to shift to the left, increasing the equilibrium price level, reducing output and employment, and increasing unemployment
Most of the problems caused by inflation are caused by the fact that
inflation is often unanticipated, and therefore comes as a surprise to individuals in the economy
Fully anticipated inflation occurs when
inflation rises the same as the forecast expected, then inflation is fully anticipated.
The goal of fiscal policy is to
influence employment, inflation, and economic growth Only when changing government spending or taxes is an attempt to change economic conditions are they considered fiscal policy
An event that causes the aggregate demand curve to shift inward or outward is one that
influences spending plans When consumers change their spending plans, aggregate demand will shift
The supply curve for an individual good is drawn under the assumption that
input prices remain constant As the price of good X rises, sellers' per unit costs of providing good X do not change
Keynes found many failings in Classical theory. He criticized the quantity theory because it neglects the role of
interest rates and fails to explain short-run changes in velocity
Investment spending rises when
interest rates fall
In the Classical model, aggregate demand and aggregate supply will
intersect at the point of full employment Classical economists assume that AD/AS intersect at full employment
The Fed is able to create money to pay for the bonds, thus putting new money
into the economy
An example of an injection into the income stream is
investment spending by business firms Injections are additions to the circular flow that represent spending not paid for out of resource income
The chair of the Federal Reserve Board of Governors
is chosen by the president from among the sitting governors for a 4-year, renewable term The current chair is Janet Yellen, formerly the vice-chair and the first woman to serve in this capacity
In the Keynesian model, employment
is determined by output In the Keynesian model, employment is determined by output
It is more difficult to measure output in services like banking or health care. For example, with widespread use of automatic teller machines and electronic banking, the number of checks is significantly down, yet productivity
is up
One reason why governments try to restrain inflation is because
it causes an unintended and often undesirable redistribution of income and wealth
The CPI tends to overstate the true inflation rate because
it fails to consider the effects of new products in the marketplace The CPI does not adjust the basket when new products are introduced that will shift consumption from one good to another
If GDP is growing at a faster rate in country A than in country B,
it is likely that living standards are improving more in country A, but this may not be the case It is possible that living standards are improving more in country B, yet GDP is not reflecting this because of omitted transactions, changes in leisure, or inaccurate data
The Keynesian short-run aggregate supply curve is horizontal because
it reflects wage and price inflexibility The Keynesian SRAS is horizontal because it reflects wages and price inflexibility
For monetary policy, the outside lag may be long because
it takes time for banks to increase or decrease their lending or for individuals to adjust their spending The outside lag refers to the time from action to impact. Once monetary policymakers take action, they must wait for banks to extend loans and borrowers to take out loans, then they must wait for borrowers to spend and for the additional spending to work it's way through the economy
Given the existence of automatic stabilizers, if the budget is balanced when the economy is at full employment,
it will be in deficit when the economy is in recession and in surplus when the economy is booming Government will automatically take in less tax revenue when recessions lower income and more tax revenue during upturns. Likewise, transfer programs like unemployment compensation are more expensive during recession
The argument against fair trade that is most used and most often makes the news is the
jobs argument People losing their jobs at a factory is bigger news than people gaining jobs from trade
When U.S. workers and voters express concern about outsourcing, they are generally worried that
jobs will be sent overseas because there is cheaper labor to be found there Workers in other countries are often paid substantially less than U.S. workers because their economic and legal environment is different
An indicator that is helpful in sorting out the relative importance of changes in total demand for labor and total labor supply is the
labor force participation rate The labor force participation rate measures the fraction of the adult population that is employed or actively seeking work
According to real business cycle theory, unemployment is
largely voluntary, caused by the decision to work less during times when wages are low Workers work extra hard when wages are high and then catch up on leisure time when wages are low, according to the real business cycle theory
Dirigiste means "directing" and represents the belief that government should play a
larger role
Because of the multiplier process, if a tax cut causes consumption spending to initially rise by $100, the resulting change in income is likely to be
larger than $100, as spending by one person creates additional income for another person The multiplier process magnifies the initial change in spending into a much larger change because each time someone receives additional income, their spending rises by the added income multiplied by the marginal propensity to consume
Takeoff is the third stage, during which there is a large increase in the rate of saving and increased saving finances capital investment in the
leading sectors
At higher rates of interest, businesses invest
less When interest rates are higher, business investments are more costly and businesses will invest less
During the depression, consumer spending fell because there were fewer jobs and
less income
The federal government is
less likely to declare bankruptcy than a city government, since it has a broader tax base The federal government has the power to tax over 300 million people and has access to other revenue sources as well
A quota is a
limit on the amount of a good or service that can be imported during a given time period A limit on the quantity to be imported is called a quota
The big push strategy is based on the Classical notion that growth in the output of an industry is
limited by the extent of the market At low levels of economic development, it is futile for any one industry to expand its output to a larger scale because it would be unable to sell its added product
Money is organized into monetary aggregates based on its
liquidity
The vicious circle of poverty occurs because
little is invested in human capital due to a low level of income, and a low level of income due to little being invested One reason why low-income countries invest little in human capital is that they have little to invest
Classical theory takes a
long-run view of the economy and believes that the economy will self heal if given time. It also believes that supply is the driving force of the economy.
Unanticipated positive inflation will create
losses for creditors and gains for debtors. When inflation is unanticipated interest rates are not adjusted for inflation and loans have lower interest rates.
The World Bank considers any country with a gross national income (GNI) of less than $1,006 per capita (in 2012 U.S. dollars) as a
low-income country
Aggregate demand is downward-sloping because a higher price level leads to
lower exports Higher domestic prices mean that a country's exports become more expensive to foreigners, so the quantity demanded falls
The results of airline deregulation over the past 30 years has been
lower fares, but increases in bankruptcy filings, union disputes, and customer complaints Although the average fare per passenger mile did fall from 33.3 cents in 1974 to 13 cents in 2010 (in real terms), deregulation also brought about a wave of bankruptcy filings, union disputes, and a sky-high number of passenger complaints
Successful deficit reduction is likely to result in
lower interest rates and a reduction in the international value of the dollar Lower interest rates will reduce the price of the dollar and stimulate export sales while curtailing import purchases
In the Keynesian view, an increase in the money supply causes aggregate demand to shift to the right. That means that if there is an increase in bank reserves, this leads to
lower interest rates, which causes investment spending to increase An increase in the money supply reduces interest rates because more funds will be available for banks to lend. The lower interest rates will stimulate investment demand
The indirect effect of an increase in the money supply is to
lower interest rates, which stimulates both investment and consumption spending, thereby increasing aggregate demand An increase in the money supply will lower interest rates and ultimately increase aggregate demand
Over time, there is a tendency for
major macroeconomic variables to move together in a predictable way In theory, major macroeconomic variables move together in a predictable way
A capital inflow means an increase in the demand for dollars and an increase in the price of a dollar,
measured in foreign currency
At higher rates of interest, households save
more When interest rates are higher, households will save more
Banks lower interest rates to encourage
more borrowing
Market transactions are
more important in developed countries than in less developed countries In developed countries, families are more likely to purchase services like cleaning, child care, and repairs
Effective monetary policy increases bank reserves, which results in
more lending and more investment spending If banks are willing to lend and businesses are willing to borrow, monetary policy has a significant impact on aggregate demand
If banks have more reserves, they are able to finance
more loans
The interest rate increases when prices are expected to increase because lenders
must charge an inflation premium
Import substitution and export promotion strategies are
mutually exclusive, since one concentrates on developing production for domestic buyers, while the other focuses on products to be sold abroad in order to earn the foreign exchange with which to import goods for domestic consumers.Correct. The two strategies are alternative trade strategies from which countries must choose The two strategies are alternative trade strategies from which countries must choose
The World Trade Organization (WTO) deals with the global rules of trade between
nations
In the Classical view, economic freedom is
necessary for a country to experience growth Many Classical economists see a need for economic freedom in order to have economic growth
Private investment is undertaken by business firms operating in the
private sector
In a four-sector model, the addition of a government with a balanced budget and
net exports that are positive has increased the equilibrium level of income compared to the two-sector model (Correct. Net exports are the fourth sector added to the model) (Correct. The four-sector model includes government expenditure)
The Fed is able to create money to pay for the bonds, which the public is
now holding
Most economists in the Classical tradition consider fiscal policy to be
of limited benefit, sometimes even harmful
Most economists in the classical tradition consider fiscal policy to be
of limited benefit, sometimes even harmful
According to the Classical model, in the short run, the money supply affects
only the general price level In the short run, the money supply affects only the general price level
The money supply contracts when the Fed sells bonds in the
open market
An increase in aggregate demand leads to an increase in
output
The second stage develops the preconditions for takeoff. In this stage, cultural barriers to development are
overcome
The implication of Say's law is that
overproduction in a market economy is not possible In the case of overproduction, supply will adjust and produce only what can be purchased
The turning points of the business cycle are called
peaks and troughs
The Fed can sell bonds in the open market to decrease the money supply and
raise interest rates
Monopolies restrict output in order to
raise the product price
In 1993, Federal Reserve Board of Governors chair Alan Greenspan announced that the policy of the Fed would emphasize
real (inflation-adjusted) interest rates as a policy target Greenspan's goal was to slow the growth of bank reserves and put the brakes on bank lending so that the expansion would continue, but not at a pace that would result in accelerating inflation
The tax advantages increase after-tax returns in the
real estate sector
Productivity is the measure of
real output per worker hour Productivity is defined to measure how much output is produced per worker hour
If real gross domestic product increases 10% and, at the same time, the population and the labor force both increase 10%,
real per capita gross domestic product remains the same Real per capita GDP is equal to GDP divided by population; if the numerator and denominator increase at the same rate, the ratio is unchanged
Lower output and employment is the defining characteristic of
recession
One possible result of a fall in aggregate demand coupled with a stable short-run aggregate supply is a(n)
recession
If the impact of expansionary fiscal policy is delayed until the economy has already recovered by itself, it is possible that policy intended to combat
recession may simply fuel inflation If the economy has already recovered, additional spending can lead to demand-pull inflation
Organized labor has generally opposed raising or eliminating immigration quotas because it wants to protect jobs for U.S. citizens, especially during and after a
recession, like that of 2007-2009 Organized labor is concerned with restricting the supply of labor in order to keep wages high
In discussions of monetary policy, the inside lag is the
recognition and implementation lags combined Both of these lags are called the inside lag, and the outside lag refers to the time from action to impact
Laissez-faire means "let it be" and represents the belief that government should play a
smaller role
Monetary policy is less effective in a global economy, because if policymakers expand the money supply and cause spending to increase,
some of the increased spending is used to purchase foreign-produced goods and services Some of the extra money is, in effect, exported, increasing demand in the rest of the world as well as at home
According to Keynes, the government should use its power to
spend (According to Keynes, through spending and taxing the government can affect the aggregate demand curve) and tax people in order to shift aggregate demand to the right, increasing output and employment. (According to Keynes, the government should increase aggregate demand to increase output and employment)
Deflation is bad for the economy because when people start anticipating falling prices, they are less willing to
spend or borrow money
In order to eliminate a budget deficit, the government must decrease
spending and/or increase taxes However, it is politically very difficult to do either of these during the expansionary phase of the business cycle Bringing in more tax revenue will reduce the size of the deficit. Spending less will reduce the size of the deficit
Because a given expansion of the money supply has little effect on the interest rate, it has a smaller impact on
spending, output, and employment
Keynesian economists consider fiscal policy to be an important
stabilization tool
One of the Fed's functions is to supervise and regulate banks to ensure the monetary system of the United States is
stable
If supply and demand both shift to the right by the same amount, the equilibrium price level
stays the same
A key component of the Keynesian model is that prices are
sticky
The national debt is a
stock concept The national debt is the total amount owed at a particular time
During the depression, business firms reduced output because they could not sell their products. They also
stopped investing because they had little confidence in the future
This is the part of a deficit that would persist even if the economy were at the full-employment level
structural deficit
Say's law says that
supply creates its own demand Say's law states that supply creates its own demand
Prices rise during a
supply-induced recession
Classical economists tend to
support Say's law Classical economists support Say's law
The Keynesian short-run aggregate supply curve is horizontal if
there are unutilized resources in the economy When resources are underutilized, SRAS is horizontal
With a cyclically balanced budget,
surpluses during the expansion phase of the business cycle offset deficits incurred in the recession phase The surpluses and deficits occur automatically and cancel each other out over the course of the business cycle
Protection of domestic industries is accomplished with two main tools, including
tariffs and quotas Tariffs are taxes imposed on imports and quotas are quantity limits
A tariff is a
tax on imported goods or services The tariff can be specific (based on weight, volume, or number of units) or ad valorem (figured as a percentage of the price)
Fiscal policy is most effective when policymakers are motivated to pursue actions
that improve the economy's performance The Keynesian argument in favor of active fiscal policy assumes that policymakers are motivated to do what is in the best interest of the economy, both in the short run and in the long run
The United State is in a recession if
the GDP (real output) declines for two successive quarters
The main competing views in economics today are
the New Keynesian and the various new Classical theories (Classical theories came first, before Keynesian)
Deflation is the situation in which
the average of all prices is declining
Comparing the size of the debt to the size of the economy by using the percentage of GDP is more meaningful than just looking at the absolute value of the debt because
the capacity to repay the debt grows as the economy grows Incomes are rising when the economy is growing, so anticipated tax revenues are up. Similarly, a household can afford to take on more debt when income is higher
Economic growth can not be measured by
the credit market The credit market is the broad market for companies looking to raise funds through debt issuance. The credit market encompasses both investment-grade bonds and junk bonds, as well as short-term commercial paper. Economic growth cannot be measured by the credit market
If the market for money is in equilibrium, then
the demand for money must be equal to the supply of money If the market is in equilibrium the demand for money will be equal to the supply of money
Automatic stabilizers partially offset changes in private spending and tend to reduce fluctuations in output and employment and are triggered by changes in
the economy
If aggregate demand and aggregate supply both shift to the right by approximately the same distance,
the equilibrium level of output will increase with little or no change in the price level A higher level of investment would shift both the aggregate demand curve and the aggregate supply curve to the right, resulting in increased output and employment without inflation
The more sensitive money demand is to the interest rate,
the flatter the money demand curve
Keynes developed his theory at a time when
the government was a drastically smaller part of the economy than it is today and therefore had much less impact on it. This smaller size influenced his theory
For most people, the problems of inflation are caused by the fact that
the inflation is unanticipated
Ignoring the government and foreign sectors, equilibrium output is determined by
the intersection of planned saving and planned investment In a closed economy, equilibrium output is determined by the intersection of planned saving and planned investment
One tenet of Classical economics that Keynes criticized is that
the role of the government should be limited, since the market will always be self-correcting Keynes did not believe that the role of the government should be limited
The Classical model assumes that the general price level is determined by
the supply of money The general price level is determined by the supply of money
When the price of the dollar rises, import-competing firms find that their foreign competitors can more easily undersell them because
their goods are cheaper in dollar terms
Monopolies have less incentive to expand output, innovate, or take risks because
there are no competitors nipping at their heels
Politicians tend to prefer bilateral aid rather than multilateral aid, because
they can exercise more control Politicians can attach conditions to bilateral aid
Unskilled workers in the United States are worse off because
they face increased competition for jobs and from people who are often willing to work for less
The labor force consists of
those who are working and those who are actively seeking work.
In the Keynesian model, government spending is considered
to be autonomous (acting independently or having the freedom to do so)
Coins with a value less than the monetary value are
token money Coins with a value that is less than the monetary value are token money
Redistribution is more likely to occur when inflation is
unanticipated
The leading sectors strategy calls for
unbalanced growth The leading sectors strategy, sometimes referred to as "unbalanced growth," argues that a country should concentrate on developing successful sectors that will then influence other sectors in the chain of production through backward and forward linkages
According to Keynes, increased planned spending would reduce
unemployment
According to Keynes, too little spending was the cause of
unemployment
The Fed typically lowers the target rate if the economy is experiencing higher than normal
unemployment The Fed lowers this rate by pumping reserves into the system, which leads to more borrowing and spending and can potentially help to reduce unemployment
Keynesian economics recommends the use of active fiscal policy. Specifically, policymakers should increase spending to reduce
unemployment and decrease spending to reduce inflation
If the economy is in equilibrium at a point on the long-run aggregate supply,
unemployment is equal to the natural rate The long-run aggregate supply curve is vertical at the real output level corresponding to the natural rate of unemployment
Suppose that there is no government and no international trade. When C + I is less than the level of output
unplanned inventories increase When C + I is less than the level of output, unplanned inventories increase
Foreign competition is
unpopular with the owners of productive resources, whether the competition is in product markets or in resource markets The owners of productive resources experience reduced income as a result of foreign competition, whether it is in product markets or in resource markets
Seventy countries made the list of high-income countries, including both industrial market economies and high-income oil exporters. Among this prosperous group, per capita incomes ranged from $12,275 and
up
Dualism refers to the coexistence of
urban, market-oriented societies and rural societies with little market activity Almost all developing countries are really two societies in the same country, and this coexistence is called dualism
Keynesians regard active fiscal policy as a
valuable tool for stabilizing economic activity
If changes in the price level have no effect on real output, aggregate supply is
vertical A fixed real output level and a variable price level imply a vertical aggregate supply curve
The Classical aggregate supply curve was
vertical Classical economists assumed that the aggregate supply curve is vertical because prices will adjust so that output is always at full employment
In the long run, aggregate supply is
vertical, because input prices are flexible in the long run Firms might earn higher profit per unit in the short run, because product prices are rising while input prices remain the same. However, in the long run, input prices will rise as well, and per unit profit returns to normal
If the demand for food is highly price-inelastic and there is an increase in the supply, the equilibrium quantity will increase
very little, while the equilibrium price will fall substantially A rightward shift of supply causes a small increase in quantity and a large drop in price when demand is inelastic
In recent years, the link between the money supply and GDP has
weakened, leading the Fed to focus more on interest rate targets This link has weakened, leading the Fed to focus more on interest rate targets
The goal of an economy is for the goods and services to go to the people
who will value them the most
In the Classical model, an increase in the unemployment rate
will likely be temporary In the Classical model, an increase in the unemployment rate is likely to be temporary
A change in one of the ceteris paribus conditions will cause the entire supply curve to shift. The most important of these are:
1. the state of technology 2. the prices of the productive resources 3. the number of suppliers 4. expectations about the future, and 5. the prices of related goods
The nonprice determinants of demand are:
1. the tastes of the group demanding the good or service 2. the size of the group demanding the good or service 3. the income and wealth of the group demanding the good or service 4. the prices of other goods and services 5. expectations about future prices or income
In a certain year, 143,060 of a country's residents were employed and 11,844 were unemployed. Under the formal definition for being unemployed, what is the unemployment rate for that year?
7.64% Unemployment rate = (unemployed worker/labor force/)*100 = {11,844 ÷ (143,060 + 11,844)}*100 = 7.64%.
If the unemployment rate is 3.5% and the labor force is 25,0000, what is the number of unemployed workers?
8750 Unemployment rate = (unemployed worker/labor force/)*100. This means, 3.5 = (unemployed worker/250000)*100 = 8750
How does a change in quantity supplied differ from a change in supply?
A change in the price affects quantity supplied, not supply.
What is a graph that shows the various combinations of choices an individual can make with the resources available?
Choice curve
What are goods that are jointly consumed?
Complementary goods (cereal and milk, lamps and light bulbs)
This occurs during periods of slow economic growth or during periods of economic contraction
Cyclical unemployment (an auto worker being laid off during a recession)
Goods that nonpayers, or free riders, *CAN* be kept from consuming
Excludables
True or false. When quantity supplied equals quantity demanded, there is an excess of quantity supplied
False
True or false. If the quantity demanded for pizza is 100 and the quantity supplied is 120, and the pizza is sold at a fair price, the market for pizza is in equilibrium.
False (Quantity supplied is more than quantity demanded, so the market is not in equilibrium)
True or false. The unemployment rate is defined as the percentage of the labor force that is actively looking for a job.
False Besides actively looking for a job, a person must also not currently have a job.
True or false. Full employment means that everyone in the population is employed or even that 100% of those who are able are willing to take a job.
False One way of defining full employment is to identify some level of unemployment as normal (acceptable or desirable) and only be concerned about unemployment in excess of that amount.
True or false. The presence of discouraged workers may cause the unemployment rate to be overstated.
False The presence of discouraged workers may cause the unemployment rate to be understated. This is because discouraged workers are those who were seeking employment, but have given up and stopped looking, so they are not included in unemployment calculations.
True or false. The system of income distribution in a market economy is not dependent on employment.
False The system of income distribution in a market economy is very dependent on employment. If people do not have jobs, they do not earn income.
True or false. If there is a shortage of coffee in the market, the price of coffee will drop.
False (If there is a shortage of coffee in the market, the price will rise because the sellers will raise the price to make more profit since it's hard to get)
True or false. If there is a surplus of coffee in the market, the price of coffee will rise.
False (If there is surplus of coffee in the market, the price will drop because the sellers will drop the price to get rid of their coffee because it's taking up space)
Short-term unemployment is called
Frictional unemployment (approx. 3-4% of the labor force) Frictional unemployment is chosen by the workers. Frictional unemployment would generally be classed as voluntary unemployment because workers are choosing to remain unemployed rather than get the first job that comes along.
This embodies the highest amount of skilled and unskilled labor that could be employed within an economy at any given time
Full employment
What is a good for which demand falls when income rises?
Inferior good (ramen noodles)
The policy of stealing employees away from jobs by offering them higher salaries doesn't lead to more production for the economy. Instead, this policy just rearranges what is produced and leads to
Inflation Workers who take higher-paying jobs have more money, but more goods and services aren't being produced, which leads to inflation.
What is most likely to happen if the supply of coffee shifts to the right, and the price has not yet changed to a new price?
Market forces will drive the price down (When the supply curve shifts to the right, the new equilibrium has greater quantity and lower prices)
Which of the following is the most successful method to allocate sweaters in Macroland?
Market prices
What is the sum of all of the individual supply curves?
Market supply curve
All else being equal (ceteris paribus), as the price of a good or service increases,
People will buy less of it
What is an example of a negative externality?
Pollution. It's a negative externality because it has spillover costs to third parties.
What function of the government promotes price stability and full employment?
Stabilization (The Government cutting taxes to end a recession)
A mismatch of workers and jobs is commonly known as
Structural unemployment (available workers do not match the jobs in terms of skills or location)
What are goods that replace each other?
Substitute goods (orange juice & apple juice, Coke & Pepsi, Reebok & Adidas)
With ceteris paribus conditions remaining constant, suppose the price of cement goes up in the United States. What happens in the market for new homes?
Supply shifts upward and to the left
If the quantity demanded for strawberries is more than the quantity supplied, what will happen to the price of strawberries?
The price will rise ( If there is more demand than supply of strawberries, this provides an incentive to the sellers to raise the price of strawberries. Thus, the price of strawberries will rise)
In the United States, the redistributive function of the government is carried out mainly by
The redistribution function is financed at the federal level and implemented at the state and local levels.
True or false. Each period of unemployment is a lost opportunity to develop skills and experience that may make a worker more valuable to an employer.
True
True or false. When there is full employment, the number of job seekers is approximately equal to the number of job vacancies.
True
True or false. A situation in which all available labor resources are being used in the most economically efficient way is full employment.
True By this definition, an economy is at full employment when 93%-94% of those who want to work are employed.
True or false. By definition, an economy is at full employment when 93%-94% of those who want to work are employed.
True Full employment does not mean that everyone in the population is employed or even that 100% of those who are able are willing to take a job.
True or false. Unemployment allows for growth in the economy.
True If a business wants to expand, but there are no workers available to hire, the only way the expanding business can get a new employee is to "steal" the employee away from the existing employer, which can be done by offering higher pay or benefits.
Unit 3
Unit 3
Which of the following is an example of a transfer payment?
Veterans' benefits. They are transfer payments because they are income and they are disbursed without work being done.
What are the three basic economic questions?
What to produce? How to produce? For whom to produce?
Mixed economy
a blend of tradition, command, and market economies (Most modern industrial countries have this)
When quantity supplied equals quantity demanded, there is
a market-clearing price (equilibrium price)
Prices play a central role in a market system in allocating scarce resources and
answering the basic economic questions (The primary functions of prices are to inform, direct, and motivate consumers and firms)
Traditional economy
answers the basic economic questions by tradition, or custom (Haiti banana farmers)
Command (or planned) economy
answers the basic economic questions through central command and control (Soviet Union, China, North Korea and Cuba)
When the supply of a product increases, but the demand for the product remains unchanged, the equilibrium price of the product will
fall, and the equilibrium quantity will increase
An outward shift of the production possibilities curve (PPC) increases the economy's capacity to respond to
human wants
As prices rise, the quantity supplied will
increase (because it's more profitable to produce and sell the good when you're charging more)
If two goods are substitutes, a rise in the price of one will
increase the demand for the other (if the price of mountain dew goes up, people will buy mellow yellow to replace it)
With increased prices for cars, producers
increase their supplies, and consumers decrease their demands
The demand curve for cars will shift upward when income
increases and when the price of gasoline decreases
The four factors of production are
land, labor, capital and entrepreneurship
Capital increases only when
physical or human capital increases
When the quantity demanded equals the quantity supplied,
price is at equilibrium
Demand is the relationship between quantities demanded and
price levels at a certain time period
When the quantity demanded is less than the quantity supplied,
prices will fall
When the quantity demanded exceeds the quantity supplied,
prices will rise
When price changes, there is an opposite change in
quantity demanded and demand, when the whole set of price and quantity change
Equilibrium occurs at a price for which the
quantity supplied and the quantity demanded are equal
Market equilibrium occurs at that price for which quantity demanded by consumers is equal to
quantity supplied by producers (This equilibrium price is also called the market-clearing price)
Economists assume people are
rational
The assumption that all resources are alike will produce a
straight line curve
There is a positive relationship between price and quantity
supplied, and there is a negative relationship between quantity demanded
What is entrepreneurship?
the activity of combining the other productive resources to produce goods and services, taking risks, and introducing new methods and new products (innovation.)
What explains how the production of larger amounts of one good leads to an increase in the sacrifice of the alternative good?
the law of increasing opportunity costs
What is profit?
the reward for innovation, risk taking, and organization
In the absence of government intervention, there will be both
too many public bads and too few public goods.
A period of 18 months of job searching is considered an
unemployment period
What is the formula to calculate the unemployment rate?
unemployment rate=Unemployed workersLabor force×100
