Popular in Macro Economics
verified elite notetaker
verified elite notetaker
verified elite notetaker
verified elite notetaker
One Day of Notes
verified elite notetaker
verified elite notetaker
Popular in Economcs
This 60 page Study Guide was uploaded by Alexis Jackson on Thursday January 29, 2015. The Study Guide belongs to Econ 102 at a university taught by Dr. Gibson in Fall. Since its upload, it has received 6144 views.
Reviews for Macro Economics
So much better than office hours. Needed something I could understand, and I got it. Will be turning back to StudySoup in the future
Report this Material
What is Karma?
Karma is the currency of StudySoup.
You can buy or earn more Karma at anytime and redeem it for class notes, study guides, flashcards, and more!
Date Created: 01/29/15
Macro Econ Exam 2 Study Guide Macro Vs Micro Macro focuses on the behavior of the economy as a whole The behavior of the macro economy is greater than the sum of individual actions and market outcomes Selfregulating economy problems such as unemployment are resolved without government intervention through the working of the invisible hand Keynesian Economics slumps are caused by inadequate spending and they can be mitigated by government intervention quotdepressed economy is a result of inadequate spendingquot Monetary Policy uses changes in the quantity of money to alter interest rate and affect overall spending Fiscal Policy uses changes in government spending and taxes to affect overall spending Recessions officially declared by National Bureau of Economics or contractions are periods of economic downturn when output and employment are falling Expansions or recoveries are periods of economic upturn when output and employment are rising Business Cycle the shortrun alternation between recessions and expansions Businesscycle peak the point at which the economy turns from expansion to recession Businesscycle trough the point at which the economy turns from a recession to expansion Real GDP measure of the economy39s overall output 0 Modern policy makers try to quotsmooth outquot the business cycle Longrun economic growth the sustained upward trend in the economy39s output over time Longrun growth per capita sustained upward trend in output per person is key to Higher wages Rising standard of living In ation rising overall level of prices De ation falling overall level of prices 0 Economy has price stabilitv when the overall level of prices changes slowly or not at all Money supply total quantity of assets that can be readily used to make purchases Hyperin ation prices rise by thousands or hundreds of thousands of Price stability the overall level of prices is changing slowly or not at all US is an Open economv an economy that trades goods and services with other countries Trade de cit when the value of goods and services bought from foreigners is more than the value of goods and services it sells to them Trade surplus when the value of goods and services bought from foreigners is less than the value of the goods and services it sells to them 1 According to Keynesian economics a depressed economy is caused by Inadequate spending An inadequate educational system Poor government policy POP Poor decisions made by business executives 2 A rise in the overall level of prices is known as A Price escalation B Expenditure escalation C In ation D Price recovery 3 During recessions there is typically an increase in A The number of people with health insurance coverage B Overall output C Overall spending D The number of people who are unemployed 4 the pattern of alternating recession and expansions is known as A the policy paradigm B the economic roundabout C economic synergy D the business cycle 5 When the value of a country s imports exceed the value of its exports the country is experiencing A a trade surplus B a trade de cit C In ation 6 LongRun economic growth is the process of addressing the business cycle the sustained rise in the quantity of goods and services the economy produces the same this as a business cycle expansion the same thing as an economic recovery 00 7 The paradox of thrift suggests that A banks are not a place to invest your savings B it is better to be a borrower rather than a lender C it is better to be a lender rather than a borrower D when people save anticipation of economic downturn they can worsen the downturn 8 Longrun economic growth A has important implications for policy concerns such as the financing of Social Security B can be measured by looking at the rate of increase in prices over time C is due only to the increase in the size of the workforce D can be measured by looking at the unemployment rate over time 9 The distinguishing feature of macroeconomics is that A it studies the behavior of the economy as a whole B it evaluates the behavior of large firms C it uses economic theory to explain popular consumer trends D it examines the markets of expensive items 10 A slowdown in the rate of growth A can lead to a mood of pessimism B does not affect the longterm standard of living C usually arises from an improvement in worker productivity D can lead to a mood of optimism 11 The most widely used indicator of conditions in the labor market is A the number of job openings advertised B the level of average household income C the average wage rate D the unemployment rate 12 before the 1930 s economists tended to regard the economy as A in need of government intervention B unstable C unable to reach equilibrium D selfregulating 13 A businesscycle peak occurs when A the economy switches from recession to expansion B the economy switches from expansion to recession C the current unemployment rate reaches a new historic high D the current unemployment rate is equal to the longterm average unemployment rate 14 In the long run the overall level of prices is mainly determined by A phases of the business cycle B changes in the money supply C the rate of longrun economic growth D undetermined factors 15 Fiscal policy involves A changes in the money supply intended to affect the rate of in ation B putting more money directly in the hands of consumers C changes in business regulation D changes in taxation and government spending 16 Movements in in ation are closely related to A the rate of longrun economic growth B the business cycle C the change of the seasons D shifts of supply and demand 17 In ation may cause people to A stop using money and rely on bartering instead B think of holding money as a good investment C view money as an asset that gains value over time D hold onto their money indefinitely 18 The idea that scal and monetary policies could be used to ght recessions was initially proposed by A Herbert Hoover B John Maynard Keynes C Milton Friedman D Joseph Schumpeter 19 A broadbased downturn in which employment declines in many industries is known as A a declining interval B a recession C a growth reversal D An expansion 20 The concept of the business cycle A Has played a crucial role in developing the field of macroeconomics B is a minor concern to most macroeconomists C has not received much formal study from the discipline of economics D is the only question of interest of macroeconomists National Income amp product accounts national accounts keep track of the ows of money between different sectors of the economy Consumer Spending household spending on goods and services Stock a share in the ownership of a company held by a shareholder Bonds is borrowing in the form of an IOU that pays interest Dividends pro ts distributed to shareholders Government transfers payments by the government to individuals for which no good or service is provided in return Disposable income equal to income plus government transfers minus taxes is the total amount of household income available to spend on consumption and to save Private Savings equal to disposable income consumer spending is disposable income that is not spent on consumption Financial Markets banking stock bond markets which channel private savings and foreign lending into investment spending government borrowing foreign borrowing Government Borrowing total amount of funds borrowed by federal state and local governments in the nancial markets Government purchases of goods and services total expenditures on goods and services by federal state and local governments Exports goods and services sold to other countries Imports goods and services purchased from other countries Inventories stock of goods and raw materials held to facilitate business operations Investment spending spending on productive physical capital such as machinery and construction of buildings and on changes in inventories Final good and Services are goods and services sold to the nal or end user Intermediate goods and services goods and services bought from on rm by another rm that are inputs for productions of nal goods and services GDP Gross Domestic Product total value of all nal goods and services produced in the economy during a given year Aggregate Spending sum of consumer spending investment spending government purchases of goods and services and exports imports total spending on domestically produced nal goods and services in economy 3 ways to calculate GDP 1 add up total value of all nal goods and services produced 2 add up spending on all domestically produced goods and services 3 add to total factor income earned by households from rms in economy Value added of a producer is the value of its sales the value of its purchases of intermediate goods GDP ClGXIM C consumer spending lsales of investment goods amp services Ggov purchases of goods and services X exports IM Imports Net exports the difference between the value of exports and the value of imports Aggregate output the economy s total quantity of output of nal goods and services Real GDP total value of all nal goods and services produced in the economy during a given year calculated using the prices of a selected base year Nominal GDP value of all nal goods and services produced in the economy during a given year calculated using the prices current in the year in which the output is produced Chained dollars the method of calculating changes in real GDP using the average between growth rate calculated using an early base year and the growth rate calculated using a late base year GDP per capita GDP divided by size of population it is equivalent to the average GDP per person Aggregate price level measure of the overall level of prices in the economy Market basket hypothetical set of consumer purchases of goods and services Consumption bundle typical basket of goods and services purchased before the price changes Price Index measures the cost of purchasing a given market basket in a given year where that cost is normalized so that it is equal to 100 in the selected base year Price index in a given year cost of market basket in year x100 Cost of market basket in base year In ation rate the change per year in a price index typically the consumer price index Consumer price indexCPl measures the cost of the market basket of a typical urban American family In ation rate price index in year 2 year 1 x100 Price index year 1 Producer price index PPI measures changes in the prices of goods purchased by producers GDP de ator for a given year is 100 time the ratio of nominal GDP to real GDP in that year 1 Total household income after paying taxes and receiving government transfers is known as a Disposable income b Exclusive income c Discretionary income d Financial income 2 Consumer spending is about what percent of GDP a 30 b 90 c 70 d 50 3 The national income and product accounts are designed to keep track of a Government debt b Consumer debt c Consumer spending business investment and government purchases d Income taxes paid The consumer price index is calculated using a A market basket of purchases made by lowincome families b A market basket that re ects purchases made by the typical urban family c The items representing the largest expenditures at grocery stores d A market basket that re ects purchases made by senior citizens Suppose the price index in Year 1 is 116 and the price index in year 2 is 123 What is the in ation rate between year 1 and year 2 a 7 b 6 c 23 d 16 A hypothetical consumption bundle used to measure changes in overall prices is known as a An aggregate indicator b An expenditure package c A market basket d A shopping cart To calculate real GDP we measure the total value of output using a Current prices with baseyear quantities b Estimated quantities bases on average family size c Estimated quantities based on population growth d The prices that prevailed during a selected base year In order to measure aggregate output we adjust GDP for changesin a Population b The price level c Family size d Firm size Goods and services used as inputs for the production of nal goods and services are known as a Transitory b Intermediate c Incremental d Temporary 10 Over a period of years in which the in ation rate is constant what is happening to the overall price level a It is increasing at a constant rate b It is constant c It is decreasing d It is increasing at an increasing rate 11 If a rm uses 20000 worth of intermediate goods and services to generate 25000 in sales of its nal product then we can say that is has created 5000 of a Value added b Investment income c Pro t d Factor income 12 In the year 2010 GDP for the US was about a 16 billion b 11 billion c 900 billion d 14500 billion 13 What is the value of the price index during the base year a It depends on what the in ation rate is in that base year b 0 c 10 d 100 14 An international comparison shows that a Higher levels of GDP per capita are associated with lower environmental quality b The overall level of wellbeing tends to rise with GDP per capita Increases in per capita GDP do not affect the level of wellbeing Higher levels of GDP per capita are associated with poorer health 99 15 A price index is Normalized measure of the overall price level A source of information about how income is allocated among rent wages interest and pro ts c A method of determining which sectors or the economy contribute most to output d A means of forecasting GDP growth 6399 16 When households buy products in the market for goods and services this is known as a Flow of consumer funds b Individual budget expenditure c Consumer spending d Inventory depletion 17 Which Government agency calculates the CPI The congressional research service The US Treasury The bureau of Labor Statistics The department of commerce opts9 18 Real GDP divided by the population size is known as Real GDP per capita Segmented GDP Standard GDP Adjusted GDp 99 5399 unemployment of people work are actively looking for work but aren t currently employed Labor force employment unemployment Labor force participation rate labor force x100 Population age 16 Unemployment rate of unembloved workers x100 Labor force Discouraged workers are nonworking people who are capable of working but have given up looking for a job given the state of the job market Marginally attached workers are nonworking people who are capable of working but have given up looking for a job even recent past but are not currently looking for work Underemployment of people who work part time because they cannot nd full time jobs Jobless recovery period in which the real GDP growth rate is positive but the unemployment rate is still rising Frictional unemployment unemployment due to the time workers spend in job search Structural unemployment more people are seeking jobs in a particular labor market than there are jobs available at the current wage rate even when the economy is at the peak of the business cycle Minimum wages government mandated oor on the price of labor Ef ciency wages wages that employers set above equilibrium wage rate as an incentive for better employee performance Natural rate of unemployment unemployment rate that arises from the effects of frictional plus structural unemployment Cyclical unemployment the deviation of the actual rate of unemployment from the natural rate due to the downturns in the business cycle Natural unemployment frictional unemployment structural unemployment Actual unemployment natural unemployment cyclical unemployment Real wage wage rage Pdcelevel Real income income Pdcelevel In ation rate price index year 2 price index year 1 x100 Price index year 1 Shoeleather costs are the increased costs of transactions caused by in ann Menu costs real cost of changing a listed price Unitofaccount costs arise from the way in ation makes money a less reliable unit of measurement Interest rate on a loan is the price calculated as a percentage of the amount borrowed that a lender charges a borrower for the use of their savings for one year 1 In 2010 percent of unemployed workers were considered longterm unemployed 43 30 15 74 1069 The unemployment rate is a The portion of the labor force unemployed b The ratio of the number unemployed to the number unemployed c The difference between the number unemployed and the number employed d The portion of the population unemployed The in ation rate a Is the annual rate of increase in the price level b Is always increasing when the overall price level is increasing c Will be zero when prices are increasing at a constant rate d Is equal to the price level Most economics agree that a binding minimum wage a Reduces unemployment b Contributed to frictional unemployment c Contributed to structural unemployment d Increases employment An ef ciency wage is a A wage set above the equilibrium level in order to motivate employee performance b The wage paid to the most recently hired workers in a rm c A wage designed to save shortterm costs for the rm d The wage paid to the most seniorlevel employees Unexpected de ation a Allows borrowers to gain at the expense of lenders b Reduces the real value of outstanding debt c Makes it harder for borrowers to repay their loans d Makes it easier for borrowers to repay their loans Structural unemployment occurs when a The wage rate is persistently above its equilibrium level b Workers spend an inefficiently long time in theirjob search c A downturn in economic activity causes rms to reduce the size of their workforce d Firms pose notices of nonexistent job openings 8 Data on the US economy indicate that b When the unemployment rate is low most unemployment is frictional When the unemployment rate is low a very small share of the unemployment is frictional c All unemployment is frictional unemployment d Frictional unemployment is harmful for the economy 9 Costs associated with changing a listed price are known as an 539 10 11 0390 12 1069 13 goo9 14 Shoeleather costs Menu costs Implicit costs Unitof account costs Actual unemployment is equal to The difference between natural unemployment and structural unemployment The sum of frictional unemployment and cyclical unemployment The sum of cyclical unemployment and natural unemployment The difference between cyclical unemployment and frictional unemployment US data from the past 60 years shows that The unemployment rate has steadily declined since 1950 Changes in GDP do not impact the unemployment rate in any predictable way Falling real GDP is always associated with a rising rate of unemployment The unemployment rate always falls during a period of economic expansion The sum of employment and unemployment is known as The labor force The employment base The worker input index The human capital index The wage divided by the price level is known as the Living wage Effective wage Standard wage Real wage Which federal agency calculates the of cial unemployment rate a b C d 15 16 on cm 17 0399 The bureau of labor statistics The congressional budget of ces The department of commerce The US treasury If there are discouraged workers The measured unemployment rate may overstate the percentage of people who would like to work but are unable to nd jobs The measured unemployment rate may understate the percentage of people who would like to work but are unable to nd jobs The measured size of the labor force will overstate the number of people available for work The measured labor force participation rate will overstate the true number The natural rate of unemployment rises when Union membership declines Unemployment bene ts are reduced The amount of cyclical unemployment rises There are more new entrants to the labor forces Employment is the total number of people Who are working either full or part time Who are working and earning above a minimum wage Who are either working or volunteering for community organizations Who are working full time 18 The unemployment rate is based on numbers collected from a monthly survey of families 99F 25000 60000 75000 100000 19 Cyclical unemployment a b c d Arises from workers who are out of work on a seasonal basis Helps the economy be more productive Will be highest when the rate of output growth is highest Is the share of unemployment arising from the business cycle Tracking economic growth real GDP per capita Population size Rule of 70 the time it takes a variable that grows gradually over time to double its approximate 70 Annual growth rate X100 Labor productivity output per worker Sustained economic growth occurs only when the amount of output produced by the average worker increases steadily Productivity real GDP of people working 3 reasons why average US workers today produce more than before 1 More physical capital human made resources buildings machines computers 2 More human capital improvement in labor created by education and knowledge embodied in the workforce 3 Technological progress Aggregate production function shows how productivity real GDP per worker depends on the quantities of physical capital per worker and human capital per worker as well as the state of technology GDP per worker T X physical capital per worker 4 X human capital per worker 6 Diminishing returns to physical capital when holding the amount of human capital per worker and the state of technology fixed each successive increase in the amount of physical capital per worker leads to a smaller increase in productivity Growth accounting estimates the contribution of each major factor in aggregate production function to economic growth Total factor productivity amount of output that can be achieved w a given amount of factor inputs Research and development is spending to create and implement new technologies Infrastructure roads power lines ports info networks and other under pinning for economic activity Convergence hypothesis international differences in real GDP per capita tend to narrow over time Sustainable longrun economic growth longrun growth that can continue in the face of the limited supply of natural resources and the impact of growth on the environment The improved capabilities of labor arising from education and knowledge are known as Knowledge resources Knowledge capital Physical capital Human capital 999 s Over the past century the annual rate of growth per capita GDP has averaged a 35 percent b 29 percent c 23 percent 1 18 percent An aggregate production function will show how productivity depends on a Prices costs and profit b Technology and natural resources c Technology human capital and physical capital 1 Population and natural resources Countries that add significantly to their stock of physical capital a Usually experience greater unemployment b Experience low rate of economic growth c Experience diminishing marginal returns to labor 1 Experience declines in productivity America s surge in productivity growth following 1995 was due to a Firms learning to make use of information technology b Improvements in private education c Firms expectation that employees would work longer hours d Improvements in public education Diminishing returns to physical capital may disappear if we a Look only at lowtech industries b Also increase the level of technology and human capital c Allow long time period of adjustment d Look only at hightech industries Over the period of 1948 to 2007 American labor productivity rose by 10 11 12 13 5 percent a year 13 percent per year 33 percent per year 23 percent per year 993 Typically countries in which investment accounts for a large share of GDP a Experience low growth rates b Experience declining productivity c Borrow heavily from other countries 1 Have a high domestic savings rate In the US real GDP per capita in 2010 was times as great as it was in 1900 a 7 b 5 c 10 d 3 Economist Paul Romer has described research and development as Equilivent to the development of human capital A force that proceeds on its own without economic incentives Equivalent to the development of physical capital The creation of improved instructions 993 The key to statistic used to track economic growth over time is The poverty rate Real GDP per capita The size of the workforce Nominal GDP F Research and development is paid for by 3 International aid organizations b A combination of private and government funds c Government funds only d Private sources only New growth theory asserts that technological change a Cannot be measured b Does not affect the rate of economic growth c Responds to economic incentives d Benefits individual firms rather than society as a whole 14 15 16 17 18 19 Using the rule of 70 we can determine that if real GDP per capita is growing at a rate of 16 percent per year it will double in approximately years a 30 b 35 c 24 d 44 An international comparison today shows that a Population growth is the most important determinant of economic growth b Natural resources are the most important determinant of economic growth c Resourcerich nations consistently have a higher standard of living than nations where natural resources are spare Natural resources are less important than human and physical capital in determining productivity 1 Total factor productivity is a measure of a The cost of technology inputs b The cost of human capital inputs c The amount of output that can be produced with a given amount of factor inputs d The cost of incorporating new technology in the production process The primary ingredient necessary for longrun economic growth is a An increasing population size b A strong currency c A strong military 1 Rising labor productivity In the time since Malthus wrote his book a Advances in technology and increases in physical capital have more than offset the effects if a rising population b Productivity has declined c His predictions have proven true 1 The average standard of living has declined Growth accounting allows us to allocate a The time it takes for output per worker to double b The cost of technological progress c The time it takes for real GDP to rise by more than the rate of population growth 1 The effects of greater physical and human capital on economic growth Econ Exam 3 study guide Savinginvestment spending identity savings and investment spending are always equal for the economy as a whole GDPCGXM Closed economy GDP C l G total income total spending GDP C G S total income consumption spending and savings Sl Savings investment spending Budget Surplus the difference between tax revenue and government spending when tax revenue exceeds government spending Budget de cit difference between tax revenue and government spending when government spending exceeds tax revenue Budget balance difference between tax revenue and government spending sgov T G TR T value of tax revenue TR value of government transfers National savings sum of private savings the budget balance is the total amount of savings generated within the economy SNational s Gov sprivate Closed economy 5 national l national savings investment Open economy investment spending Closed economy national savings capital in ow Net capital ow total in ow of funds into a country minus the total out ow of funds out of a country Net capital in ow NCl IM X I 5 National spending national savings net capital in ow Loanable funds market hypothetical market that illustrates the market outcome of the demand for funds generated by borrowers and the supply of funds provided by lenders Present value of X is the amount of needed today in order to receive X at a future date given the interest rate Total investment spending demand for loanable funds to nance that spending is neg related to interest rate Demand of loanable funds slopes down Supply of loanable funds slopes up Shifts of the demand for loanable funds 1 Changes in perceived business opportunities 2 Changes in government borrowing Crowding out occurs when a government budget de cit drives up the interest rate and leads to reduced investment spending Shifts of the supply of loanable funds 1 Changes in private savings behavior left 2 Changes in net capital in ows left Anything that shifts the supply of loanable funds or demand loanable funds curve changes in interest rates too Real interest rate nominal interest in ation rate Fisher effect increase in expected future in ation drives up the nominal interest rate leaving the expected real interest rate unchanged Wealth value of accumulated savings Financial asset paper claim that entitles the buyer to future income from the seller stock bonds bank deposits Physical asset tangible object that can be used to generate future income Liability a requirement to pay income in the future Transaction costs expenses of negotiating and executing a deal Financial risk uncertainty about future outcomes that involve nancial losses or gains Diversi cation investing in several different things so that the possible losses are independent events An asset is a liquid if it can be quickly converted into cash with relatively little loss of value llliquid if it cannot be quickly converted into cash wlittle loss of value Loan lending agreement between an individual lender and an individual borrower Default occurs when a borrower fails to make payments as speci ed by the loan or bond contract Loanbacked security an asset created by pooling individual loans and selling shares in that pool Financial intermediary an institution that transforms the funds it gathers from many individuals into nancial assets Mutual funds nancial intermediary that creates a stock portfolio to individual investors Pension fund type of mutual fund that holds assets in order to provide retirement income to its members Life insurance Company sells policies that guarantee a payment to a policyholders bene cences when the policyholders dies Bank deposit a claim on a bank that obliges the bank to give the depositor his or her cash when demanded Bank nancial intermediary that provides liquid assets in the form of bank deposits to lenders and uses those funds to nance the illiquid investment spending needs of borrowers Ef cient markets hypothesis asset prices embody all publicly available information 1 A bond is a A nancial asset that gives the holder an ownership share in the issuing rm b A riskfree nancial asset c A nancial asset that promises to pay a xed sum of interest every year and the principal value of the bond at some future date d A liability from the owner39s point of view and an asset from the issuer39s point of view 2 The presence of a positive capital in ow will cause a The demand for loanable funds to decrease b The demand for loanable funds to increase c The supply of loanable funds to decrease d The supply of loanable funds to increase 3 When there is a widely held belief that there is an abundance of promising business opportunities a The demand for loanable funds will decrease b The demand for loanable funds will increase c The supply of loanable funds will decrease d The supply of loanable funds will increase 4 Which of the following accounting identities is NOT true for a simpli ed economy without government and without interaction with the rest of the world a Total income consumption spending savings b Total income total spending c Total spending consumption spending investment spending d Total income savings consumption spending 5 The effect of an increase in the demand for loanable funds is to a Decrease the equilibrium interest rate thereby decreasing the quantity of loanable funds supplied b Decrease the equilibrium rate thereby increasing the quantity of loanable funds supplied c Increase the equilibrium interest rate thereby increasing the quantity of loanable funds supplied d Increase the equilibrium interest rate thereby decreasing the quantity of loanable funds supplied 6 The existence of a federal budget de cit causes a The demand for loanable funds to decrease b The supply of loanable funds to increase 7 9 10 11 12 13 c The supply of loanable funds to decrease d The demand for loanable funds to increase The effect of an increase in the expected in ation rate is to a Decrease the demand for loanable funds thereby increasing the equilibrium nominal interest rate b Decrease the demand for loanable funds thereby decreasing the equilibrium nominal interest rate c Increase the demand for loanable funds thereby decreasing the equilibrium nominal interest rate d Increase the demand for loanable funds thereby increasing the equilibrium nominal interest rate In an open economy savings is equal to a National savings plus capital in ow b Capital in ow minus capital out ow c Investment spending d The budget balance plus capital out ow What is measured on the vertical axis of a graph depicting the loanable funds market The number of potential investment projects The interest rate The quantity of loanable funds The present value of a dollar received in the future Which of the following statements is FALSE for an economy that has no interactions with the rest of the world gnum a National savings is equal to the sum of private savings plus the budget balance b If the budget balance is negative private savings must also be nega ve c A budget surplus means that the budget balance is positive d A budget de cit means that the budget balance is negative When you borrow money from your bank you are a Increasing the supply of loanable funds b Acquiring a nancial asset c Decreasing the demand for loanable funds d lncurring a liability Consider a loanable funds market in which the equilibrium interest rate is 6 percent What would happen if the interest rate were set above equilibrium at 8 percent a The demand for loanable funds would decrease b The quantity of loanable funds demanded would exceed the quantity suppHed c The supply of loanable funds would increase d The quantity of loanable funds demanded would be less that the quantity supplied Savers who supply loanable funds a Will supply more funds when interest rates are lower other things equal b Behave in a way that is consistent with a downwardsloping supply of loanable funds c lncur an opportunity cost when they lend to business d 14 Are unaffected by interest rates The downward slope of the demand for loanable funds shows that a b c d 15 an 16 9069 17 9069 18 Savers supply more funds when interest rates are lower Savers supply more funds when interest rates are higher More potential investment projects appear pro table when interest rates are higher More potential investment projects appear pro table when interest rates are lower In an economy with a negative capital in ow Some portion of national savings is used to nance investments in foreign countries Savings rates will be low compared with the level of investment Investment will exceed national savings Some investment spending is funded by the savings of foreigners A budget surplus arises when Savings is equal to consumption Tax revenues fall short of government expenditures Consumption spending exceeds investment spending There is governmentgenerated savings A surplus of loanable funds will result if The supply of loanable funds decreases The demand for loanable funds increases The interest rate is held below the equilibrium level The interest rate is held above the equilibrium level The downward slope of the demand for loanable funds re ects the fact that a b C d A lower interest rate lowers the value of dollars to be received in the future A higher interest rate means that more potential investment projects will be pro table A higher interest rate means that fewer potential investment projects will be pro table A lower interest rate means lower income for savers Marginal propensity to consume MPC is the increase in consumer spending when disposable income rises by 1 MPC change in consumer sbendind Change in disposable income Marginal propensity to save MP5 is the increase in household savings when disposable income rises by 1 Total increase in real GDP 1MPCMPC2MPC2 Rise in 1 1 x 1MPC Autonomous change in aggregate spending is an initial change in desired level of spending by rms households or government at a given level of real GDP Multiplier ratio of the total change in real GDP caused by an autonomous change in aggregate spending to the size of that autonomous change Consumption function an equation showing how an individual household39s consumer spending varies wthe household39s current disposable income C A MPC x yd C individual household consumer spending A individual household autonomous consumer spending agt0 YD individual household current disposable Aggregate consumption function the relationship for the economy as a whole between aggregate current disposable income aggregate consumer spending CAMPCXYD Planned investment spending the investment spending that business intent to undertake during a given period Accelerator principle a higher growth rate of real GDP leads to higher planned investment spending but a lower growth rate of real GDP leads to lower planned investment spending Inventories stocks of goods held to satisfy future sales Inventory investment the value of the change in total inventories held in the economy during a given period Unplanned inventory investment occurs when actual sales are more or less than businesses expected leading to unplanned changes in inventories Actual investment spending the sum of planned investment spending unplanned inventory investment Planned aggregate spending total amount of planned spending in economy GDP Cl YD GDP AEplanned C I planned Incomeexpenditure equilibrium when aggregate output measured by real GDP is equal to planned aggregate spending Incomeexpenditure equilibrium GDP level of real GDP at which real GDP equals planned aggregate spending Keynesian Cross diagram identi es income expenditure equilibrium as the point where the planned aggregate spending line crosses the 45degree line 1 Which one type of investment can be negative a Investment technology b Investment in buildings c Investment in inventories d Investment in machinery 2 An initial rise or fall in aggregate spending that causes ripple effects on the level of total income is known as a A normalized change b An autonomous change in aggregate spending c An economic disruption d An economic uctuation 3 Which of the following statements about investment spending is FALSE a The level of investment spending is dependent on the interest rate b Investment spending is larger than consumer spending c Investment spending is more volatile than consumer spending d Most recessions originate as a decline in investment spending 4 At the incomeexpenditure equilibrium a Planned investment is zero b Unplanned investment is zero c Unplanned investment is negative d Unplanned investment is positive 5 The marginal propensity to consume is a The increase in consumer spending when disposable income increases by 1 b The portion of total income that is saved c The number of times during the year that consumers change their planned expenditures d The portion of total income that is consumed 6 The consumption function shows that consumer spending by household varies with a Level of education of the head of the household b The number of adults in the household c Current disposable income of the household d The number of children in the household 7 Which of the following would cause an upward shift of the aggregate consumption function a Lower stock market prices b A decrease in household wealth c An increase in household wealth d The expectation of lower disposable income in the future 8 Actual investment spending is equal to a Planned investment spending divided by unplanned inventory investment b Planned investment spending plus unplanned inventory investment c Planned investment spending minus unplanned inventory investment d Planned investment spending multiplied by unplanned inventory investment 9 What is the marginal propensity to save when the marginal propensity to consume is 8 4 3 2 1 10039 10 Other things equal rms will take on less investment spending when a Interest rates are low b They have large amounts of extra production capacity c Expected future sales growth is high d They have no extra production capacity 11 The expectation of lower disposable income in the future causes A downward shift of the aggregate consumption function The consumption function to become downwardsloping An upward shift of the aggregate consumption function No change in the consumption function 12 The slope of the consumption function ls equal to the marginal propensity to consume ls equal to the marginal propensity to save Will always be 1 Is determined by the level of autonomous consumption 13 In our representation of the multiplier process we assume that prices are constant and therefore a Consumption spending will equal disposable income b Real GDP will equal nominal GDP c Real GDP will exceed nominal GDP d Nominal GDP will exceed real GDP 0069 0069 Aggregate demand curve shows relationship between the aggregate price level and the quantity of aggregate output demanded by households businesses gov and the rest of the world Wealth effect of a change in the aggregate price level effect on consumer spending caused by the effect of a change in the aggregate price level on purchasing power of consumers assets Interest rate effect of a change in the aggregate price level effect on consumer spending caused by the effect of a change in the aggregate price level on the purchasing power of consumers and rms money holdings Aggregate supply curve shows the relationship between the aggregate price level and the quantity of aggregate output supplied by the economy Nominal wage dollar amount of the wage paid Sticky wages nominal wages that are slow to fall even in the face of high unemployment and slow to rise even in the face of labor shortages Short run aggregate supply curve show the relationship between the aggregate price level and the quantity of aggregate output supplied that exists in the short run the time period when many production costs can be taken as xed Longrun aggregate supply curve shows relationship between aggregate price level and the quantity of aggregate output supplied that would exist if all prices including nominal wages were fully exible Potential output the level of real GDP the economy would produce it all prices including nominal wages were fully exible ADAS model the aggregate supply curve and the aggregate demand curve are used together to analyze economic uctuations Shortrun macroeconomic equilibrium when the quantity of aggregate output supplied is quantity demanded Shortrun equilibrium aggregate price level aggregate price level in the short run macroeconomic equilibrium Shortrun equilibrium aggregate output quantity of aggregate output produced in the short run macroeconomic equilibrium Demand shock an event that shifts the aggregate demand curve Supply shock an event that shift the aggregate supply curve Stag ation the combination of in ation and falling aggregate output Longrun macroeconomic equilibrium when the point of shortrun macroeconomic equilibrium is on the longrun aggregate supply curve Recessionary gap aggregate output is below potential output In ationary gap aggregate output is above potential output Output gap the difference between actual aggregate output and potential output Selfcorrecting when shocks to aggregate demand affect aggregate output in the short run but not long run Stabilization policy the use of Gov Policy to reduce the severity of recessions and rein in excessively strong expansions When rms and individuals become more optimistic about their economic prospects a Aggregate demand decreases thereby shifting to the left b Aggregate demand increases thereby shifting to the right c Aggregate demand increases thereby shifting to the right d Aggregate demand increases thereby shifting to the left The wealth effect and the interest rate effect explain a How real GFP differs from nominal GDP b The downward slope of aggregate demand c The position of the incomeexpenditure equilibrium d How the price level is determined The aggregate demand curve shows the relationship between a The overall price level and the aggregate quantity of output demanded b Income and expenditure c Income and investment d The interest rate and the level of planned investment spending A negative demand shock is an event that a Shifts the shortrun aggregate supply curve to the left b Shifts the aggregate demand curve to the left c Shifts the aggregate demand curve to the right d Shifts the shortrun aggregate supply curve to the right An upwardsloping shortrun aggregate supply curve indicates that a Increases in the overall price level will increase the amount of aggregate output supplied by rms b Increases in aggregate demand will increase aggregate supply c Increases in the overall price level will decrease the amount of aggregate output supplied by rms d Increases in government spending will increase aggregate supply When the government increases taxes a Aggregate demand decreases thereby shifting to the right b Aggregate demand increases thereby shifting to the left c Aggregate demand increases thereby shifting to the right d Aggregate demand decreases thereby shifting to the left Which of the following is a positive supply shock a A reduction in consumer spending due to a reduction in household wealth b The improvement in productivity arising from Internet technology c An increase in nominal wages d An increase in energy prices 8 When there is a widespread improvement in worker productivity a Aggregate supply increases thereby shifting to the left b Aggregate supply decreases thereby shifting to the right c Aggregate supply decreases thereby shifting to the left d Aggregate supply increases thereby shifting to the right 9 A widespread increase in production costs for most industries would be represented by A rightward shift of aggregate demand A rightward shift of aggregate supply A leftward shift of aggregate demand A leftward shift of aggregate supply 10 An increase in aggregate demand is represented by A leftward shift on the entire curve A movement from on point to a higher one along the same aggregate demand curve c A rightward shift of the entire curve d A movement from one point to a lower one along the same aggregate demand curve 11 If potential output is increasing over time it implies that the longrun aggregate supply curve is Shifting to the right Becoming horizontal The same as the shortrun aggregate supply curve Shifting to the left 12 The shortrun aggregate supply curve is and the long run aggregate supply curve is Vertical vertical Upwardsloping upwardsloping Vertical upwardsloping Upwardsloping vertical 13 What is measured on the vertical axis of a graph showing the aggregate demand curve Nominal GDP The aggregate price level The interest rate Employment 14 In a graph showing the aggregate demand curve an increase in the aggregate price level will cause A leftward shift of the curve A movement to a higher level of real GDP along the same curve A movement to a lower level of real GDP along the same curve A rightward shift of the curve 15 What is the effect of a negative supply shock The aggregate price level increases and real output decreases The aggregate price level decreases and real output decreases The aggregate price level increases and real output increases The aggregate price level decreases and real output increases 9069 0 0 0069 9069 gnum gnup agom Social insurance government programs intended to protect families against economic hardship ex Social security Medicare Medicaid Expansionary Fiscal Policy scal policy that increases aggregate demand An increase in gov purchases of goods and services Cut in taxes Increase in gov transfers Contractionary scal policy scal policy that reduces aggregate demand Reduction in gov purchases of goods and services Increase in taxes Reduction in gov transfers LumpSum taxes taxes that don39t depend on the taxpayer39s income No change in mult Automatic stabilizers are gov spending and taxation rules that cause scal policy to be automatically expansionary when the economy contracts and automatically contractionary when the economy expands Discretionary scal policy scal policy that is the result of deliberate actions by policy makers rather than rules Cyclically adjusted budget balance an estimate of what the budget balance would be if real GDP were exactly equal to potential output Fiscal year runs from Oct lst Sept 30th and is labeled according to the calendar year in which it ends Public debt Gov Debt held by individual and institutions outside the gov DebtGDP ratio the Gov Debt as a of GDP Implicit liabilities spending promises made by gov that are ef ciently a debt despite the fact that they are not included in the usual debt statistics Gov Budget balance taxes gov purchases gov transfers 1 Which of the following would be a tool of expansionary scal poHcy a An increase in government spending b A decrease in government spending c An increase in taxes d A decrease in transfer payments 2 If government transfer payments rise by 100 billion and this increases real GDP by 100 billion then we can conclude that a The multiplier is greater than one b The multiplier is positive but less than one c The multiplier is 0 d The multiplier is equal to one 3 The government budget balance a Is the sum total of all taxes collected b Is the difference between estimated tax revenue and actual tax revenue C Is the difference between estimated government spending and actual government spending d Is the difference between government revenue and total spending on purchases and transfers 4 The American recovery and reinvestment act of 2009 was a scal stimulus of a 135 billion b 787 billion c 550 billion d 390 billion 5 Which of the following statements is FALSE a During periods of prosperity the budget balance increases b During recessions the budget balance is reduced c Most economists agree that it would be a good idea to require an annually balanced budget d The role of taxes and transfers as automatic stabilizers would be undermined if the budget is required to balance annually 6 Temporary tax cuts enacted by Congress to ght a recession are considered to be a A discretionary scal policy intended to be expansionary b A discretionary scal policy intended to be contractionary c Automatic stabilizers d An effective means of closing an in ationary gap 7 10 11 If government transfer payments rise by 100 billion and this increases real GDP by 75 billion then we can conclude that a The multiplier is greater than one b The multiplier is equal to one c The multiplier is positive but less than one d The multiplier is 0 Government programs designed to protect families against economic hardship are known as a Social insurance programs b Discretionary scal programs c Freeriding programs d Government purchases Government spending and taxation rules that serve to automatically dampen swings of the business cycle are known as a Discretionary scal policy b Discretionary monetary policy c Growth multipliers d Automatic stabilizers The 2009 stimulus package was an example of using the government budget to a Stabilize the economy by increasing aggregate demand b Increase longrun economic growth c Decrease the rate of in ation d Stabilize the economy by increasing aggregate supply Which of the following statements is TRUE Contractionary scal policy is used to shift aggregate demand to the left when the economy is experiencing an in ationary gap Contractionary scal policy is used to shift shortrun aggregate supply to the left when the economy is experiencing a recessionary gap Contractionary scal policy is used to shift aggregate demand to the right when the economy is experiencing a recessionary gap Contractionary scal policy is used to shift shortrun aggregate supply to the right when the economy is experiencing an in ationary gap 12 Suppose that the marginal propensity to consume is 75 If the government spending increases by 30 billion what will be the total effect on real GDP a It will increase by 225 billion b It will increase by 120 billion c It will decrease by 225 billion d It will increase by 30 billion 13 In 2007 taxes on personal income and corporate pro ts accounted for percent of total government revenue 75 90 48 32 goop 14 Which of the following statement is TRUE a An increase in government purchases of goods and services is an example of an autonomous increase in aggregate spending b An increase in government purchases of goods and services is an example of a decrease in the multiplier c An increase in government purchases of goods and services is an example of an autonomous decrease in aggregate spending d An increase in government purchases of goods and services is an example of an increase in the multiplier 15 The basic equation of national income accounting state that GDP ClGXIM In this equation what does term IM represent ancenUves b Instant messaging c Imports d Income 16 The basic equation of national income accounting state that GDP ClGXIM In this equation what does the letter C represent A Consumption B Competition C Commerce D Capital 17 If the economy is currently experiencing an in ationary gap a Then the current shortrun macroeconomic equilibrium is the same as the longrun macroeconomic equilibrium b Then the level of real GDP at the current shortrun macroeconomic equilibrium is below the level of real GDP at the longrun macroeconomic equilibrium c Then an expansionary scal policy can restore real GDP to the level of potential output d Then the level of real GDP at the current shortrun macroeconomic equilibrium is above the level of real GDP at the longrun macroeconomic equilibrium 18 The basic equation of national income accounting states that GDP CIGX IM On the righthand side of this equation what does the letter G represent a Government b Goods c Global d gold Chapter 14 Money banking amp the Federal Reserve System Money asset that can easily be used to purchase goods and services Currency in circulation cash held by public Checkable bank deposits bank accounts on which people can write checks Money supply total value of nancial assets in the economy that are considered money Medium of exchange asset that individuals acquire for the purpose of trading goods and services rather that for their own consumption Store of value means of holding purchasing power over time Unitof account measure used to set prices and make economic calculations Commodity money good used as a medium of exchange that has intrinsic value in other uses Commoditybacked money medium of exchange with no intrinsic value whose ultimate value is guaranteed by a promise that it can be converted into valuable goods Fiat Money medium of exchange whose value derives entirely from its of cial status as a means of payment Monetary aggregate overall measure of money supply Near Money s nancial assets that can39t be directly used as a medium of exchange but can be readily converted into cash or Checkable bank deposits Bank reserves currency banks hold in their vaults plus their deposits at the Federal Reserve T Account tool for analyzing a business39s nancial position by showing in a single table the business39s asset left and liabilities right Bank run phenomenon in which many banks depositors try to withdraw their funds due to fears of bank failure Deposit insurance guarantees that a banks depositors will be paid even if he bank can39t come up with the funds up to a maximum amount per account Reserve requirements rules set by the Federal Reserve that determine the minimum reserve ratio for banks Discount window Federal Reserve stands ready to lend money to banks in trouble Excess reserve bank s reserves over and above its required reserves Monetary Base currency circulation and bank reserves Money multiplier ration of the money supply to monetary base Federal funds market allows banks to fall short of the reserve requirement to borrow funds from banks with excess reserves Discount rate rate of interest the fed charges on loans to banks Open market operation purchase or sale of go Debt by the fed Commercial bank accepts deposits and is covered by deposit insurance Investment bank trades in nancial assets and is not covered by deposit insurance Savings and loan thrift another type of deposit taking bank usually specialized in issuing home loans Leverage when its nances its investments with borrowed funds Balance sheet effect reduction in a rm39s net worth due to falling asset prices Vicious cycle of deleraging takes place when asset sales to cover losses produce negative balance sheet effects on other rms and force creditors to call in their loans forcing sales of more assets and causing further declines in asset prices Subprime lending lending to homebuyers who don39t meet the usual criteria for being able to afford their payments Securitization pool of loans is assembled and shares of that pool are sold to investors 1 Because money is an asset that can be traded for goods and services we thatitis a Store of value b The same thing as wealth c Unit of account d Medium of exchange 2 The money multiplier is the ratio of a Bank reserves to currency in circulation b The money supply to the monetary base c Bank assets to bank liabilities d Checkable bank deposits to currency in circulation 3 A medium of exchange that has intrinsic value in other uses is known as a Paper currency b Commoditybacked money c Fiat money d Commodity money 4 When the Federal Reserve buys and sells US Treasury bills this is known as Discount policy Openmarket operations Commercial policy Multiplier policy gnum 5 The monetary base is the sum of a Currency in circulation and checkable bank deposits b Currency in circulation and reserves held by banks c Bank assets and bank liabilities d M1 and M2 6 The arrangement in which the Federal Reserve stands ready to lend money to banks in trouble is known as a The reserve requirement b The reserve window c Deposit insurance d The discount window 7 When a bank issues a loan to a customer a Bank assets fall by the amount of the loan 9n The composition of bank assets changes so that bank reserves are increased and the value of bank loans is decreased Bank assets rise by the amount of the loan The composition of bank assets changes so that bank reserves are decreased and the value of bank loans is increased 8 The seven members of the Federal Reserve Board of Governors an Are appointed by the US president and must be approved by Congress Are elected by governors of the individual states of the US Are appointed by the US secretary of the Treasury Are elected by stockholders of banks 9 What name is given to the process of assembling several different loans into a pool and then selling shares in the pool a b c d Diversi cation Centralization Securitization Leverage 10Which of the following statements about at money is FALSE a b With at money there is no risk of counterfeiting With at money the supply of money can be adjusted more easily than with commodity money With at money there is the risk that governments will increase the money supply at times when it is to their own advantage Fiat money is money whose value derives entirely from its of cial status as means of exchange 11Because money is a commonly accepted measure used to set prices and make economic calculations we say that is a b c d A medium of exchange The same thing as wealth A store of value A unit of account 12Which of the following statements is FALSE a b c d In January 2012 the monetary base was actually larger than M1 In January 2012 the money multiplier was less than one Following the collapse of Lehman brothers currency in circulation became a larger fraction of the monetary base that it typically is As people chose to hold more of their money as currency rather than as checkable deposits the size of the money multiplier will be reduced 13The excess of Banks s assets over its bank deposits and other liabilities is known as Deposit insurance Capital insurance The bank39s capital The reserve requirement 10039 14The fraction of customer deposits that a bank holds as reserves is known as The reserve ratio The liquidity ratio The deposit backup The safety factor 006 15Which of the following statements about the relationship between M1 and M2 is TRUE a M1 is larger than M2 because M2 does not include currency in circulation b M2 is larger than M1 because M2 includes nearmoneys and M1 does not c Of these two measures of the money supply M2 is the narrower de nition d M1 is larger than M2 because 1 includes nearmoneys and M2 does not 16Money is The same thing as wealth Any asset that can easily be used to purchase goods and services The measure of the market value of an asset The sum total of all economic activity gnum 17Suppose a bank nds itself with 3000 in excess reserves If the banking system faces a 20 percent minimum reserve requirement what is the max Amount of the potential increase in the money supply 3000 15000 6000 9000 gnum 18Which of the following statements is FALSE a If the fed reduces reserve requirements banks will lend smaller percentage of their deposits leading to fewer loans and a decrease in the money supply via the money multiplier b Banks typically borrow in the federal funds market when they have insuf cient reserves to meet the reserve requirement of the federal reserve c A change in reserve requirements or a change in the discount rate will have an effect on the money supply d When a bank borrows reserves from the Fed itself it is said to be borrowing at the discount window 19How many regional Federal Reserve banks are there a 8 b 16 c 12 d 25 Chapter 15 Monetary Policy Short term interest rates interest rates on nancial assets that mature within less than a year Long term interest rates interest rates on nancial assets that mature a of years in the future Money demand curve shows relationship between the interest rate and quantity of money demanded Liquidity preference model of interest rate interest rate is determined by the supply and demand for Money supply curve shows how the quantity of money supplied varies with the interest rate Target federal funds rate fed reserve39s desired fed funds rate Expansionary monetary policy monetary policy that increases aggregate demand Contractionary monetary policy monetary policy that decreases aggregate demand Taylor rule for monetary policy rule that sets the fed funds rate according to the level of the in ation rate and either the output gap or the unemployment rate In ation targeting occurs when the central bank sets an explicit target for the in ation rate and sets monetary policy in order to hit that target Zero lower bound for interest rates means that interest rates cannot fall below 0 Monetary neutrality changes in the money supply have no real effects on the economy Chapter 15 review questions 1 Monetary policy that increases the demand for goods and services is known as In ationary monetary policy Contractionary monetary policy Expansionary monetary policy Quantitative monetary policy gnup The shortrun effect of an increase in the money supply is that a The aggregate price level decreases and real output also decreases b The aggregate price level increases and real output also increases c The aggregate price level increases and real output decreases d The aggregate price level decreases and real output increases If he economy starts out in longrun macroeconomic equilibrium the longrun effect of an increase in the money supply is to a Leave the aggregate price level unchanged b Decrease real GDP c Leave real GDP unchanged d Increase real GDP What is measured on the horizontal axis when we draw the money demand curve The interest rate The in ation rate The aggregate price level The quantity of money demanded by the public 906m When shortterm interest rates fell between 2007 and 2008 a The interest rate on holding money increased b People were less willing to hold money in place of making deposits in an interest earning account c The opportunity cost of holding money increased d The opportunity cost of holding money decreased An increase in the aggregate price level a Will cause a decrease in the demand for money b Will cause an increase in the demand for money C Is shown by moving from one point to another along the same money demand curve d Will have no effect on the demand for money 7 When the Federal Reserve undertakes actions to decrease the money supply the money supply curve shifts to the and the equilibrium interest rate a Left increases b Left decreases c Right increases d Right decreases 8 In the long run a monetary expansion a Raises the aggregate price level but has no effect on real GDP b Increases the real GDP but has no effect on the aggregate price level c Lowers the aggregate price level but has no effect on real GDP d Decreases real GDP but has not effect on the aggregate price level 9 An increase in the money supply will lead to a shortrun in investment spending due to the resulting interest rate a Increase lower b Decrease lower c Decrease higher d Increase higher 10The federal open market committee meets times per year a 12 b 4 c 52 d 8 11The liquidity preference model of the interest rate assets that a The interest rate is established by the interaction of the supply and demand for money b The amount of money people are willing to hold is independent of the interest rate The demand for money is vertical There is no opportunity cost of holding money no 12The advent of ATM machines has a Shifted the demand for money to the right b Shifted the demand for money to the left c Not affected the demand for money d Caused people to hold higher average money balances 13An increase in the money supply shifts aggregate demand to the thereby causing a level of real output in the short run Left lower Right higher Right lower Left higher gnum 14The downward slope of the money demand curve shows that a People hold more money when in ation rates are higher b People hold more money when the aggregate price level is higher c People hold more money when interest rates are higher d People hold more money when interest rates are lower 15When longterm interest rates are higher than shortterm rates the market is signaling that It expects shortterm rates to rise in the future The current interest rate is below its equilibrium level The current interest rate is above its equilibrium level It expects shortterm rates to fall in the future 0069 16To increase the interest rate the federal reserve will US treasury bills and this will have the effect of the money supply a Sell decreasing b Purchase decreasing c Purchase increasing d Sell increasing 17The opportunity cost of holding money a Is zero b Is higher when interest rates are higher C Is unchanged over time d Is higher when interest rates are lower 18lf the current interest rate is below the target rate the federal reserve will a Change the target to meet the actual rate b Purchase US treasury bills c Increase the money supply d Sell US treasury bills Globalization the phenomenon of growing economic linkages among countries Ricardian model of international trade analyzes international trade under the assumption that opportunity costs are constant Autarlq a situation in which a country does not trade wother countries Factor intensity of production of a good is a measure of which factor is used in relatively greater quantities than other factors in production Heckscher ohlin model a country has a comparative advantage in a good whose production is intensive in the factors that are abundantly available in that country Domestic demand curve shows how the quantity of a good demanded by domestic consumers depends on the price of that good Domestic supply curve shows how the quantity of a good supplied by domestic producers depends on the price of that good World price of a good is the price at which that good can be bought or sold abroad Exporting industries produce goods and services that are sold abroad Importcompeting industries produce goods and services that are also imported Free trade economy has this when the gov does not attempt either to reduce or to increase the levels of exports and imports that occur naturally as a result of supply and demand Trade protection policies that limit imports Tariff tax levied on imports Import quota legal limit on the quantity of a good hat can be imported International trade agreement treaties in which a country promises to engage in les trade protection against the exports of other countries in return for a promise by other countries to do the same for its own exports North America free trade agreement NAFTA trade agreement between US Canada and Mexico European Union EU is a customs union among 27 European nations World trade organization WTO oversees international trade agreements and rules on disputes between countries over those agreements Offshore outsourcing takes place when business hire people in another country to perform various tasks Chapter 5 questions In the Ricardian Model of international trade a Opportunity costs are constant b Opportunity costs are always decreasing c Production possibilities curves are vertical d Opportunity costs are always increasing The gure shows the production possibilities curves for the US and Mexico in the production of refrigerators and tractors Which of the following statements is true The US has an absolute advantage in the production of both goods The gure shows the domestic supply and domestic demand for cotton Both the autarky price and the world price are indicated If this economy is closed to world trade what will be the outcome The price will be 100 per bale and 5 million bales of cotton will be sold the gure shows the production possibilities curves for the US and Mexico in the production of refrigerators and tractors In Mexico what is the opportunity cost of each tractor produced 05 refrigerator The gure shows the domestic supply and demand for notebooks Suppose that the world price is 2 and that a 2 tariff has been imposed PW indicates the world price on the graph and PT indicates the price with the tariff Once the tariff is imposed what quantity will be imported 3000 In order for a country to gain from trade it must be the case that a It pays lower wages than the country with whom it is trading b It trades only with wealthier countries c Each country specializes according to its comparative advantage d It trades only with poorer countries Globalization is the process by which a Exports are becoming larger than imports b Imports are becoming larger than exports c Poor countries are growing poorer d Economic linkages among countries are growing Chapter 19 Balance of payments accounts are a summary of the country s transactions with other countries Balance of payments on current account or current account is its balance of payments on goods and services plus net international transfer payments and factor income 1 Which of the following statements is true A money owing into the US from foreigners who purchase US assets is the positive component of the US nancial account 2 A country s balance of payment accounts are A a summary of its transactions with other countries 3 When the exchange rate changes from 55 pesos 1 dollar to 65 pesos 1 dollar the peso has and the dollar has A depreciated appreciated 4 An increase in the established value of a currency governed by a xed exchange rate regime is known as A a revaluation 5 Which of the following is NOT a strategy for maintaining a xed exchange rate at a level other than its equilibrium value Buying or selling the currency through exchange market intervention Implementing foreign exchange controls Allowing the exchange rate to be determined by market forces Shifting the supply and demand curves for the domestic currency gnup 6 If a Brazilian citizen working the in the US sends part of her earnings to family members in Sao Paulo this transaction is considered to be A an international transfer 7 The real exchange rate is the nominal exchange rate adjusted for differences in A the aggregate price level 8 International differences in the demand for funds primarily re ect A underlying differences in investment opportunities 9 The sale of Americanmade Boeing aircraft to an airline in the United Arab Emirates is considered to be A a sale of purchase of goods and services 10Licensing systems that limit the right of citizens to buy foreign currency are known as A foreign exchange controls 11Which of the following statements is true a The creation of the euro was motivated by the advantages of a oating exchange rate b Foreign exchange controls distort incentives for international trade c A xed exchange rate allows more exibility in conducting monetary policy d A oating exchange rate created a more stable environment for international business transactions 12ln an open economy with a oating exchange rate a lowering of the domestic interest rate will lead to an of the currency which will exports A depreciation increase 13The stocks of foreign currency that governments use to buy and sell their own currency are known as A foreign exchange reserves 14A country has a xed exchange rate when A the government keeps the exchange rate near a particular target 15lf a signi cant capital in ow into the US creates an increase in the balance of payments on nancial account A there must be an offsetting decline in the balance of payments on current account 16An increased demand for US dollars on the part of Europeans would cause A the dollar to appreciate against the euro 17Assuming away any effects of expected changes in exchange rates which of the following statements is true A if interest rates are higher in Canada than in the US then capital will ow from the US to Canada 18When a currency becomes more valuable in terms of other currencies we say that it A has appreciated Chapter 1 1 Apply the basic principles of economics Because of scarcity people choose all choices have an opportunity cost people respond to incentives in predictable ways market forces and economic systems in uence choices people s choices have intended and unintended consequences which lie in the future people gain when they trade voluntarily 2 Identify opportunity costs The true cost what you must give up in order to get something 3 Perform marginal analysis quotHow muchquot of an activity should I do Chapter 2 1 Graph and interpret a PPF use it to analyze opportunity cost feasibility ef ciency 2 Identify what causes a PPF to shift Progress in technology would cause outward shift or increase in economy s factors of production labor capital 3 Identify absolute and comparative advantage Absolute a country has this if they can produce more output per worker than another country Comparative lower opportunity cost Chapter 3 1 Apply the competitive model of supply and demand Demand curve shifts if there is a change in the quality demanded at any given price Movement occurs when there is a change in the quantity demanded of a good arising from a change in the goods price Increase in demand rightward shift of demand curve decrease in demand leftward shift Principle factors that shift demand curve changes in income tastes expectations of consumers Suoplv curve changes occur from changes in input prices changes in the prices of related goods amp services changes in technology expectations of producers 2 Distinguish between supply and demand shocks and predict how 3 they change the equilibrium Supply shock Demand shock Identify consumer and producer surplus A V A 5 539 Consumer Surplus P V vv vr 39lq jl V P 2 ES V I39 39 Fmduter 139 I Surplus I 3E 39 I I D 393 E 11 Quantity Q Quantity Cumright WWWEEUI39IITTI39I39ii39 ZEB39i IITI39iGLltlUi3 awnmmrInrguonomic5u Mint Lu ui39I Chapter 4 1 Graphically illustrate price ceilings price oors and quotas Pr iceonf ag cununm products ii 7 Price ceiling Pl I2 P Pl Eli I T 4 I FIFIEE oor I I I I 39 39339 I I I I 7 El 133 Eli Cl 112 Quantity CupyII igIlIIt 39IIquotF39I39ar3aInltjunic5cmlimecu ul 2 Analyze how these policies distort market equilibrium 3 Identify deadweight loss from these policies and changes in consumer and producer surplus Deadweight loss occurs when marginal bene t is not equal to marginal cost l2211 Deadweight Loss Example 10 539 39 39 Hie dagTerence between B M and MB is 2 S T P 5 I mama i 5 X our deadweight loss I 4 E 3 3 lt3 D 1 D I I u i i 339 i 539 1 Iquot 5 IS in RIG Emed erenoe Quantity between Hie I515 55 I Chapter 7 1 Calculate GDP 3 ways GDP CIGXIM adding up total value of all nal goods and services produced adding up spending on all domestically produced goods and services adding to total factor income earned by households from rms in the economy Calculate real GDP using baseperiod prices Total value of all nal goods amp services in given vear Base year Calculate a real GDP de ator For a given year is 100 X the ratio of nominal GDP to real GDP in that year Calculate a CPI or PPI for a given basket of goods CPI or PPI updated cost X100 Base period cost Chapter 8 1 Calculate employment statistics Unemployment rate unemployed X100 Labor force unemployed employed Labor force participation rate labor force Working age population Classify types of unemployment and how the types relate to the natural rate of unemployment full employment Cyclical business cycle Frictional searching for jobs Structural suppygtdemand Identify costs of in ation Menu costs real cost of changing a listed price Unit of account costs makes money a less reliable unit of measurement Shoe leather costs increase in transactions due to in ation Identify winners and losers from unexpected in ation when contracts are written in nominal terms Chapter 9 1 3 4 5 Apply the rule of 70 70 of years for variable to double Annual growth rate Analyze the contributions of TFP physical capital per worker and human capital per worker to output per worker and what policies affect each Graph the aggregate production function and identify what shifts it Understand the implications of diminishing returns to physical capital per worker Analyze the role of nonrenewable resources in economic growth Chapter 10 1 Understand how investment national savings and net capital in ows are related 2 Model the market for loanable funds and distinguish between demand and supply shock 3 Predict changes in equilibrium interest rates using the loanable funds model Chapter 11 1 Derive the MPC the multiplier and the consumption function and show how they relate 2 Determine incomeexpenditure equilibrium GDP using the Keynesian cross diagram 3 Understand how planned investment depends on the interest rate 4 Analyze how changes in inventories unplanned investment lead to income expenditure equilibrium GDP Analyze how autonomous changes in aggregate spending affect the equilibrium Chapter 12 wewwe Understand why the AD SRAS and LRAS curves have the sloped they do Distinguish between demand and supply shocks and predict their effects Distinguish between short and long run effect of shocks Distinguish between in ationary and recessionary gaps Analyze the effects of stabilization policy Chapter 13 1 Analyze the government s budget 2 3 Analyze the short and long term effects of scal policy using the aggregate Distinguish between expansionary and contractionary scal policy demand and supply model 4 Explain problems with scal stabilization policy lags crowding out ricardian equivalence 5 Contrast the multiplier effects of government spending and tax cuts 6 Analyze how the government s budget behaves over the business cycle and the role of automatic stabilizers Chapter 14 1 Explain the roles types and measures of money 2 Understand a bank s balance sheet and the roles of bank reserves and capital 3 Derive the simple money multiplier and analyze more realistic versions of it 4 Identify the monetary policy tools of the Fed 5 Understand the Fed s balance sheet 6 Predict how the Fed s actions will affect the money supply Chapter 15 1 Model the supply of and demand for money using the liquidity preference theory 5 6 7 Apply the concepts of monetary neutrality and the sher effect Distinguish between money demand and supply shocks and predict their effect on interest rates Explain how the Fed uses openmarket operations to change shortterm interest rates Discuss the taylor rule and in ation targeting Distinguish between expansionary and contractionary monetary policy and analyze economic effects using the aggregate demand and supply model Distinguish between short and long run effect of monetary shocks Chapter 5 Chapter 19
Are you sure you want to buy this material for
You're already Subscribed!
Looks like you've already subscribed to StudySoup, you won't need to purchase another subscription to get this material. To access this material simply click 'View Full Document'