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Date Created: 11/15/15
ECO372 Final Exam Study Guide 1 What is the name of the market where businesses sell products to households and government institutions Goods market Explanation The goods market is term that refers to the primary market where businesses interact with end users of products 2 How would you describe Real Gross Domestic Product GDP The market value of all nal goods and services produced in an economy or country Explanation Real GDP will be stated in the currency used during that year It only includes nal goods and services 3 Who is included in underemployment gures People who are working part time or not actively working a fulltime job Explanation Underemployment gures show us the number of people whose skills are not being fully utilized 4 The Bureau of Economic Analysis in the United States is responsible for what Calculating United States gross domestic product GDP Explanation The primary function of the Bureau of Economic Analysis is to produce reports related to economic activity such as GDP 5 The Federal Reserve is responsible for setting the Federal funds rate Explanation The federal funds rate is the interest rate at which the US government can borrow money from the fed 6 Let s say the government created a 10 income tax surcharge What changes will occur in the ASAD model Shifted the AD curve to the left Explanation An income tax on the people would cause aggregate demand to shift to the left because people would have less income to spend on consumer goods 7 Where does the largest source of household income originate from in the US Wages and salaries Explanation The majority of people earn a living by working for an employer while a minority of the population earns money from entrepreneurial endeavors 8 Imagine a country were to increase aggregate expenditures by 20 What will happen to the AD Curve Shift right by more than 20 Explanation As the country spends more it will create income that will be redistributed through wage income and cause demand to increase 9 What is the main function of aggregate demand management policies To control aggregate levels of spending within the economy Explanation Government policies are often needed to ensure that aggregate spending is correlating effectively with actual demand 10 Imagine a world where consumer spending is declining If output is equivalent to potential output which policy would be ideal according to the ASAD model An increase in government spending Explanation If output is already at its max potential the next best option will be an increase in government spending 11 What to John Maynard Keynes say about market economies quotThey might recover slowly after they experience a signi cant decline in aggregate demandquot Explanation The recovery of demand is often much slower than the initial decline of demand For example stock markets crash rapidly and take many years to fully recover 12 Based on laissezfaire policy what is the best way to x unemployment Destroy labor unions and repeal government policies that make real wages excessively high Explanation Laissezfaire policy believes that the invisible hand of the market be the most efficient way to reach full employment 13 Based on the ASAD model expansionary monetary policy will have the largest impact on price level when what occurs Increases in both nominal and real income Explanation Higher incomes will be one of the results that occur from a greater money supply 14 What is true about the federal funds rate Will sometimes be set to zero Explanation During an economic crisis the fed may set the rate to zero to provide the government with necessary funding 15 If the Federal Reserve wants to increase the federal funds rate from 1 to 125 what monetary policy tool will be used to achieve the increase The discount rate Explanation The discount rate is changed on a regular basis and has a major impact on the health of the overall economy 16 What will banks do if the Federal Reserve increases the required reserves for nancial institutions Lend less and decrease the money supply Explanation A higher reserve rate will make less money available to borrowers such as homebuyers and small businesses 17 Let s say the money multiplier is equal to 3 and the Fed decided to change the rate by 1 point This will cause banks to change their reserves by a total of 300 How can the Fed go about increasing the money supply by 2700 Reduce the discount rate by 3 percentage points Explanation It s simple math really 3 x 300 900 The 900 is then factored with the multiplier of 3 to get a net increase of 2700 in the money supply 18 What would happen if the Fed reduced its reserve requirement from 65 percent to 5 for nancial institutions Increase the money multiplier Increase the money supply Explanation Banks with a lower reserve requirement will be eager to lend that money to new borrowers to earn additional interest income 19 Countries can run a trade de cit when they can do the following Borrow from or sell assets to foreigners Explanation just think China We are borrowing tons of money from China but selling them almost zero US made products and running a massive de cit 20 What does a weak US dollar do to the economy Raises in ation rates and expands the economy Explanation A weak dollar can expand the economy by allowing us to import goods a low cost 21 In the short run a trade de cit can be a good thing What is a trade de cit a bad idea in the longrun The country be forced to sell all its nancial assets to foreign count es Explanation Trade de cits are not sustainable over the long term and will eventually lead to nancial collapse 22 When a country runs a trade de cit an expansionary monetary policy will most likely do the following Decrease exchange rates Increase the trade de cit Explanation The local currency will be devalued as a result of expanding the money supply 23 What does the balance of trade measure Difference in monetary value of imports and exports Explanation The dollar value of imports an exports is considered a balance of trade 24 How does a country run a trade de cit Borrowing from foreign nations or selling assets to them Explanation See question 19 25 Expansionary scal policy will result in the following outcomes Raise income Increase imports Increase the trade de cit Explanation Expanding the money supply will cause people to have higher incomes and demand more consumer goods thus increasing the trade de cit 26 Describe the net effect of expansionary scal policy on a trade de cit Income and price effects create similar outcomes thus causing the trade de cit to increase Explanation See question 22 27 If US currency interest rates decrease against Mexican interest rates and Mexican in ation decreases relative to the US then the Dollar will lose value in terms of Pesos Explanation This same principle can be applied to other currencies such as the japanese Yen 28 What is the expected result of expansionary monetary po cy Lower US interest rates Decrease US exchange rates Explanation Expanding the money supply will devalue the currency 29 The US sets limits on Italian automobile imports Limits on the amount of items that can be imported is called what Quota Explanation A quota simply sets a maximum limit on certain imports to protect domestic producers 30 Duties charged by the government on imported goods such as canned pickles would be considered what Tariff Explanation A tariff is a fee or tax on an imported good
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