macroeconomics final exam

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Total income households have after paying taxes and receiving government transfers
disposable income
Market failure may occur because
individual actions have side effects that are not properly taken into account by the market
A graphical representation of the relationship between the total quantity of goods and services demanded and the price level
aggregate demand curve
If banks were required to keep 100% of deposits in reserves, they could
make no loans
The point on a business cycle when real GDP stops falling and begins rising
business cycle trough
In the long run, changes in the money supply
affect only the price level but they do not change aggregate output
The double coincidence of wants problem can be solved by
An inflationary gap can be closed with
a decrease in government purchases
Monetary policy affects GDP and the price level by
changing aggregate demand
The short-run aggregate supply curve is positively sloped because
wages are sticky or don’t readily adjust to changes in economic conditions in the short run
nominal GDP
that year’s output times same year price
real GDP
base year price times that year’s output
The money spent on domestically produced final goods and services
is the GDP, appears as income to someone, and appears in the circular flow model
Diminishing returns to physical capital means that as more and more physical capital is combined with a fixed amount of human capital with a fixed technology, eventually
additions to aggregate output or real GDP declines
The most important factor affecting a household’s consumer spending is
current disposable income
A contractionary fiscal policy is a policy that
reduces aggregate demand by decreasing government purchases
The CPI is used for calculating payments from the U.S. government to individuals. To the extent it is biased upward, this index
raises government expenditures
Physical capital would include
the tools a worker has to work with
In the “paradox of thrift”
increased saving by individuals increases their chances of becoming unemployed
Long-run growth is the sustained upward trend in
aggregate output per person over several decades
When the value of a nation’s imports exceeds the value of that nation’s exports, the nation is said to have
a trade deficit
can cause decreases in output
Among the assets of a bank are
The marginal propensity to save is
the fraction of an additional dollar of disposable income that is saved
The process of bringing down inflation that has been embedded into expectations is called
Technological improvements will
shift the production possibility frontier outward
Which of the following is included in GDP
the purchase of a ticket to a Rolling Stones concert
A key insight into macroeconomics is that in the short run the combined effect of individual decisions is
very different from what any one individual intended
The short-run Phillips curve represents the relationship between the unemployment rate and the rate of change in
aggregate price level
Which of the following demonstrates how people respond to incentives to make themselves better off?
more students major in economics when they hear that salaries for economists are rising
In the classical model, it is thought that the long-run
and short-run aggregate supply curves are both vertical
When banks borrow and lend reserves from each other, they are participating in the ______ market
federal funds
The models used in economics
emphasize basic relationships by abstracting from complexities in the everyday world
Conditional convergence suggests
poor countries’ growth rates may not catch up to those of richer countries without changes in education and infrastructure
An increase in the supply of money will lead to ___ in equilibrium real GDP and ___ in equilibrium interest rate
an increase; a decrease
A liquidity trap is a situation in which
using expansionary monetary policy is not effective because, the nominal interest rate is almost zero
Contractionary monetary policy involves
decreasing the money supply, increasing interest rates, and decreasing aggregate demand
Medicaid, Medicare and Social Security are examples of
transfer payments
When a local factory closes, why does it spell bad news for the local restaurants?
Unemployed factory workers have lower incomes and are less likely to dine out
Human capital is
the improvement in labor created by education and knowledge that is embodied in the work force
Sources of funds for investment spending are
savings by households, government, and foreigners
The inflation tax is
the decrease in the real value of money held by the public caused by inflation
Long-run economic growth is
higher in countries when it has a strong rule of law and political stability
According to the liquidity preference model, if the Fed increases the money supply, the equilibrium interest rate ____, and this leads to ____ in the quantity demanded of nonmonetary interest-bearing financial assets
falls; a decrease
When the output gap is ____, reflecting an inflationary gap, the unemployment rate is ____ the natural rate of unemployment
positive; below
Among the losers with unexpected deflation are
In the simplest circular-flow model, households supply ____ and demand ____
factors of production; goods and services
Decisions about monetary policy are made by
the Federal Open Market Committee
Examples of bank regulations designed to prevent bank runs are
capital requirements, deposit insurance, and reserve requirements
Labor productivity growth can be attributed to
improvement in technological process
The reserve ratio is the
fraction of deposits the banks hold in their vaults plus their deposits at the Federal Reserve
Inflation is a situation where
the average price level increases
An economy is said to have a comparative advantage if it
has the lowest cost for producing a particular good
The value of MPC is
greater than 0 and less than 1
A recession leads to
reduced output, income and living standards, and higher unemployment
The best currently available measure of the standard of living in a country is
the real GDP per capita
Money whose value derives entirely from its official status as a means of exchange is known as
fiat money
Suppose a panel of economists is predicting that a nation’s real GDP per capita will double in approximately 20 years. Based upon the Rule of 70, what must be the predicted annual growth rate of real GDP per capita?
A recessionary gap can be closed with
expansionary fiscal policy
Among the public goods important for economic growth are
political stability
The long-run aggregate supply curve is vertical because in the long run
all prices are flexible
A cut in taxes will have a greater impact on aggregate demand if it is given to
people with a high MPC
The opportunity cost of holding money is
the difference between interest rates on monetary assets and on nonmonetary assets
A choice made___ is a choice whether to do a little more or a little less of something
at the margin
Gains from trade arise because of
specialization in production
Monetary policy is similar among wealthy countries because the central banks of most countries
try to keep inflation between 2% and 3% per year
The idea that a 1 percentage point increase in the output gap will decrease the unemployment rate by 1/2 of a percentage point is known as
Okun’s law
An increase in the aggregate price level
increases the demand for money
Gross domestic product is defined as
consumer spending + government purchases + investment spending + exports – imports
Which of the following combination of assets are considered to be money?
currency in circulation, checkable bank deposits, and travelers’ checks
Economists generally believe that a country should specialize in the production of a good or service if
they can produce the product while forgoing fewer alternative products than any other country
The amount of money that people demand is
negatively related to the interest rate
Growth accounting enables us to
estimate the effects of technological progress on economic growth
As a consequence of the existence of a nonaccelerating-inflation rate of unemployment, or NAIRU
there is no long-run tradeoff between unemployment and inflation
Which of the following would shift the aggregate demand curve to the left?
an increase in the interest rate
If the Fed wants to decrease interest rates, it can
increase the money supply by buying Treasury bills
If the multiplier is 4, and investment spending falls by $100 billion, the change in equilibrium income will be
-$400 billion
When the economy is in a recession
tax receipts decrease but unemployment insurance payments increase
To ____ the money supply, the Fed could ____
increase; lower the discount rate
We have to make choices because
resources are scarce and because choices involve a trade-off
Real GDP is nominal GDP adjusted for
changes in prices
a shift to the left of the AD curve could be cause by
increased government purchases, increased government transfers and by decreased taxes
The purpose of macroeconomic policy is to
bring unemployment closer to the natural rate and to reduce the severity of recessions
Treasury bills
usually pay lower interest rates than other short-term assets because they are less risky than other assets
Which of the following is a tool used by the Fed in the conduct of monetary policy?
buying and selling federal government bonds
If the short-run macroeconomic equilibrium is ____ of the economy’s potential output, then there is a(n) _____ and the aggregate price level is expected to ____
to the left; recessionary gap; fall
The convergence hypothesis helps explain why
high-income countries tend to have slower growth rates compared to lower-income countries
Monetary base is
the sum of reserves held by the banks and currency in circulation
An upward shift in the consumption function can be caused by
an increase in consumer wealth
If the money supply increases by 10%, in the long run
the price level increases by 10%
Categories: Macroeconomics