Macroeconomics Practice Exam Questions
What is opportunity cost?
what you give up in order to get something else
A college cost $20,000 per year. The job you give up to go to college pays $30,000 a year. What is the opportunity cost of going to college?
Demand has a negative slope
A price change would do what to the demand or supply curves?
Income, taste, or population changes do what to the demand curve?
Supply curve has a positive slope
Cost of production, technology, or natural factors changes would do what to the supply curve?
What are the factors of production?
What is national income?
the total income earned by all factors of production
equal to GDP
What is GDP?
Sum of the money values of all final goods and services produced within the US borders in a year
Are intermediate goods included in GDP?
What is nominal GDP?
GDP in current dollars
What is real GDP?
GDP in constant dollars
adjusts for inflation
What is the business cycle?
a graph that shows the fluctuations in real GDP growth
Is the US economy open or closed?
closed because our import is low
How do you measure the openness in an economy?
export + import / GDP
What is labor productivity?
the amount of output a worker produces in a unit period of time
What influences labor productivity?
What is the Production Possibilities Frontier?
a graph that shows the combination of two goods produced given all resources are employed under existing technology
A point outside the PPF means what?
It is unattainable
A point inside the PPF means what?
It is attainable but inefficient
A point on the PPF line means what?
attainable and maximum efficiency
What is potential GDP?
GDP produced by maximum possible employment
What is a recessionary gap?
real GDP is less than potential GDP
What is an inflationary gap?
real GDP is more than potential GDP
What does fiscal policy do during a recession?
cuts taxes and increases government expenditure
What does fiscal policy do to the budget deficit?
tax decrease = budget deficit increase
government expenditure increase = budget deficit increased
What is budget deficit?
government expenditure – tax
What does fiscal policy do to income distribution?
it is bad for income distribution because wealthy companies are paying less tax and becoming even more wealthy
How do you find tax multiplier?
-MPC / 1-MPC
If MPC = 0.8, what would tax multiplier be?
If tax decreases by $1, what would the tax multiplier output be?
it would increase by $4
How do you find government spending multiplier?
1 / 1-MPC
If MPC = 0.8, government expenditure multiplier would be?
If government expenditure increased by $1,000,000, how would the output change?
It would increase by $5,000,000
How do you find investment multiplier?
1 / 1-MPC
If MPC = 0.8, investment multiplier would be?
If investment increased by $1,000,000, how would the output change?
it would increase by $5,000,000
What are the three roles of money?
medium of exchange
unit of account
store of value
What is medium of exchange?
standard object used in exchanging goods and service
What is unit of account?
standard unit of quoting prices
What is store of value?
money maintains its power; value not lost over time
What is money supply?
currency + demand deposit
What is currency?
ALL money coins and paper notes held by the public
What is demand deposit?
all money deposited into checking and savings accounts held by commercial banks
What is the federal reserve?
the central bank of the US
What does the federal reserve control?
federal funds rate
What does a commercial bank do?
collects deposit from depositors and makes loans to borrowers
How do commercial banks help the federal reserve?
helps control monetary policy
What is price level?
average of all goods and service in the economy
What is inflation?
SUSTAINED increasing price level in the economy
How can real wage be defined?
your purchasing power
If you have $10 and an apple costs $5, what is your real wage?
How does inflation effect real wage?
Your real wage would decrease because price level would rise but your money would remain the same
What is real interest rate?
nominal interest rate – inflation
Do borrowers like to pay low or high interest rates?
What happens if the US dollar is appreciated?
the dollar is strong and export decreases
What happens if the US dollar is depreciated?
the dollar is weak and export increases
Easy monetary policy leads to what during a recession?
decreased federal funds rate
increase of money supply
increase in bond prices
decreased bond interest rates
decreased credit cards, auto loans, mortgage rates, etc.
******decreases all interest rates*******
What does the federal reserve do during a case of high inflation?
pursue a tight monetary policy
Tight monetary policy leads to what during inflation?
increased interest rates
decreased investment spending
decrease in total spending
*******Price level goes down******