ECO 2013

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Principles of Macroeconomics with Professor W.T. Coppedge.

The concept of scarcity, as used by economists, refers to

A situation in which the available resources are not enough to satisfy the wants of the people.

An important implication of scarcity is that

People must make a choice.

The opportunity cost of a choice is the

Value of the next best activity not chosen.

The opportunity cost of attending college

Includes the lost wages that would have been earned if the student had not attended college.

When the economy is in recession, jobs are generally harder to find and more people go to college. We can conclude that the opportunity cost of

Going to college decreases when the economy is in recession.

According to the law of demand, if the price of compact disks decreased (ceteris paribus) the

Quantity demanded of compact disks would increase.

Suppose you observe that taxi fares per trip increased when more commuters took taxis. What is the best possible explanation?

The price of gasoline went up.

According to the law of demand, one way to reduce the amount of tobacco consumption is to

Raise the price of tobacco.

What will increase the demand for a normal good?

An increase in consumer income.

Consider the market for pop music played on compact disks. If there is a decrease in the number if pop music programs broadcast on radio, we can expect

The demand for compact disks to increase.

Suppose that Sunny D is an inferior good. What is true given an increase in consumer income?

A leftward shift in the demand curve of Sunny D.

Coffee and tea are substitutes so that if the price of tea increases, the

Demand for coffee increases.

If the price of product X falls and this causes the demand for product Y to shift to the right, then we can conclude that X and Y are

Complements.

If an increase in the price of product X causes an increase in the demand for product Y, we can conclude that

They are substitutes.

What will not cause the demand for ice cream to change?

A change in the price of ice cream.

According to the law of supply, if the price of personal computers increased, (ceteris paribus)

The quantity supplied of personal computers would increase.

What would not affect the supply of automobiles?

An increase in the price of motor oil.

Suppose all blue collar workers receive a substantial pay increase. What will happen in the product markets that employ these workers?

Supply will decrease.

Market equilibrium occurs when the

Quantity supplied equals quantity demanded.

If quantity supplied is less than quantity demanded, then

There is a shortage in the market.

If there is a surplus of a product, we can conclude that

The products prices is above equilibrium.

If price is below equilibrium

Quantity demanded exceeds quantity supplied, and a shortage exists.

The U.S. surgeon general warns that animal fat in the diet is unhealthy. With the discovery that longhorn beef cattle have little body fat, you would expect

Ranchers to be more willing to produce longhorn cattle as the price rises.

If it is discovered that using a smartphone regularly causes brain cancer, then in the market for smartphones

Equilibrium price and equilibrium quantity will fall.

What is the most likely reason for the increase in the price of roses on Valentines Day?

An increase in the demand for roses.

If a technological improvement took place in the computer industry, we should expect to see the equilibrium price of computers to

Decrease and the quantity of computers sold to increase.

Suppose it is observed in a market that price has fallen but more product is being produced and sold. This could be caused by a(n)

Increase in supply.

When both supply and demand shift right at the same time

The change in equilibrium price cannot be predicted, but the change in equilibrium quantity can be predicted.

Suppose in a financial crisis, major automakers reduce their production of autos while consumers reduce their demand for autos. We can conclude with certainty that in the market of autos

The equilibrium quantity will decrease but the equilibrium price will increase, decrease or remain unchanged.

Suppose a war in the Middle East destroys many oil fields. This will cause a(n)

Increase in oil prices.

The high price of gasoline in the late-2000's was likely the result of

A decrease in the supply of gasoline along with an increase in the demand for gasoline.

A price ceiling would result in a(n)

Shortage.

A price floor would result in a(n)

Surplus.

If price changes from $8 to $12 and quantity demanded changes from 80 units to 40 units, the the price elasticity of demand is

1.67.

A product with an inelastic demand means that

Consumers are relatively insensitive to a change in the price of the product.

A product with an elastic demand means that

Consumers are relatively sensitive to a change in the price of the product.

If a 3% change in price results in a 1.5% change in quantity demanded, then the price elasticity of demand is ___ and demand is ___.

1/2, inelastic.

In the process of calculating the production of the economy in the U.S., what must be taken into account?

-The fact that some of the goods that people buy are shipped to the U.S. from abroad.
-The fact that some of the goods produced in the economy are shipped to other countries.
-The fact that some goods are used as inputs in to the production of other goods, like hamburgers.

GDP is

A measure of the value of all newly produced final goods and services in a country during some period of time.

The numbers one finds when one measures the GDP of the U.S. are quite large, measured in trillions. How many billions constitute a trillion?

1,000.

Sally has recently graduated from college and has bought a house that was built 50 years ago for $100,000. She used a real estate agent to help her find and purchase the house, and the real estate agent received 6% of the value of the sale, or $6,000, to be paid by the seller of the house. The value of GDP in this case would

Increase by $6,000.

What is the correct ordering if we want to rank the four spending components, as a share of U.S. GDP in 2010, in descending (from highest to lowest) order?

Consumption, government purchases, investment, net exports.

Investment expenditures are the sum of

Business fixed investment, inventory investment, and residential investment.

Expenditure on ___ is spending that is not included in GDP.

-Used goods.
-Intermediate goods.
-Financial assets.

Investment, as defined in the text, refers to

Purchase of new capital, such as new factories or equipment.

Inventory investment is included as a spending item when computing GDP because

Not everything produced in a given times period is sold during that time period.

Transfer payments

Are excluded from government purchases and GDP.

In which spending category would you enter the following transaction if you were trying to calculate U.S. GDP? People in France flock to see the latest Brad Pitt movie that was produced in Hollywood.

Net exports.

For a hypothetical economy in a given year, consumption equaled $372, investment equaled $126, government purchases equaled $184, goods exported equaled $75, and goods imported equaled $84. What was the value of GDP?

$673.

For a hypothetical economy in a given year, GDP equaled $1,171, consumption equaled $482, investment equaled $286, goods exported equaled $198, and goods imported equaled $57. What did government spending equal?

$262.

In calculating GDP as income, what best describes what net investment is?

A measure of how much new investment there is each year after depreciation has been subtracted.

The concept of value added refers to

The increase in the value of a product that occurs at each stage of production.

A base year is a year when

Real and nominal GDP are equal to each other.

If nominal GDP is $5 trillion, and the GDP price deflator is 1.25, what is real GDP?

$4 trillion.

The CPI is a measure of

The price of consumer goods and services.

In the hypothetical economy, a market basket consists of one stereo and two TV's. In the base year, 2005, the price of a TV was $200, and the price of a stereo was $500. In 2010, the price of a TV was $380, and the price of a stereo was $750. The CPI for 2010 was

1.68.

What best explains the meaning of the term labor force?

All people 16 years of age and over who are counted as employed or unemployed.

According to the Current Population Survey, what is the best example of an unemployed person?

Any person without a job while looking for work.

Suppose an individual is working at home without pay. That person would be counted as

Not in the labor force.

If the working-age population is 100 million, the labor force is 75 million and the number employed is 60 million, what is the unemployment rate?

20%.

The natural unemployment rate is the unemployment rate

When the real and potential GDP are equal.

Cyclical unemployment can best be described as the

Increase in unemployment above the natural rate during and in the aftermath of recessions.

The natural unemployment rate is caused by a combination of

Frictional and structural unemployment.

Frictional unemployment occurs because

It takes time to find a job.

Creative destruction occurs when

The forces causing the destruction of certain types of jobs result in the creation of better types of jobs.

The adjective real, in the term real GDP, is used to indicate that

This measure of output is adjusted for the general increase in prices over time.

What is the best measure of how individuals benefit from economic growth?

The rate of increase in real GDP per capita.

The term per capita refers to

The population.

The average annual growth rate of the U.S. economy over the past 40 years has been about

3%.

Because of the increase in population over the past 40 years

The rate of increase in real GDP per capita has been less than the rate of increase in real GDP.

Over the past 40 year, the average rate of increase in U.S. real GDP per capita has been about

2%.

The increase in real GDP per capita over the past 40 years is closest to

$22,000.

Over the past 40 years, real GDP per capita has roughly

Doubled.

The unemployment rate

Increases as real GDP decreases.

Suppose the CPI in 2010 was 188.9. In 1980, it was 49.3. What was the average annual rate of inflation over this 30 year period?

9.44%.

How long will it take a $100 deposit to increase to $200 if the rate of interest is 4%?

18 years.

Factors of production

-Land ---> Rent
-Labor ---> Wages
-Capital ---> Interest
-Entrepreneurship ---> Profit

CPI (Consumer Price Index)

Market basket of goods and services a typical urban family would buy per month.

Rule of 72

Divide rate of growth/investment by 72 and it will equal the number of years it takes for your investment to double.

Recession

When a nation has had 2 or more quarters of negative real GDP.

DPI

NI
-Corp Tax
-RE
-SS Tax
+TR
=
Personal Income
-Personal Income Tax
=
DPI

NI

C
I
G
Nx
=
GDP
-Depr.
=
NDP
-IBT
=
NI

GDP

Rent
Wages
Interest
Profit
=
NI
+IBT
=
NDP
+Depr.
=
GDP

Demand

Dx = f (Px, Price of other goods, Tastes, Income, Expectations, # of Buyers)

Supply

Sx = f (Px, Price of inputs, Tech, Taxes, Subsidies, Expectations, # of Sellers)

Supply and Demand

-If demand increases = price & quantity increase.
-If demand decreases = price & quantity decrease.
-If supply increases = price decreases & quantity increases.
-If supply decreases = price increases & quantity decreases.

If a person withdraws $500 from their savings and puts it into their checking, then M1 will ___ and M2 will ___.

Increase; not change.

The major assets on a banks balance sheet are its

Reserves, loans and holdings of securities.

The largest liability on the balance sheet of most banks is its

Checking and savings accounts of its customers.

A bank will consider a car loan to a cutomer ___ and a customers checking account to be ___.

An asset; a liability.

The Federal Open Market Committee consists of seven members of the ___, the president of the Federal Reserve Bank of Ne York, and ___.

Federal Reserves Board of Governors; four presidents from the the other 11 Federal Reserve banks.

The three main monetary policy tools used by the Federal Reserve to manage the money supply are

Open market operations, discout policy, and reserve requirments.

To decrease the money supply the Federal Reserve could

Conduct an open market sale of Treasury securities.

The purchase of $1 million of Treasury securities by the Federal Reserve, if there is not change in the quantity of currency, will cause reserves at banks to

Increase by $1 million.

The mot important function of money is to

Serve as a medium of exchange.

What is both a necessary and sufficient condition for anything to become money?

Acceptability.

The most widely used medium of exchange in the US in terms of value of transactions is

Cheackable deposits.

The reserves of commercial banks on deposit at the Federal Reserve Banks are

Assets of the commercial banks and liabilities of the Federal Reserve Banks.

Demand deposits in commercial banks are

Assets of the non-bank public and liabilities of the banks.

The Fed controls bank lending and thus the process of money creation through its power to

Alter legal reserve requirements and the dollar amount of reserves.

The number of dollars that the commercial banking system can add to the money supply for each dollar of new reserves created by the Fed

Is governed largely by reserve requirements and the form in which the public chooses to hold money.

Which is not a part or compnent of the Federal Reserve System?

Federal Deposit Insurance Corporation.

Suppose a new customer opens a checking account and a savings account, placing $50,000 in each. Later the bank makes a loan of $100,000 to a business firm. For this bank

assets increased by $100,000 because the loan is an asset, and liabilities are increased by $100,000 because the checking and savings accounts are liabilities.

Monetary policy actions are determined by the

Federal Open Market Committee.

If banks engage in fractional reserve banking, it means that

They hold less than 100% of their deposits as reserves.

If a bank has $100,000 in demand deposits and $30,000 are on reserve with a 20% reserve requirement, the bank

Has excess reserves of $10,000.

Required reserves consist of

Deposits at direct Federal Reserve banks plus vault currency cash.

What could expand the money suppy?

A decrease in the required reserve ration.

If the commercial banking system's excess reserves are zero and the reserve requirement is 10%, in oder for the banking system to increase deposits by $2.5 million, the Fed must

Buy $250,000 of government securities from the public.

If the legal reserve requirement is raised, the money muliplier

Is lowered.

Assume that requred reserves are 20%. If the Fed buys $1,000 worth of bonds from a member bank, then the banking system can

Increase loans by a max of $5,000.

When all banks have zero excess resrves to start and you write a check that is deposited in another bank, it is true that

The system will still have the same amount of reserves.

When the Fed wants to undertake open market operations, it

Buys or sells securities through the trading desk at the New York Federal Reserve Bank.

The initial impact of the Fed's open market sale of government securities to commercal banks is

A reduction of the commercial banking system's reserve deposits at the Fed.

The critical factor in maintaining the value of a dollar is

Confidece that the supply of dollars will be limited.

The goal of a gold standard is to

Reduce uncertainty by limiting the powr of the Federal Reserve o increase the amount of money in circulation.

The immediate, direct effect of someone's cashing a check at a commercial bank is

No change in the stock of money.

The largest component of the narrowly-defined money stock in the US, known officially as M1 is

Currency in commercial bank vaults or the hands of the public.

What happns when the Fed sells government bonds?

The money supply tends to fall.

Throughout 2001, the Fed "lowered interest rates" several times . The Fed was engaged in ___ monetary policy in order to reduce the threat of an emerging ___ in the US economy.

Expansionary; recession.

When a commercial bank borrows directly from the Fed, it pays

An interest rate called the discount rate.

What is the most popular tool of the Fed used to control the stock of money?

Buying and selling government bonds.

Which organization is responsible for managing the nations money supply?

The Open Market Committee.

Federal Funds Loan

One bank loans money to another for 24 hours. Federal Funds Rate.

High Powered Money

Reserves + currency in circulation.

4 players: Fed, banks, borrowers, re-depositors.

Prime Rate

Lowest rate people can get. Fed Funds Rate + 3%.

Open Market Committee

Meet 8 times/year.

6 Fundamental Principles

1. People respond to incentives.
2. No free lunch.
3. No thing is just one thing.
4. Butterfly effect.
5. Law of unintended consequences.
6. No one is in control.

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