Bureau of Economic Analysis
part of commerce department that is responsible for calculating GDP quarterly and for compiling the National Income Product Accounts for the U.S. economy
By summing the dollar value of all market transactions in the economy we would
obtain a sum substantially larger than the GDP
If depreciation exceeds gross investment
the economy's stock of capital is shrinking
The smallest component of aggregate spending in the United States is
GDP data are criticized as being inaccurate measures of economic welfare because
1)they do not take into account changes in the amount of leisure.
2)they do not take into account all changes in product quality.
3)they do not take into account the adverse effects of economic activity on the environment
By summing the values added at each stage in the production of some good we obtain
A. the price of that good.
B. the total income generated by that good's production.
C. the total cost (including profits) of that product.
incomes earned by U.S. resource suppliers plus taxes on production and imports
Personal income is most likely to exceed national income
during a period of recession or depression
sum of corporate income taxes, dividends, and undistributed corporate profits
difference between national income and personal income
National income represents income earned by American-owned resources, while personal income measures received income, whether earned or unearned
. Real GDP
measures current output at base year prices
What does the GDP price index include
all goods comprising the nation's domestic output
What best measures improvements in the standard of living of a nation
growth of real GDP per capita
For comparing changes in potential military strength and political preeminence, the most meaningful measure of economic growth would be
changes in total real output
Under what circumstances do rates of economic growth understate the growth of economic well-being
Economic growth has occurred because of increased length of the workweek
The Industrial Revolution and modern economic growth resulted in
the average human lifespan more than doubling
Was real per capita GDP much more equal across nations in 1820 than it is today
Economic growth rates in follower countries
tend to exceed those in leader countries because followers can cheaply adopt the new technologies that leaders developed at relatively high costs
What is the best explanation given for why labor supply (on a per capita basis) is greater in the United States than in France and other rich leader countries
A. France and other rich leader countries have more generous unemployment and welfare programs than the United States.
B. The United States has lower tax rates than France and other rich leader countries.
C. The United States has a longer legal work-week than France and other rich leader countries.
what institutional arrangements is most likely to promote growth?
Unrestricted trade between nations
Other things equal, if a full-employment economy reallocated a substantial quantity of its resources to capital goods, we would expect
labor productivity to rise
increases in the value of a product to each user, including existing users, as the total number of users rises
sources of increasing returns and economies of scale
network effects, learning-by-doing, simultaneous consumption
Economists who believe in the permanence of the recent productivity acceleration say that
innovations in computers and communications, together with global capitalism, are greatly boosting U.S. productivity and the economy's potential economic growth rate
Proponents of economic growth say that pollution
occurs, not because of growth, but because common properties are treated as free goods
Over the past several decades, the percentage of women in the paid U.S. workforce has
increased due to higher wages, expanded job accessibility, changing preferences and attitudes, and other factors
As it relates to economic growth, the term long-run trend refers to
the long-term expansion or contraction of business activity that occurs over 50 or 100 years
business cycle fluctuations
A. Unexpected financial bubbles that eventually burst.
B. Shocks to the money supply by the nation's central bank.
C. Supply shocks caused by major innovations.
reason that changes in total spending lead to cyclical changes in output and employment?
Prices are sticky in the short run
natural rate of unemployment
that rate of unemployment occurring when the economy is at its potential output
A large negative GDP gap implies
a high rate of unemployment
occurs when total spending exceeds the economy's ability to provide output at the existing price level
moves the economy inward from its production possibilities curve, increases in the price level resulting from an increase in resource costs and hence in per-unit production costs; inflation caused by reductions in aggregate supply
reduces the purchasing power of the dollar, but does not necessarily reduce one's real income
During a period of hyperinflation
people tend to hold goods rather than money
effect that decreases price level has on investment expenditures through the effect that a change in price level has on interest rates
The interest-rate effect suggests that
an increase in the price level will increase the demand for money, increase interest rates, and decrease consumption and investment spending
foreign purchases effect
suggests that a decrease in the U.S. price level relative to other countries will increase U.S. exports and decrease U.S. imports
As the U.S. price level rises, U.S. goods become relatively more expensive so that U.S. exports fall and U.S. imports rise
As the price level falls, the demand for money declines, the interest rate declines, and interest-rate sensitive spending increases
Given aggregate demand, an increase in aggregate supply increases real output and, assuming downward flexible prices, reduces the price level.
What would not shift the aggregate demand curve?
B. depreciation of the international value of the dollar
C. a decline in the interest rate at each possible price level
D. an increase in personal income tax rates
An increase in stock prices that increases consumer wealth
would most likely shift the aggregate demand curve to the right
The shape of the immediate-short-run aggregate supply curve
implies that total output depends on the volume of spending
The aggregate supply curve (short-run) slopes upward and to the right because
wages and other resource prices adjust only slowly to changes in the price level
Other things equal, if the U.S. dollar were to depreciate,
the aggregate supply curve would shift to the left
demand-pull inflation is shown as a
rightward shift of the AD curve along an upsloping AS curve
Graphically, the full-employment, low-inflation, rapid-growth economy of the last half of the 1990s is depicted by a
rightward shift of the aggregate demand curve and a rightward shift of the aggregate supply curve
If the dollar price of foreign currencies falls (that is, the dollar appreciates), we would expect
aggregate demand to decrease and aggregate supply to increase
increase in input productivity will
reduce the equilibrium price level, assuming downward flexible prices
the tendency of the price level to increase but not to decrease
The standardized budget is less likely to show a deficit than is the actual budget
neutral fiscal policy
this refers to a policy neither designed to boost nor lower economic activity
an increase in saving is the same as
The effect of a government surplus on the equilibrium level of GDP is substantially
money is socially defined
whatever performs the functions of money extremely well is considered to be money
Currency held in the vault of First National Bank is
not counted as part of the money supply
In defining money as M1, economists exclude time deposits because
they are not directly or immediately a medium of exchange
are certain highly liquid financial assets that do not function directly as a medium of exchange but can be readily converted into M1.
$V = 1/P
If P equals the price level expressed as an index number and $V equals the value of the dollar, then
Board of Governors of the Federal Reserve
The basic policy-making body in the U.S. banking system
provide facilities by which commercial banks and thrift institutions may collect checks
An important routine function of the Federal Reserve Bank
The seven members of the Board of Governors of the Federal Reserve System are
appointed by the President with the confirmation of the Senate
the twelve Federal Reserve Banks
They are privately owned and publicly controlled central banks whose basic goal is to control the money supply and interest rates in promoting the general economic welfare
Research involving industrially advanced countries suggests that
the less independent the central bank, the higher the average annual rate of inflation
Banks and thrifts have responded to their relative declines by expanding their services and merging with one another
mutual funds companies
Firms whose central business is providing individual account shares of collections of stocks, bonds, or both
The Financial Services Modernization Act of 1999
permitted banks, thrifts, pension companies, and securities firms to merge and to sell each other's products
a major deterrent to bank panics in the United States
Banking was failing, people rushed to get their money; they are a risk of fractional reserve banking, but are unlikely when banks are highly regulated and lend prudently
The primary purpose of the legal reserve requirement
provide a means by which the monetary authorities can influence the lending ability of commercial banks
When a check is drawn and cleared
bank against which the check is cleared loses reserves and deposits equal to the amount of the check.
A commercial bank can expand its excess reserves by demanding and receiving payment on an overdue loan.
Commercial banks sell government bonds to the public
would reduce the money supply
by borrowing funds in the Federal funds market
A bank temporarily short of required reserves may be able to remedy this situation
is larger the smaller the legal reserve ratio = 1/R
The multiple by which the commercial banking system can expand the supply of money on the basis of excess reserves
The Fed can change the money supply by
A. changing bank reserves through the sale or purchase of government securities.
B. changing the quantities of required and excess reserves by altering the legal reserve ratio.
C. changing the discount rate so as to encourage or discourage commercial banks in borrowing from the central banks.
D. doing all of these.
the buying and selling of government securities to alter the supply of money
lower interest rates, an expanded GDP, and a higher rate of inflation
If the Fed were to reduce the legal reserve ratio, we would expect
amount of excess reserves in the banking system
A decrease in the reserve ratio increases the
the term auction facility
monetary policy tools was introduced in December 2007
monetary policy tools
reserve ratio, discount rate, fed funds rate, open market operations, the term auction facility
prime interest rate affects investment spending while the affects overnight borrowing of bank reserves.
prime interest rate
the interest rate on short-term loans that banks charge their commercial customers with high credit ratings
Federal funds rate
the interest rate at which banks make overnight loans to one another
Explains how the Fed should set the Federal Funds Rage
Federal Funds Target=Current inflation rate+real equilibrium federal funds rate+.5(inflation gap)+.5(output gap)
The problem of cyclical asymmetry
a restrictive monetary policy can force a contraction of the money supply, but an expansionary monetary policy may not achieve an increase in the money supply
Monetary policy is thought to be more effective in controlling demand-pull inflation than in moving the economy out of a depression