Economics Final

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Size of unemployment rate...

size of labor force = employed + unemployed

The rate of unemployment when the economy is at its potential output is called the...

natural rate of unemployment

You have lost your job at an automobile plant because of the use of robots for welding on the assembly line. What type of unemployment are you experiencing?

structural unemployment

If the annual inflation rate is 5% per year, about how many years will it take for the price level to double?

14 years (rule of seventy)

The industries or sectors of the economy in which business cycle fluctuations tend to affect output the most are...

consumer durables and capitol goods

During periods of full employment the...

level of real output is at 100%

A college graduate using the summer following graduation to search for a job would be...

frictional unemployment

If actual GDP is $340 billion and there is a positive GDP gap of $20 billion, potential GDP is...

$16.19 billion

The size of MPC is assumed to be...

lowest to greatest

Suppose that a new machine, having a useful life of one year, costs $80,000 and that is projected to earn net additional revenue of $96,000. The expected rate of return is...

$16,000 (difference between the two

In which phase of the business cycle will the economy most likely experience rising real output and falling unemployment?

expansionary phase

If business taxes are reduced and the real interest rate increases...

the level of investment spending might either increase or decrease

Multiplier Effect

shifts in aggregate demand when expansionary fiscal policy increases income and consumer spending

As disposable income decreases, consumption...

decreases, direct relationship
savings would also decrease

If the consumption function shifts downward, and the shift was not caused by a tax change, then the saving schedule...

will shift upward

What would shift the consumption schedule upward?

Change in wealth, interest rates, expectations (optimism)

An inverse relationship between the rate of interest and level of investment is...

illustrated by the investment demand curve

What would decrease investment demand? (shift it left)

business taxes, cost of capitol equipment

The greater the MPS, the...

smaller the multiplier, smaller the effect change in spending has

A private closed economy includes...

no government sector (only consumer/business)

The equilibrium level of GDP in a private closed economy is where...

consumption and planned investment equals the level of GDP

The equilibrium level of GDP is associated with...

actual investment = planned investment + unplanned investment
change in inventory

Suppose that the level of GDP increased by $100B in a private closed economy where the MPC is .5. Aggregate expenditures must have increased by...

1/MPS= multiplier

If a $10B decrease in taxes increases equilibrium GDP by $40B then...

consumption will also increase by $40B

An increase in the investment demand curve will...

shift it right

Saving and investment are, respectively...

saving = leakage
investment = injection

If GDP exceeds aggregate expenditures...

firms sell more than they planned to sell and end up with inventories being too low

Over time, an increase in the real output and incomes of the trading partners of the US will...

increase exports and imports

The amount by which an aggregate expenditures schedule must shift downward to eliminate demand-pull inflation and still achieve full-employment GDP is the...

inflationary expenditure gap

A rightward shift of the AD curve in the very steep upper part of the upsloping AS curve will...

slightly increase output, more severe effect on inflation

The fear of unwanted price wars might explain why many firms are reluctant to...

reduce prices when decline in demand occurs

The foreign purchases effect suggests that an increase in the US price level relative to other countries will...

cause foreigners to buy less exports
we will import more

What would decrease aggregate demand?

consumption, government spending, exports, investments
cost of capitol goods

The slope of the immediate short run aggregate supply curve assumes...

business will produce more of the demand, but they won't raise prices because input prices are fixed

A decrease in the price of capital goods will shift the...

supply curve to the right

A decrease in the quantity of real output demanded along the aggregate demand curve is caused by...

price level rises, people buy less

Efficiency wages contribute to...

higher than minimum wage, increases morale + productivity
pulls more skilled workers
decrease per unit cost of production

What will cause an increase in the price level and a decrease in output?

Ag supply shift left: increase in business taxes, expectations, cost of production, etc.

Mr. Smith deposits $350 in his bank account. Then, Mr. Jones gets a loan for $2,000 from the same bank. In what direction and by what amounts has the money supply changed?

bank lends, supply increases

Maximum checkable deposit expansion is equal to...

the amount of actual reserves multiplied by the monetary multiplier

If the required reserve ratio is 15% and banks hold additional excess reserves equal to 5% of any new deposit, then the money multiplier...

effective ratio: 15% to 5%

If a bank has checkable deposits of $400,000 and reserves of $150,000 and a required reserve ratio of 25%, then how much can the bank lend and how much can the banking system lend?

reserve ratio (checkable) = excess for bank
excess ($multiplier) = system

If aggregate supply is greater than aggregate demand...

inventories increase

Changes in taxes and government spending without explicit action by the federal government is known as...

built in stability

as the economy declines, personal income tax revenue dramatically falls. This describes how the progressive income tax system...

attempt to reduce the tax incidence of people with a lower ability-to-pay, as they shift the incidence increasingly to those with a higher ability-to-pay

If the cyclically adjusted budget shows a deficit of about $100 billion and the actual budget shows a deficit of about $150 billion, it can be concluded that there is...

expansionary spending

If the government wants to reduce consumption by $36 billion in order to reduce inflation and if the MPC is .75, by how much should the government raise taxes to achieve its objective?

Tax multiplier= MPC/MPS >> multiplier/change

What is a consequence of the US public debt?

Foreign ownership of large amounts of government debt will require that the government raise taxes to repay debt and interest owned to foreign governments which will not be acceptable
depreciation of the dollar, giving rise to inflation and also directly affecting dollar status as reserve currency

If Congress cuts taxes to counter the effects of a severe recession, this would be using...

expansionary fiscal policy

Fiscal policy refers to the...

changes to government spending/ taxes

The amount by which the government expenditures exceed revenues during the year is the


As a percentage of GDP, the US public debt is...

the money borrowed by the federal government of the United States at any one time through the issue of securities by the Treasury and other federal government agencies

The principal advantage money has over barter is its function as...

median exchange


the process of transforming loans or other financial assets into securities

If you write a check to purchase a used Honda, you are using money primarily as...

medium of exchange

If a coin is token money...

face value is unrelated

The purchasing power of money and the price level vary...


Stabilizing a nation's price level and the purchasing power of its money can be achieved...

both fiscally and monetary

The basic policy-making body in the US banking system is the...

board of gov of Federal Reserve

The Federal Open Market Committee consists of...

the seven members of the Federal Reserve Board and five of the twelve Federal Reserve Bank presidents

Currency in circulation is part of

currency in M1 and M2

Moral hazard created during the financial crisis occurred because...

banks know federal reserve will lend so they take risks

Bank panics

not impossible, not likely with bank regulation

If the required reserve ratio is lowered...

multiplier increases

On a bank's balance sheet, its office building is...

an asset

What is one characteristic of fractional reserve banking?

banks only hold percentage of checking account

A commercial bank has actual reserves of $50,000 and checkable deposits of the $200,000 and the required reserve ratio is 20%. The excess reserves of the bank are the...

required ratio = required actual - required excess

When a check is cleared, the bank loses...

checkable cash deposit

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