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Macroeconomics Final Review

Maurice receives $100 as a birthday gift. In deciding how to spend the money, he narrows his options down to four choices: Option A, Option B, Option C, and Option D. Each option costs $100. Finally he decides on Option B. The opportunity cost of this decision is
the value to Maurice of the option he would have chosen had Option B not been available.
Mallory decides to spend three hours working overtime rather than watching a video with her friends. She earns $8 an hour. Her opportunity cost of working is
the enjoyment she would have received had she watched the video.
Regan grows flowers and makes ceramic vases. Jayson also grows flowers and makes vases, but Regan is better at producing both. In this case, trade could
benefit both Jayson and Regan.
Paul can produce 8 units of wheat or 10 units of corn per day. Cliff can produce 6 units of wheat or 4 units of corn per day. The comparative advantage for wheat belongs to __________ and the comparative advantage for corn belongs to __________.
Cliff; Paul
Other things the same, an increase in the interest rate
would decrease the quantity of loanable funds demanded.
An increase in capital
increases the marginal product of labor so the labor demand curve shifts to the right.
In the short run, an increase in the money supply causes interest rates to
decrease, and aggregate demand to shift right.
In the short run, a decrease in the money supply causes interest rates to
increase, and aggregate demand to shift left.
If the Federal Reserve decided to lower interest rates, it could
buy bonds to raise the money supply.
When it comes to people's tastes, economists generally believe that
tastes are based on historical and psychological forces.
Economists in general
do not try to explain people's tastes, but they do try to explain what happens when tastes change.
Suppose today people change their expectations about the future. This change in expectations
can affect today's demand.
You love peanut butter. You hear on the news that 50 percent of the peanut crop in the South has been wiped out by drought, and that this will cause the price of peanuts to double by the end of the year. As a result,
your demand for peanut butter increases today.
A steel company sells some steel to a bicycle company for $100. The bicycle company uses the steel to produce a bicycle, which it sells for $200. Taken together, these two transactions contribute
$200 to GDP.
One bag of flour is sold for $1.50 to a bakery, which uses the flour to bake bread that is sold for $4.00 to consumers. A second bag of flour is sold to a consumer in a grocery store for $2.00. Taking these three transactions into account, what is the effect on GDP?
GDP increases by $6.00.
Renee earned a salary of $60,000 in 2001 and $80,000 in 2006. The consumer price index was 177 for 2001 and 221.25 for 2006. Renee's 2006 salary in 2001 dollars is
$64,000; thus, Renee's purchasing power increased between 2001 and 2006.
In 1970 Professor Fellswoop earned $12,000; in 1980 he earned $24,000; and in 1990 he earned $36,000. If the CPI was 40 in 1970, 60 in 1980, and 100 in 1990, then in real terms, Professor Fellswoop's salary was highest in
1980, and lowest in 1970.
Suppose you are given the following information about the current levels of spending and output in the economy: potential GDP=2000, consumption=1000, investment=400, government spending=400, and net exports= -200. Since the current level of output is ___ potential GDP, in the absence of government intervention we can expect inflation (or price) to ___.
less than; decrease
If the MPC is 0.80 and there is no crowding- out effect, then an initial increase in aggregate demand of $100 billion will eventually shift the aggregate demand curve to the right by
$500 billion.
Suppose that the MPC is .60 and there is no crowding-out effect. If government expenditures increase $20 billion, aggregate demand
shifts right $50 billion.
Assume that the MPC is 0.75. Assuming that only the multiplier effect matters, a decrease in government purchases of $10 billion will shift the aggregate demand curve
left by $40 billion.
If the Federal Reserve decreased the stock of money, the:
Money supply curve would shift leftward and the equilibrium interest rate would rise.
In the economy, when the demand for something decreases its price will tend to ___ and when the supply of something decreases its price will tend to ____.
decrease; increase
If the spending multiplier in the economy is equal to 4 this means that a
$100 increase in investment will increase real GDP by $400.
Lower inflation makes domestic goods sold abroad ___ expensive and, hence ___ short-run equilibrium output. Assume a constant exchange rate to answer this question.
less; increases.
Use the balance sheet for the following questions.

Table 29-2
First Bank of Mason City
Assets Liabilities
Required Reserves $20.00 Deposits $100.00
Loans $80.00

Refer to Table 29-2. The reserve ratio is
20 percent
Use the balance sheet for the following questions.

Table 29-2
First Bank of Mason City
Assets Liabilities
Required Reserves $20.00 Deposits $100.00
Loans $80.00

Refer to Table 29-2. If $1,000 is deposited into the First Bank of Mason City, and the bank takes no other actions, it's
assets will increase by $1,000.
Use the balance sheet for the following questions.

Table 29-2
First Bank of Mason City
Assets Liabilities
Required Reserves $20.00 Deposits $100.00
Loans $80.00

Refer to Table 29-2. If someone deposits $400 into the First Bank of Mason City,
A. the bank will be able to make additional loans totaling $320.
B. excess reserves initially increase by $320.
C. required reserves initially increase by $80.
Which of the following increases the marginal product of labor thereby increasing potential output?
an increase in either the physical or human capital stock
Which of the following would NOT increase productivity?
an increase in the number of workers hired by firms.
When the money supply and the price level in countries that experienced hyperinflation are plotted against time, we see that
the price level grew at about the same rate as the money supply.
Steven puts money into an account. One year later he sees that he has 6 percent more dollars and that his money will buy 2 percent more goods.
The nominal interest rate was 6 percent and the inflation rate was 4 percent.
The quantity theory of money
can explain both moderate inflation and hyperinflation.
When the price level rises, the number of dollars needed to buy a representative basket of goods
increases, and so the value of money falls.
Your boss gives you an increase in the number of dollars you earn per hour. This increase in pay makes
your nominal wage increase. If your nominal wage rose by a greater percentage than the price level, then your real wage also increased.
According to the quantity equation, if P = 12, Y = 6, and M= 8, then V =
According to the quantity equation, if P = 2, Y = 6,000, and M= 3,000, then V =
If V and M are constant, and Y doubles, the quantity equation implies that the price level
falls to half its original level
If velocity and output were nearly constant,
the inflation rate would be about the same as the money supply growth rate.
Suppose that monetary neutrality and the Fisher effect both hold. An increase in the money supply growth rate raises.
the inflation rate but not the growth rate of real GDP.
You buy a stock and its price rises less than the price level. Before taxes you made
a nominal gain and a real loss, and you pay taxes on the nominal gain.
If inflation is higher than expected,
creditors receive a lower real interest rate than they had anticipated.
If the exchange rate is 5 units of Peruvian currency per dollar and a hotel room in Lima costs 300 units of Peruvian currency, how many dollars do you need to get a room?
60 and your purchase will increase Peru's net exports.
You are staying in London over the summer and you have a number of dollars with you. If the dollar appreciated relative to the British pound then, other things the same,
the dollar would buy more pounds. The appreciation would encourage you to buy more British goods and services.
Other things the same, if the exchange rate changes from 115 yen per dollar to 125 yen per dollar, the dollar has
appreciated and so buys more Japanese goods.
Suppose a country had net exports of $8.3 billion and sold $52.4 billion of goods and services abroad. This country had
$52.4 billion of exports and $44.1 billion of imports.
One year a country has negative net exports. The next year it still has negative net exports and imports have risen more than exports.
its trade deficit rose
An Italian citizen opens and operates a spaghetti factory in the United States. This is Italian
foreign direct investment that increases Italian net capital outflow.
Greg, a U.S. citizen, opens an ice cream store in Bermuda. His expenditures are U.S.
foreign direct investment that increase U.S. net capital outflow.
Catherine, a citizen of Spain, decides to purchase bonds issued by Chile instead of ones issued by the United States even though the Chilean bonds have a higher risk of default. An economic reason for her decision might be that
the Chilean bonds pay a higher rate of interest.
If U.S. imports total $100 billion and U.S. exports total $150 billion, which of the following is correct?
The U.S. has a trade surplus of $50 billion.
Most economists use the aggregate demand and aggregate supply model primarily to analyze
short-run fluctuations in the economy.
Which of the following shifts aggregate demand to the left?
a decrease in the money supply
Which of the following shifts aggregate demand to the left?
Stock prices fall for some reason other than a change in the price level.
As recessions begin, production
falls and unemployment rises.
The sticky-wage theory of the short-run aggregate supply curve says that when the price level is lower than expected,
production is less profitable and employment falls.
According to the sticky-wage theory of the short-run aggregate supply curve, if workers and firms expected prices to rise by 4 percent, but instead they rise by 2 percent, then
employment and production fall.
Which of the sentences concerning the aggregate demand and aggregate supply model is correct?
The price level and quantity of output adjust to bring aggregate demand and supply into balance.
Other things the same, the aggregate quantity of goods demanded decreases if
A. real wealth falls.
B. the interest rate rises.
C. the dollar appreciates.
Investment spending decreases when the price level
rises and interest rates rise.
When the dollar appreciates, U.S.
exports decrease, while imports increase.
An increase in the interest rate causes investment to
fall and the exchange rate to appreciate.
Suppose a stock market boom makes people feel wealthier. The increase in wealth would cause people to desire
increased consumption, which shifts the aggregate demand curve right.
From 2001 to 2005 there was a dramatic rise in the price of houses. If this made people feel wealthier, then it would shift
aggregate demand right.
The initial impact of an increase in an investment tax credit is to shift
aggregate demand right
Suppose that the Federal reserve is concerned about the effects of rising stock prices on the economy. What could it do?
sell bonds to raise the interest rate
Which of the following tends to make aggregate demand shift right farther than the amount government expenditures increase?
the multiplier effect
The government buys a bridge. The owner of the company that builds the bridge pays her workers. The workers increase their spending. Firms that the workers buy goods from increase their output. This type of effect on spending illustrates
the multiplier effect.
If there is crowding out, which of the following might decrease as government expenditures increased?
demand for capital goods