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Macroeconomics Final

Terms in this set (277)

The basic principle in economic studies
scarcity
One of the basic assumptions in economic studies is that people are
rational
marginal analysis is involving comparing
MB and MB
Every society faces a trade-off between
equity and efficiency
What kind of statement is: We need to privatize the social security program in the State of Kansas
Normative Statement
The opportunity cost of the good on the x-axis is what of the PPF
Slope
If the PPF is linear, then the opportunity cost of producing a good or service is
Constant
The PPF shows the ___________ combination of goods and services a firm can produce
possible and efficient
Economic decline happens when the PPF shifts
Inward
One of the basic principles of economics is that trade makes
Everyone better off
In what kind of market is the product homogeneous and there are many buyers and sellers
Competitive
The income effect and the substitution effect can help explain the law of
demand
the sum of individual demand for a product at each price is:
market demand
What is another name for excess supply
surplus
what kind of good is is if demand decreases as income increases
inferior good
movement along the supply curve occurs due to change in
price
if the cost of doing business decreases, we can expect the supply curve will
shift to the right
if both price and quantity increase, it must be from
higher demand
What is one cause of price decrease
lower resource cost
The supply curve will shift when
labor costs change
The GDP deflator is a ratio of
current to fixed prices
Net export is calculated as
Export-Imports
New houses are included in which component of the GDP
investment
Inflation rate is measured as percentage change in prices from one period to which period
the next
The GDP is not a perfect measure of standard of living because it does not take what into account
social problems
the government purchases do not include
transfer payments
The GDP is the market value of final good and services produced by who of a country
residents
GDP equation
Y = C + I + G + NX
For a good to be included in the GDP, it must be produced
legally
Durable good is a good that can be used for:
more than one period
A decline in the value of money occurs when
inflation occurs
Inflation is the increase in
the average price level in an economy
What is NOT a cost of inflation?
higher real values of output
When people are living on a fixed income, inflation will:
decrease the real value of their income
Which of the following areas of bias are NOT included in the CPI?
foreign production bias
Changes in the PPI tend to ______ changed in the actual producer costs
overstate
The price index that focuses on the prices of inputs and raw materials is known as the
Producer Price Index
What price index tends to be the most volatile over time
PPI
When inflation occurs, a unit of money will buy what amount of food than before
a smaller amount
The CPI is 100 in year 1, 156 in year 2, and 160 in year 3, What is the inflation for year 2?
5.6%
The labor force is defined as
employed plus unemployed
Natural rate of unemployment is the sum of
structural + frictional
Labor force participation rate measures percentage of who in the labor force
adult population
All modern dynamic economies are subject to ____ of job.
creative-destruction
The deviation of unemployment from its natural rate is called
cyclical rate of unemployment
The BLS produces data on unemployment from a regular survey of households called the
current population survey
A firm chooses to pay wages that are above equilibrium for the skills needed in hopes that the workers will work hard. What is this called?
Efficiency Wages
The trough stage of the business cycle is immediately followed by
an expansion
Minimum wage laws that require wages of low-skill workers to be above equilibrium contribute to what type of unemployment?
structural
A nation's economic growth is best measured by the annual growth rate of
real GDP per capita
What is the formula to calculate the time required to double GDP according to the rule of 70?
70/g=doubling time
A country's productivity is measured by
GDP per hour worked
Which of the following factors does NOT impact productivity
labor force participation rate
High tax rates on personal income are used to fund high salaries for government leaders are an example of government acting as an:
extractive institution
Foreign direct investment occurs when an investor in one country
makes an investment in business activities in another country that gives the investor ownership rights
Which of the following is a public policy to foster economic growth that typically would be favored by the government of a high-income country rather than a developing country?
foster agglomeration of similar industries
Which of the following is an argument against foreign aid?
There are many cases where the aid has been diverted away from the intended purpose
As the quantity of one input rises while the amounts of other inputs remain constant, output tends to rise by smaller and smaller increments. This pattern is referred to as the
law of diminishing returns
When currency is not backed by precious metals but has value simply because people accept it as money, then the country has what type of money system
fiat
Gold coins used as money are an example of what kind of money
commodity
Which of the following is NOT included in the M1 measure of the money supply?
Savings account balances
A demand deposit is the balance:
in a checking account
An asset is liquid when it
can be converted to money easily, quickly, and without loss of value
M2 equals M1:
plus time deposits
The monetary base equals
cash help by general public plus commercial bank reserves
Bank reserves are
not part of M1 or M2
What counts as money in the M2 measure of the money supply
a savings account that has a balance of $20,000
The portion of deposits that a bank is required to hold on reserve
required reserve ration
The study of economics:
looks at how individuals, businesses, and governments make decisions about how to use their limited resources.
A central theme of economic thought is that human wants are virtually _____ and resources are _____.
unlimited; scarce
In economics, resources include
labor and physical capital
When individuals, firms, and policymakers make decisions, these decisions often have both costs and benefits. This is an example of
Trade-Offs
Maria was thrilled to receive a 3% raise. Inflation is 4%. Maria is experiencing?
Money illusion
Soybeans are traded in what market
commodity
The question of whether student loans should or should not be forgiven is an example of
normative analysis
Policies promoting equitable income distribution may lead to
more or less efficiency
Labor is defined as...
human effort used in the production of goods and services
The equipment and machinery that are used to produce goods and services are known as
physical capital
Skills that are acquired through education, experience, and training that allow labor to be more productive are known as
human capital
Individuals who combine various resources into a business in pursuit of profits are known as
entrepreneurs
The practice of holding other factors constant in order to understand the effect of a specific variable is known as the:
ceteris paribus assumption.
When Amazon builds its second headquarters, what is the effect on the economy?
The amount of physical capital increases.
The value of a business or property minus the value of any debt obligations is known as:
owner's equity.
In the finance field, the word capital refers to _____. In the economics field, the word capital refers to:
money; equipment and structures.
_____ enables us to quantify choices and to understand the relationships between resources and behavior.
Economics
Spending on new capital goods and investment is which factor of production?
Spending on new capital goods and investment is which factor of production?
Which branch of economics focuses on economic issues that impact the overall economy, such as unemployment, inflation, recessions, and economic growth?
macroeconomics
A market:
consists of all potential and actual buyers and sellers of resources and products
The opportunity cost of an economic model is known as the
exclusion of real-world complications
In the circular flow model, people usually work for____ in the _____market
money; resource
The economic model that depicts the maximum output that can be produced in an economy when resources are used efficiently is known as the:
PPF Model
The limits to what an economy can produce result from
scarcity
The bowed out, concave shape of the PPF is explained by
law of increasing costs
Minimizing production costs per unit is also known as
productive efficiency
A sustained increase in the amount of goods and services produced is known as
economic growth
What may cause a economy's PPF to shift to the left
A massive earthquake and tsunami damage much of the country's infrastructure.
_____ is the ability to produce a product at a lower opportunity cost than a trading partner can.
Comparative advantage
Gains from trade are based on _____ rather than:
comparative advantage; absolute advantage.
Boeing, a U.S. aircraft manufacturing company, has suppliers from countries such as Germany, Japan, and Italy. This is an example o
globalization
A country's exports minus its imports is known as:
Net exports
The rate at which one country's currency can be converted to another country's currency is known as the _____ rate.
exchange
Consider a country that produces only two goods: pineapples and tractors. Suppose it is possible for this country to increase its production of pineapples without producing fewer tractors. In this case, its current output combination is inefficient. T or F
True
In a two-good, two country world, if one country has an absolute advantage in the production of both goods, it can still benefit by trading with the other country. T or F
True
In economics, the term "free market" refers to a market where no sales tax is imposed on products sold. T or F
False
the amount of a good that buyers are willing and able to purchase
quantity demanded
income effect and substitution effect help explain the law of
demand
The economic principle stating that a positive relationship exists between price and quantity supplied, ceteris paribus, is the law of
supply
where quantity supplied equals quantity demanded
equilibrium
Something other than price that affects a consumer's willingness to buy is known as a change in
demand
Kind of good? Demand increases as income increases.
Normal
Products for which an increase in the price of one good reduces demand for the other good are _____ goods.
Complementary
Recent research has discovered that consumers are drinking less soda because of a decline in its popularity. Which determinant of demand does this represent?
changes in taste and preferences
If the supply increases, the result is _____ equilibrium price and _____ equilibrium quantity.
lower; higher
If the cost of doing business decreases, we expect the supply curve will:
shift to the right
Many restaurants sell pizzas and salads. Suddenly salads become more profitable. As a result, we expect a _____ equilibrium price of pizza and _____ equilibrium quantity of pizza.
higher; lower
If both price and quantity increase, it must be from:
higher demand
When there is an increase in supply and a decrease in demand, what will happen with certainty?
price will decrease
When there is an increase in supply and a decrease in demand, the impact on quantity will depend on:
the curve that shifts the most
Peanut butter and jelly are complements. If the price of peanut butter increases, the demand for jelly will increase. T or F
False
An increase in quantity supplied is represented by a rightward shift of the supply curve. T or F
False
A surplus is defined as the situation that exists when the quantity of a good supplied is geater than the quantity demanded. T or F
True
The maximum price that a consumer is willing to pay for a good or service
willingess to pay
Marta bids $15 for a shirt on an online auction site. She is the winning bid at $12. What is her consumer surplus?
$3
On a graph, consumer surplus would be depicted in the area:
below the demand curve, and above the actual price
The min. price that a seller will take for a good or service is called
willingness to accept
When price increases, producer surplus could increase because
new sellers enter the market
Reduction in total surplus resulting from a market distortion is called
deadweight loss
Minimizing production costs for any given output is called
productive efficiency
A law that sets a max. price generally below equilibrium is called a price
ceiling
Farmer Jones raises wheat. The equilibrium market price for wheat is $5.15 per bushel. However, government is requiring Farmer Jones to sell his wheat at $5.50 per bushel. This is an example of a:
price floor
Price floors, price ceilings, and taxes are all types of:
government intervention
The difference between consumer surplus and producer surplus in a market is equal to the deadweight loss. T of F
False
Rent control is an example of price floor. T or F
False
There is a shortage of every good that is scarce. T or F
False
GDP is defined as
the market value of all final goods and services produced within a country in a given period of time
the value of this would not be included in GDP
Fabric purchases by a shirt factory
Adjustments for business inventory of product or inputs that are accumulated or sold during a year helps to ensure the accuracy of GDP by ensuring that GDP:
includes all of the time period's production
A significant part of economic activity in developing nations occurs in the _____ economy, which consists of small businesses that largely are unreported, are unregulated, and lack property rights.
underground
Earned income plus unearned income minus taxes
disposable personal income
GDP equation
Y = C + I + G + NX
Largest category of expenditures in US GDP
consumption
What is the difference between GDP and NDP
NDP=GDP-Depreciation of capital
A sharp increase in the number of medical errors increases the number of lawyers hired to determine medical malpractice settlements. This will
Increase GDP and decrease well being in the economy
Nominal GDP will increase
if either the price level or the quantity of goods and services produced rises.
If the GDP deflator is less than 100, then for that year, nominal GDP ________ real GDP.
is less than
If the GDP deflator is 142, by how much have prices changed since the base year?
prices have an increase of 42%
The output of Mexican citizens who work in Texas would be included in the
GDP of Mexico
If Gladys sells her 2003 Jeep Cherokee for $3,500 in 2018, the sale of her car contributes $3,500 to 2018 GDP. T or F
False
If income is unequally distributed in an economy, increases in GDP may not raise well-being in an economy. T or F
True
Nominal GDP measures the value of all final goods and services at base-year prices. T or F
False
Transfer payments are subtracted from national income to get personal income. T or F
False
Which of the following price indices comes closest to measuring the cost of living of the typical household?
CPI
consumer price index of 160 in 1996 with a base year of 1982-1984 would mean that the cost of the market basket
rose 60% from the cost of the market basket in the base year.
The increase in quality bias in the consumer price index refers to the idea that price increases in the CPI reflect pure inflation, but ________ quality increases. This causes the CPI to ________ the cost of the market basket.
not; overstate
To reduce the bias in the consumer price index, the Bureau of Labor Statistics
updates the market basket every two years, rather than every 10 years.
The producer price index measures the prices that firms
) receive for the goods and services they use at all stages of production.
If the CPI changes from 125 to 120 between 2017 and 2018, how did prices change between 2017 and 2018?
Prices decreased by 4%.
Which of the following describes the accuracy of the Consumer Price Index?
Changes in the CPI overstate the true rate of inflation.
A decline in the value of money occurs when _____ occurs.
inflation
The real value of income is:
the amount of goods and services that it will buy
A chain-weighted price index is different from the consumer price index because:
the market basket is not fixed but reflects the current mix of items purchased.
Which price index considers the prices of the largest number of goods and services?
GDP Deflator
When deflation occurs
the real interest rate is greater than the nominal interest rate
The cost to firms of changing prices
menu cost
Which describes the product quality improvement bias in the consumer price index?
New versions of a product may have more features than older versions, and yet the price may not be higher.
If an economy experiences deflation, the real interest rate
will be less than the nominal interest rate.
The price index that focuses on the prices of inputs and raw materials is known as the:
PPI
The consumer price index implicitly assumes that the demand curve for each good and service in the representative market basket is
Vertical
The inflation rate measures the average prices of goods and services in the economy. T or F
False
If the CPI falls from 142 to 140 between two consecutive years, this implies that prices fell by 2% between those two years. T or F
False
Which of the following is NOT a reason for considering unemployment a problem?
Unemployment may prevent people from going to school.
Jonia's population of 500,000 includes 95,000 children below age 16, 80,000 retirees, 20,000 discouraged workers, 228,000 employed persons, and 12,000 unemployed persons. What is the unemployment rate of Jonia?
5.0%
The labor force consists of:
all persons age 16 or older who are classified as employed or unemployed.
Econland's population of 260,000 includes 60,000 children below age 16, 40,000 retirees, 5,000 discouraged workers, 30,000 full-time homemakers, 110,000 employed persons, and 10,000 unemployed persons. What is the labor force participation rate of Econland? Round to the nearest whole percentage.
60%
When the number of discouraged workers increases, the U3 unemployment rate will _____, giving a false impression that the economy is:
drop; healthier.
Which of the following does NOT lead to an underestimation of the unfulfilled desires to work in the computation of the U3 unemployment rate?
people who pretend to be looking for work but who do not really want a job
Why does underemployment cause inaccuracies in the U3 unemployment rate?
It is difficult to measure underemployment.
The U6 unemployment rate is designed to adjust for a few issues in the U3 unemployment rate. Which is NOT one of the main adjustments?
The underemployed are subtracted from the numerator.
What stage of the business cycle immediately follows a recession?
trough
During an economic expansion, _____ rises and _____ falls.
Output; Unemployment
What is the difference between a recession and a depression?
They both have rising unemployment and falling output, but a depression is much more severe.
There are not as many job openings as there are unemployed people. This is called _____ unemployment.
Cyclical
Immediately after Ken's university graduation, he begins looking for employment and finds a job that will begin two months after his graduation. During the time that he is searching for his new job, Ken would be classified as being _______ unemployed.
frictionally
A firm chooses to pay wages that are above equilibrium for the skills needed in hopes that the workers will work hard. Economists call this wage practice:
Efficiency Wages
The natural rate of unemployment
varies across countries, even within the category of developed countries.
The household survey asks adults about their employment status and is used to compile the monthly unemployment rate. T or F
True
The natural rate of unemployment consists of frictional unemployment plus cyclical unemployment. T or F
False
Paying efficiency wages are a way for a company to cut costs and become more efficient, and are therefore lower than market wages. T or F
False
A nation's economic growth is best measured by the annual growth rate of:
real GDP per capital
According to the rule of 70, how long will it take for Macroland's real GDP per capita to double if it has an annual growth rate of 2.5%?
28 Years
According to the rule of 70, what annual growth rate would allow a country's output to double in 14 years?
5.0%
High tax rates on personal income that are used to fund high salaries for government leaders are an example of government acting as an:
extractive institution
Human capital per worker affects productivity because:
the skill and knowledge levels of workers are positively related to their productivity.
Which answer is NOT a reason that encouraging international trade can foster economic growth in developing nations?
Trade equally benefits all industries within a country.
Generally, what is the relationship between the abundance of a country's natural resource endowment and the country's development level?
There is no consistent relationship between resource endowment and prosperity
The ability of poor countries to grow more rapidly than high-income countries is known as the:
Catch-Up Effect
Developing a new hybrid type of corn plant that has a higher yield than other varieties of corn is an example of:
a technological change.
Conducting business internationally rather than in one country provides a benefit of greater _____ but this comes with a risk of facing:
a. growth potential; unfavorable institutions.
What of the following issues has been recently debated regarding economic growth in high-income countries?
Has the economic growth rate been slowing down?
One policy approach that is especially helpful for governments of high-income countries to use to foster economic growth is to:
grant patents and copyrights to allow inventors to gain a return
Factors that determine productivity include all of the following EXCEPT:
money per capita
A country's productivity is measured by:
GDP per hour worked
Increases in capital per hour worked cannot sustain high rates of economic growth unless accompanied by technological change. T or F
True
Countries without well-developed financial systems are able to sustain high levels of economic growth. T or F
True
Which of the following is not a function of money?
open market operation
What is the difference between commodity money and fiat money?
The value of commodity money is based on the material out of which it is made, and the value of fiat money comes from its acceptance by its users.
Sam has been saving for his retirement for twenty years. He has a plan and has estimated how much he needs to save each year to provide the standard of living that he wants in retirement. Sam is emphasizing which of the following functions of money as he saves for retirement?
Store of Value
An asset is liquid when it:
can be converted into money easily, quickly, and without loss of value.
Bank reserves are
not part of M1 or M2
A banking system has $900 billion in deposits and $20 billion in excess reserves. The reserve requirement is 10%. How much does the banking system have in total reserves?
$110 billion
Which of the following equations is correct?
Total reserves = Required reserves + Excess reserves
Bigtown Bank has total deposits of $900 million and total reserve of $150 million. It is subject to a required reserve ratio of 15%. What is the maximum amount of additional loans that Bigtown Bank could lend out today?
$15 Million
The required reserve ratio is 20%. What is the maximum possible potential deposit multiplier?
5
shadow banking system
a system that is outside the regulation system of commercial banks but provides many of the same banking services
Deposit insurance helps to reduce the likelihood of:
bank runs
Which is NOT a tool used by the Federal Reserve to control the U.S. money supply?
deposit insurance
A country's central bank typically does NOT:
serve as a commercial bank for individual depositors.
The _____ is a 12-person group that plays an important role in determining the policy of the Federal Reserve System.
Federal Open Market Committee
When a central bank buys bonds on the open market, the country's money supply will:
increase
A change in the required reserve ratio will impact a nation's money supply by changing the:
size of the potential deposit multiplier and the amount that is held in excess reserves.
In an economy with money, as opposed to barter, people are more likely to specialize in the production of goods and services. T or F
True
Most U.S. currency held outside the U.S. banking system is held by foreigners. T or F
True
If bankers become more uncertain regarding future deposits and withdrawals and choose to hold more excess reserves against deposits, the money multiplier will increase. T or F
False
The Fed has complete control over the money supply. T or F
False
The study of economics
looks at how individuals, businesses, and governments make decisions about how to use their limited resources.
Suzanne just obtained a car loan at a 5% interest rate. This is a _____ interest rate.
Nominal
The question of whether student loans should or should not be forgiven is an example of:
Normative analysis
A farmer uses soil, seeds, a highly skilled foreman, tractors, and a barn to produce his harvest. Which factor of production is the farmer?
Entrepreneurship
The opportunity cost of an economic model is known as the:
exclusion of real-world complications.
Regarding the circular flow model, _____ is income to households and _____ to businesses.
money; an expense
Ensuring that the optimal mix of goods and services is produced is known as:
allocative efficiency.
According to the law of demand, ceteris paribus, when the price of roses goes up, what happens to the quantity demanded for roses?
Because the price has increased, fewer roses are demanded.
As the price of the dog food that Michelle feeds her dog falls, Michelle has more purchasing power. This is an example of the _____ effect.
income
The sum of individual demand for a product at each price is:
market demand
____ is the maximum price of a good or service that the consumer puts on it.
Willingness to pay
When price increases, producer surplus could increase because:
new sellers enter the market.
What statistic measures the average price level that is faced by citizens of a country as they make their household purchases?
CPI
Letitia is doing some comparison shopping by looking at the prices of goods at several stores. When she does this, she is using money as a:
Unit of Account
Gold coins used as money are an example of _____ money.
Commodity
How does M2 differ from M1?
M2 include M1 plus time deposits
The monetary base equals:
currency in circulation + reserves held by banks
A banking system has $200 billion in deposits and $50 billion in total reserves. The reserve requirement is 20%. How much does the banking system have in excess reserves?
$10 billion
What is fractional reserve banking
Banks are required to hold only a set proportion of total deposits in reserve.
If the reserve requirement is 10%, what is the size of the money or deposit expansion multiplier?
10
The multiplier used to assess the impact of monetary policy on the economy is equal to:
one divided by the required reserve ratio.
In most countries, the central bank does NOT:
serve as a bank for corporations.
What group at the Federal Reserve is responsible for conducting the monetary policy of the United States?
Federal Open Market Committee
Why is a "real" measure used as the basis for a nation's economic growth rate?
This is an adjustment for the cost of living, so the measure captures growth of output rather than price.
A nation's total real GDP is NOT used as an indicator of the living standard of the people in the nation because it:
does not take into consideration the population of the nation.
With sustained economic growth, the production possibilities frontier of a country:
shifts outward farther from the graph's origin.
Which of the following factors does NOT impact productivity?
labor force participation rate
What term is used to describe a situation in which laws, customs, or practices in a society give select groups the ability to gain wealth by draining it from the population at large?
extractive institutions
Worker productivity can be improved through investments in:
healthcare, education, and infrastructure.
Which of the following is NOT a component of GDP when calculated by the expenditure approach?
salaries
How does the consumer price index (CPI) differ from the personal consumption expenditure (PCE) index?
PCE is chain-weighted, and the CPI has a fixed market basket.
Which of the following statements is NOT true regarding recent economic data in the United States?
The female unemployment rate is considerably higher than the male unemployment rate.
Jim Clifton of the Gallup polling company has called the U3 unemployment rate a big lie because:
it fails to include discouraged workers and underemployed as part of the unemployed.
According to the text, which of the following is the best way to define economic growth?
sustained increases in a nation's real GDP per capita over time.
If Macroland has a higher economic growth rate than Econia over a twenty-year period, then Macroland's production possibilities frontier (PPF) will:
shift outward more rapidly than Econia's PPF during the time period.
Which of the following is NOT a way that economic growth is often harmed when corruption is widespread?
Taxes are raised on everyone, which adds the efficiency of all firms.
Peter, a high school student with a part-time job, saves some money each payday, believing that it will provide him with the purchasing power to buy books and pay tuition when he attends college in two years. He is relying heavily on money as a:
Store of Value
What connection does the underground economy have to the money supply?
The underground economy often uses currency for its transactions.
The shadow banking system is:
a system that is outside the regulation system of commercial banks but provides many of the same banking services.
Opportunity Cost is defines as
the highest value alternative that must be given up to engage in an activity
In a market economy, those who are willing and able to buy what is produced
receive the most of what is produced
The processes used to produce goods and services describes
technology
Comparative Advantage
the ability to produce a good at a lower opportunity cost than another producer
The income effect of a price change results in a
movement along the demand curve due to change in purchasing power brought about by the price change
If the price of gasoline increases significantly, then what will be the impact in the market for public transportation
the demand curve shifts to the right
One would speak of a movement along a supply curve for a good, rather than a change in supply, if
the price of the good changes
Real GDP will increase
only if the quantity of final goods and services produced rises.
Which of the following labor market statistics best indicates the amount of labor that is available to the economy from a given-working age population
labor force participation rae
An advantage of the establishment survey over the household survey of the labor market is that the establishment survey
is based on actual payrolls, rather than on unverified answers
If the price level rose in three consecutive years fro 100 to 120 to 140, then the annual inflation rate over those years would
decrease
Which of the following price indices comes closest to measuring the cost of living of the typical household
consumer price index
What does PPI measure?
average of the prices received by producers of goods and services at all stages of the production process
A nation's output rises by 3%, and its average price level rises by 2%. This means that the nation's nominal GDP rises by ____ and real GDP rises by____
5% and 3%
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