The adjustment of the economy to potential real GDP in the long run from a level of real GDP below potential real GDP occurs as nominal wages _______, shifting the short-run aggregate supply curve to the ________.fall; rightIn the static aggregate demand - aggregate supply model, a decrease in interest rates will in the short run lead to ________ in real GDP and ________ in the price level.an increase; an increaseIn the basic AD-AS model, a decrease in the aggregate demand curve would in the long run lead to ________ in the unemployment rate and _______ in the price level.no change; a decreaseIn the static aggregate demand - aggregate supply model, an increase in the corporate income (profit) tax will in the short run lead to ________ in real GDP and ________ in the price level.a decrease; a decrease (if the tax is decreased than real GDP and price level will increase)In the basic aggregate demand and aggregate supply model, which of the following would cause a recession? A decrease infirms' expectations of future profitability of investment spendingIf in Year 1 the price level was 100 and real GDP was $20 trillion and in Year 2 the price level was 105 and real GDP was $21 trillion, then the predominant change that occurred in Year 2 wasan increase in aggregate demandIn the basic aggregate demand and aggregate supply model, a decrease in net exports from a decline in real GDP in the BRIC nations would in the short run lead to _______ in the unemployment rate and a _________ in the inflation rate.an increase; a decreaseWhat would be the appropriate monetary policy if the economy is in a short-run equilibrium below potential GDP?Decrease interest ratesIn the basic aggregate demand and aggregate supply model, which of the following would cause inflation? A decrease ininterest ratesIn the basic aggregate demand and aggregate supply model, which of the following would cause deflation? An increase inincome taxesVelocity Formula(P*Q)/MQuantity Equationthe equation M x V = P x Y, which relates the quantity of money, the velocity of money, and the dollar value of the economy's output of goods and servicesM1currency, demand deposits, traveler's checks, and other checkable depositsM2M1 plus savings accounts, certificates of deposit, and other liquid assetsrequired reserve ratiothe smallest fraction of deposits that the Federal Reserve allows banks to holdAs the economy moves up a given long-run aggregate supply curve,cyclical unemployment does not change.Who is the current Chair of the Federal Reserve?Jerome PowellAs a lender of last resort, a central bank like the Federal Reserve makes loans to "banks" that haveliquidity problemsDuring the 2007-2009 financial crisis, the "run" on investment banks took the form oflenders to investment banks not renewing their short-term loans.What bank assets are counted as bank reserves?Vault cash and bank deposits with the Federal ReserveIf the Federal Reserve lowers the required reserve ration, then thisincreases excess reserves, encourages banks to make more loans, and increases the money supplyWhich of the following best describes how banks create money?Banks create checking account deposits when making loans from excess reservesIn the static aggregate demand- aggregate supply model, an increase in the interest rate by the Federal Reserve will in the short run lead to _________ in the unemployment rate and _________ in the price levelan increase; a decreaseIn the basic AD-AS model, the long-run automatic adjustment mechanism to potential GDP in the long run from a level of real GDP above potential GDP occurs as the __________ shifts to the ___________short-run aggregate supply; leftIn the static (basic) AD-AS model, which of the following would cause deflation?a decrease in foreign real GDPIn the static (basic) AD-AS model, which of the following would cause a recession?an increase in income taxesIf in Year 1 the price level was 100 and real GDP was $18 trillion and in Year 2 the price level was 105 and real GDP was $17 trillion, then the predominant change that occurred in Year 2 wasa decrease (shift to the left) in short-run aggregate supplyIf the economy is in a short-run equilibrium with real GDP above potential GDP, an appropriate monetary policy by the Federal Reserve would bea decrease in business taxesA moderate increase in oil prices will cause the inflation rate to _________ and the unemployment rate to _________increase; increaseA moderate increase in income taxes will cause the growth rate of the economy to __________ and the unemployment rate to _________decrease; increaseGDP is an imperfect measure of economic well-being because it fails to measure what types of production?Household production and the underground economyIn years after the base year, nominal GDP is ____________ real GDP.greater thanIn the base year, nominal GPD is _____________ real GDP.equal toIn years prior to the base year, nominal GDP is ____________ real GDP.less thanWhich two countries have the largest GDP?1) China 2) U.S.Which country has the highest GDP per capita and which country has the lowest?1) Highest- U.S. 2) Lowest- IndiaWhich index measures the degree of inequality in the distribution of family income in a country?Gini indexhousehold surveyinterviews households and measures the unemployment rateestablishment surveyinterviews businesses and measures the employment rate -economists prefer this survey because it is determine by actual payroll records rather than unverified answersunemployment rate formulanumber of unemployed (that are actively looking for work)/labor force x 100cyclical unemploymentunemployment that rises during economic downturns and falls when the economy improvesstructural unemploymentunemployment that occurs when workers' skills do not match the jobs that are availablefrictional unemploymentunemployment that occurs when people take time to find a jobnatural rate of unemploymentthe sum of frictional unemployment and structural unemploymentWhen the economy is at full employment, unemployment is equal tothe natural rate of unemploymentThe unemployment raterises during recessions, falls during expansions, and is always above zero.The employment-population ratio measures thethe percentage of the working-age population that is employedlabor force participation rate formulalabor force/working-age population x 100The price index which is used to measure changes in the cost of living is theConsumer Price Index (CPI)CPI formula100 x (cost of item in current year/cost of item in base year)Inflation Rate Formula(Current year CPI ) - (Earlier Year CPI) / (Earlier Year CPI) x100Substitution Bias (CPI)The inability of the CPI to account for consumers' substitution toward relatively cheaper goods and services, therefore over-estimating the cost of the market basketReal average hourly wage(nominal average hourly wage / CPI) x 100What happens in inflationary periods?The nominal interest rate exceeds the real interest rate, and the real cost of borrowing decreasesWhat happens in deflationary periods?The real interest rate is greater than the nominal interest rate, and the real cost of borrowing increasesRule of 70Doubling time (in years) = 70/(percentage growth rate).The two key factors that cause labor productivity to increase over time arethe quantity of capital per hour worked and the level of technology.Potential Real GDPthe level of GDP attained when all firms are producing at capacity.high point of economic activitypeaklow point of economic activitytroughperiod between the high point of economic activity and the following low pointrecessionperiod between the low point of economic activity and the following high pointexpansionThe unemployment rate ___________ and the inflation rate _____________ during recessionsincreases; fallsThe key idea in the aggregate expenditure model isin any particular year, the level of GDP is determined mainly by the level of aggregate expenditure.What is the effect on inventories, GDP, and employment when aggregate expenditure (total spending) exceeds GDP?Inventories decrease, GDP increases, and employment increases.Macroeconomic equilibrium occurs whentotal spending, or aggregate expenditure, equals total production, or GDPWhat are the four main determinants of investment?Expectations of future profitability, interest rates, taxes and cash flow.Marginal Propensity to Consume (MPC)the increase in consumer spending when disposable income rises by $1MPC formulachange in consumption/change in incomeOn a 45°-line diagram (or Keynesian Cross), the horizontal axis measures_________ while the vertical axis measures _____________.real GDP; real aggregate expenditureOn a 45 degree- line diagram, the macroeconomic equilibrium will bewhere the AE line intersects the 45 degree lineThe multiplier effect is the process by whichan increase in autonomous expenditure leads to a larger increase in real GDP.Multiplier formula1/(1-MPC)The economic definition of money isAny asset that people are generally willing to accept in exchange for goods and services.The central bank of a country controls the money supply, which equals the currency held bythe public plus their checking account balancesM1The most narrowly defined money supply, equal to currency in the hands of the public and the checkable deposits of commercial banks and thrift institutions.M2M1, savings accounts, small time deposits, and money markets (more broad)What is the largest asset and largest liability of a typical bank?Loans are the largest asset and deposits are the largest liability of a typical bank.Bank reserves includevault cash and deposits at the FedHow do banks create money?When there is an increase in checking account deposits, banks gain reserves and make new loans, and the money supply expands.A fractional reserve banking system is one in which banks hold less than 100 percent of ________ as reserves.depositsIn 1913, Congress established the Federal Reserve system with the intention of putting an end tobank panicsThe maturity mismatch that banks face refers to the banks having ________ deposits and ________ loans.short-term; long-termFirms in the shadow banking system were more vulnerable than commercial banks to "bank" runs because in the shadow banking system, unlike the commerical banking system, there wasno federal deposit insuranceThe United States is divided into___________ Federal Reserve Districts. The Federal Reserve Bank's Board of Governors consists of ______________members appointed by the president of the U.S. to 14-year, non-renewable terms. One of the board members is appointed to a ___________ year, renewable term as the chairman.12; 7; 4The four main monetary policy tools used by the Federal Reserve to manage the money supply areopen market operations, discount policy, reserve requirements, and interest on reserves.Open market operations refer to the purchase or sale of ________ to control the money supply.U.S. Treasury securities by the Federal ReserveBy increasing the interest rate on bank reserve deposits at the Fed, the Fed can ________ the level of excess reserves banks are willing to hold, thereby ________ bank lending.increase; decreasingquantity equationM x V = P x Y (M= $ supply, V= velocity, P= inflation rate, real GDP = Y)According to the quantity theory of money, if velocity does not change, when the money supply of a country increases, what will occur?nominal GDP will increaseVelocity formula(P x Y) / MInflation Rate (in terms of quantity equation)Growth rate of the money supply- Growth rate of real outputGovernment Spending equalstax revenue plus the change in bonds plus the change in the money supply.Three ways to pay for government spendingcollecting taxes, borrowing by issuing bonds, or printing moneyautomatic stabilizersgovernment spending and taxes that automatically increase or decrease along with the business cycle.fiscal policyGovernment policy that attempts to manage the economy by controlling taxing and spending.monetary policyGovernment policy that attempts to manage the economy by controlling the money supply and thus interest rates.What is meant by supply-side economics?Supply-side economics refers to the use of taxes to increase incentives to work, save, invest, and start a business in order to increase long-run aggregate supply.If the dollar appreciates against the Mexican peso,U.S. exports to Mexico become more expensiveIf the U.S. dollar depreciates against the Mexican peso,U.S. imports from Mexico become more expensiveIn the aggregate expenditure model, an appreciation in the foreign exchange value of the dollar would cause the aggregate expenditure line to shiftdownward, decreasing equilibrium real GDP.In the short-run model of foreign exchange rates, what variable is on the vertical axis?the foreign exchange value of the dollarThe demand for U.S. dollars is a derived demand forU.S. goods, services, and assets.The supply for U.S. dollars is a derived demand forforeign goods, services, and assets.The demand curve for U.S. dollars is downward sloping because an increase in the foreign exchange value of the dollar makesU.S. goods, services, and assets more expensive to foreigners.Which of the following would shift the demand for U.S. dollars to the left?a decrease in U.S. interest ratesfederal funds ratethe rate that banks charge each other for short-term loans of excess reserves. (short-term nominal interest rate)Quantity equation expressed in growth ratesgrowth rate of the money supply+ growth rate of the velocity of $= inflation rate+ growth of the output (M+V=P+Y)

ECO 202 (Final Exam)

Other sets by this creator

Recommended textbook solutions

Principles of Economics

Krugman's Economics for AP

Principles of Microeconomics

Essentials of Investments

Other Quizlet sets