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Note cards - Chapters 1 - 16 Macroeconomics

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

net exports

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.

national income

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

Corporate profits

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

Network effects

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

Demand-pull inflation

occurs when total spending exceeds the economy's ability to provide output at the existing price level

Cost-push inflation

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

interest-rate effect

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

ratchet effect

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

deposit insurance

a major deterrent to bank panics in the United States

Bank panics

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.

Open-market operations

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

Taylor rule

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

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