MacroEconomic questions Pearson Exam Prep

Wealth is the value of all the things that people______

own

Saving is the amount of income that is​ _____ in net taxes or spent on​ _____ goods and services.

paid; consumption

A mortgage is a legal contract that gives ownership of a​ _____ to the​ _____ in the event that the​ _____ fails to meet the agreed loan payments​ (repayments and​ interest).

home;lender;borrower

A stock is a certificate of​ _____ and claim to the​ _____ that a firm makes.

ownership;profits

A financial institution is a firm that operates on both sides of the markets for​ _____: It​ _____ in one market and​ _____ in another.

financial capital;borrows,lends

How can the change in U.S. wealth differ from U.S.​ saving?

The change in wealth includes changes in the prices of assets owned and saving excludes these items.

The net present value is the​ _______ flows of money from a financial decision minus​ _____.

Value today of all future; the initial cost of the decision

Net worth is the total market value of what a financial institution has​ _____ minus the market value of what it has​ _____.

lent;borrowed

If the annual interest paid on a​ $500 loan is​ $25, the nominal interest rate is​ _____ percent per year.

If the nominal interest rate is 5 percent per year and the inflation rate is 2 percent a​ year, the real interest rate is​ _____ per year.

5;3

The present value of $250​,three years in the future if the interest rate is 2 percent is?

$235.58

Net present value is the​ _______..

present value of all the future flows of money that arise from a financial decision minus the initial cost of the decision

State the financial decision​ rule:

If the net present value is positive​ _______ and if the net present value is negative​ _______.

take the​ action;

do not take the action

Joe has a term deposit that pays 5 percent a year and its value after two years will be ​$10,000.

What is the present value of​ Joe's term​ deposit?

The present value of​ Joe's term deposit is

​$9070.29

The loanable funds market is the aggregate of all the individual​ _____ markets.

financial

The demand for loanable funds is the relationship between​ _____ demanded and the​ _____ when all other influences on borrowing plans remain the same.

the quantity of loanable​ funds; real interest rate

The supply of loanable funds is the relationship between​ _____ supplied and the​ _____ when all other influences on lending plans remain the same.

the quantity of loanable​ funds; real interest rate

The risk that a​ borrower, also known as a​ creditor, might not​ _____ is called credit risk or default

risk.

repay a loan

The​ _______, the greater is the amount that a household decides to save.

greater a​ household's disposable income and the smaller a​ household's expected future income

The supply of loanable funds is determined by the​ _________. The supply of loanable funds changes when​ _______.

aving decisions of​ households, which are influenced by the real interest​ rate, disposable​ income, expected future​ income, wealth, and default​ risk;

disposable​ income, expected future​ income, wealth, or default risk change

The demand for loanable funds increases and the supply of loanable funds increases.

As a​ result, the equilibrium real interest rate​ _______ and the equilibrium quantity of loanable funds​ _______.

rises, falls, or remains the​ same; increases

The demand for loanable funds increases and the supply of loanable funds decreases.

As a​ result, the equilibrium real interest rate​ _______ and the equilibrium quantity of loanable funds​ _______.

​rises; increases,​ decreases, or remains the same

What happens in the loanable funds market when the real interest rate falls​?

The​ _______ because the​ _______ is the opportunity cost of loanable funds.

quantity of loanable funds demanded increases​;

real interest rate

The ​crowding-out effect is the tendency for a government budget deficit to raise the​ _____ and​ _____ investment.

real interest​ rate; decrease

A government budget surplus​ _______ loanable funds.

Increases the supply of

A government budget surplus​ _______ the real interest​ rate, decreases​ _______.

​Lowers;

private​ saving, and increases investment

A government budget deficit​ _______ loanable funds.

increases the demand for

A government budget deficit​ _______ the real interest​ rate, increases​ _______.

raises;

private​ saving, and decreases investment

What happens in the loanable funds market when a shortage or a surplus​ arises?

When a shortage or a surplus arises in the loanable funds market​ _______.

the real interest rate is pulled to the new equilibrium level

The real interest rate that Alfred is paying to Daisy is​ _______.

2.5%

Tom took out a ​$5,000 loan to buy a boat at an interest rate of 10 percent a year.

He plans to repay the loan after 2 years.

How much will he have to​ pay?

$6050

Consider payment of

​$500​, which will be made three years in the future. The interest rate is 1 percent.

$485.30

The two main official measures of money in the United States today are​ _______.

The two main official measures of money in the United States​ _______ really money.

M1 and​ M2; are

Which of the following are​ money?

Deposits are​ money, checks are not​ money, and credit cards are not money.

What are depository​ institutions?

financial firm that takes deposits from households and firms

The functions of depository institutions include​ _______.

lowering the cost of borrowing

Correct statement about depository institutions.

loans and funds committed for an agreed-upon period of time

Depository institutions provide four​ benefits, which are​ _______.

creating​ liquidity, lowering the cost of​ borrowing, lowering the cost of monitoring​ borrowers, and pooling risk

FDIC insurance helps to minimize the cost of bank failure by​ _______.

limiting the loss of each deposit to amounts over​ $250,000

FDIC insurance brings​ _______ stability to the banking system because​ _______.

more; depositors know that money they have deposited with a bank will be repaid making bank runs less likely

An open market purchase​ _______ the monetary base. An open market sale​ _______ the monetary base.

increases;decreases

A central bank​ _______. A commercial bank​ _______.

is a​ bank's bank;

is a firm that takes deposits from households and firms

The quantity of money that the banking system can create is limited by​ _______.

the monetary​ base, desired​ reserves, and desired currency holdings

We call the leakage of bank reserves into currency the currency​ drain, and we call the ratio of​ _____ to​ _____ the currency drain

ratio.

currency;deposits

If the monetary base increases by​ $1 million and the quantity of money increases by​ $2.5 million, then the money multiplier is​ _____.

2.5

Starting from a​ short-run equilibrium, when the Fed decreases the quantity of​ money, _______.

people enter the loanable funds market and sell bonds

The price of a bond​ _______ and the interest rate in the short run​ _______.

falls;rises

In the long​ run, an increase in the quantity of money​ _______ the interest rate.

does not change

If the interest rate is 5​ percent, do people buy or sell​ bonds? Will bond prices rise or​ fall?

People will​ _______ bonds. Bond prices will​ _______.

sell;fall

Will the interest rate​ change?

The interest rate will​ _______

rise

At an interest rate of 7 percent a​ year, people want to hold ​ _______ money than the quantity​ supplied, so they ​ _______ bonds.

more;sell

How does the price of a bond and its interest rate​ change? The price of a bond​ _______ and the interest rate​ _______.

falls;rises

The quantity theory of money is that in the​ _______, an increase in the quantity of money brings an equal percentage​ _______.

Long run; increase in the price level

The​ long-run historical evidence and international evidence show us that the relationship between money growth and the inflation rate​ _______.

Supports the quantity​ theory, but the correlation is not perfect

If the price level and the money wage rate rise by the same​ percentage, the quantity of real GDP supplied​ _______ and there is a movement up along the​ _______ aggregate supply curve.

does not​ change; long-run

If the price level rises and the money wage rate remains​ constant, the quantity of real GDP supplied​ _______ and

there is a movement up along the​ _______ aggregate supply curve.

increases; short-run

When potential GDP​ increases, _______.

​long-run aggregate supply and​ short-run aggregate supply increase. The LAS and the SAS curve shift rightward

If the money wage rate rises and potential GDP remains the​ same, does the LAS curve or the SAS curve shift or is there a movement along the LAS curve or the SAS​ curve?

a leftward shift of the SAS curve and no change in the LAS curve

the​ "average overall increase across the​ board" wage increase​ _______.

decreases​ short-run aggregate supply because it increases​ firms' costs

When the price​ level, the money wage​ rate, and other factor prices rise by the same​ percentage, there is a movement

along​ ______. Potential GDP​ ______.

the LAS curve​; does not change

When the price level rises but the money wage rate and other factor prices remain the​ same, there is a movement

along​ ______. The quantity of real GDP supplied​ ______.

the SAS​ curve; increases

The aggregate demand curve slopes downward because​ _______.

of the wealth effect and the substitution effect

Aggregate demand​ _______ when a decrease in the quantity of money occurs.

Aggregate demand​ _______ when an increase in expected inflation occurs.

decreases;increases

Which of the following statements illustrates fiscal policy​?

the U.S. government has proposed a hike in the corporate tax rate.

Which of the following statements illustrates monetary

policy​?

The Fed has raised the federal funds rate by 0.3 percent.

An increase in expected future income​ _______.

An increase in the expected future inflation rate​ _______.

increases aggregate demand​ today;

increases aggregate demand today

What is the effect of an increase in expected future profits on aggregate​ demand?

An increase in expected future profits​ _______.

increases aggregate demand today

Examples of fiscal policy that increase aggregate demand include​ ______.

an increase in government​ expenditure, a decrease in​ taxes, and an increase in transfer payments

Why does an international substitution effect​ arise?

An international substitution effect arises because when the U.S. price level​ rises, _______.

people spend less on the more expensive​ U.S.-made items and they spend more on the less expensive​ foreign-made items

Examples of monetary policy that decrease aggregate demand include​ ______.

a decrease in the quantity of money and an increase in interest rates

Inflation results from​ _______.

a persistent increase in aggregate demand at a faster pace than that of the increase in​ long-run aggregate supply

A macroeconomic equilibrium in which real GDP exceeds potential GDP is​ _______ equilibrium.

And one in which real GDP is less than potential GDP is​ _______ equilibrium.

an above full​-employment​;

a below full​-employment

Starting from a​ full-employment equilibrium, an increase in aggregate demand​ _______, and creates​ _______ gap.

increases real GDP above potential​ GDP;

an inflationary

In the long​ run, the money wage rate​ _______, short-run aggregate supply​ _______, and the economy returns to a​ full-employment equilibrium.

rises; decreases

Starting from a​ full-employment equilibrium, a decrease in​ short-run aggregate supply​ _______ the price level and​ _______ potential GDP.

​increases;

decreases real GDP below

How does the economy return to a​ full-employment equilibrium?

The economy returns to a​ full-employment equilibrium as​ _______.

the money wage rate falls

The output gap in the graph is​ _______ because​ _______.

a recessionary​ gap;

potential GDP exceeds real GDP

The output gap in the graph is​ _______ because​ _______.

an inflationary​ gap; potential GDP is less than real GDP

At arrow 1 in the​ graph, the economy is in​ _______ full- employment equilibrium and the intersection of the AD and SAS curves is to the​ _______ of the LAS curve.

a below, left

At arrow​ 2, the economy is in​ _______ full-employment equilibrium and the intersection of the AD and SAS curves is to the​ _______ of the LAS curve.

an above, right

In times of​ recession, the Fed​ _______ the interest rate and​ _______ the quantity of money.

lowers, increases

The defining feature of the classical view of macroeconomics is that the economy is​ __

self- regulating and always at full employment

Classical macroeconomists recommend​ _______.

policies that minimize the disincentive effects of taxes on​ employment, investment, and technological change

The defining feature of the Keynesian view of macroeconomics is that the economy is​ _______.

rarely at full employment

Keynesian macroeconomists recommend​ _______.

policies that actively offset changes in aggregate demand that bring recession

The defining feature of the monetarist view of macroeconomics is that the economy is​ _______.

self-regulating and that it will normally operate at full​ employment, provided that monetary policy is not erratic and that the pace of money growth is kept steady

Monetarist macroeconomists recommend​ _______.

policies that keep taxes low to avoid disincentive effects that decrease potential GDP

What happens in the loanable funds market when the real interest rate rises​?

The​ _______ because the​ _______ is the opportunity cost of loanable funds.

quantity of loanable funds demanded decreases​;

real interest rate

What happens in the loanable funds market when a shortage or a surplus​ arises?

When a shortage or a surplus arises in the loanable funds market​ _______.

the real interest rate is pulled to the new equilibrium level

On January​ 1, 2021,​ Sophie's Sunl ounge owned 4 tanning beds valued at​ $20,000.

During​ 2021, Sophie's bought 3 new beds at a total cost of ​$14,000. At the end of the​ year, the market value of all of​ Sophie's beds was ​$27,000.

Calculate​ Sophie's gross investment and depreciation during 2021.

​Sophie's gross investment during 2021 was ​$14,000.

​Sophie's depreciation during 2021 was ​$7,000

The table provides estimates of an​ economy's wealth and saving in three years.

What are the years in which the change in wealth exceeds​ saving?

What are the years in which saving exceeds the change in​ wealth?

2020 and 2021; none of the years in the table

Choose the correct statement

The real interest rate is the nominal interest rate adjusted to remove the effects of inflation on the buying power of money.

I=

S​ + (T−G​)+ (M−X​)

Candy takes a summer job painting houses. During the​ summer, she earns an​ after-tax income of ​$4,500 and she spends

​$2,500

on living expenses.

What was​ Candy's saving during the​ summer?

total savings during the summer $2,000

the supply of loanable funds is influenced by​ _______.

expected future​ income, and the higher a​ household's expected future​ income, the smaller is its saving today

Choose the correct statement about investment.

A government budget deficit competes with investment for funds.

when the price of a financial asset​ rises, _______.

the interest rate falls

How can the change in U.S. wealth differ from U.S.​ saving?

The change in wealth includes changes in the prices of assets owned and saving excludes these items.

A government budget deficit​ occurs, which​ _______. The real interest rate​ _______.

increases the demand for loanable​ funds;

rises

Private saving​ _______, and investment​ _______

​increases; decreases

Sarah takes out a loan today for ​$14,000 at an interest rate of 2 percent a year. She plans to repay the loan after 5 years.

How much will she have to pay after 5​ years?

$15,457 in 5 years