ECON 201: Macroeconomics Comprehensive Exam Review

Practice fill-in-the-blank flashcards covering economic growth, financial markets, loanable funds, money and banking, the aggregate expenditure model, and aggregate demand.

Economic growth is formally defined as how much __________ grows over time.

real GDP per capita

Prior to the Industrial Revolution, pre-modern economies remained at subsistence due to the __________, in which rising income led to higher fertility and population growth that pushed living standards back down.

Malthusian cycle

According to the Rule of 70, the approximate number of years required for any variable growing at a steady annual rate to double equals __________.

$$70 \div \text{growth rate (\%)}$$

In the aggregate production function $Y = A \times F(K, H)$, the variable $A$ represents an index of __________.

technology

Unlike physical capital, new growth theory posits that knowledge is a non-rival good, meaning that knowledge capital is not subject to __________.

diminishing returns

When an economy increases the amount of physical capital per worker or human capital per worker, it is undergoing __________.

capital deepening

The growth theory concept stating that countries with lower GDP per capita tend to grow faster than wealthier nations, other things being equal, is known as __________.

convergence

To compare money across time, an amount received $n$ years in the future is converted into today's dollars using the formula $PV = \frac{FV_n}{(1 + r)^n}$, where $PV$ stands for __________.

present value

A firm evaluating a business project to maximize wealth under non-risky conditions should undertake the project if its net present value (NPV) is __________.

greater than zero ($NPV > 0$)

A financial institution is considered __________ if its net worth is positive but it cannot meet a sudden demand for cash repayment.

illiquid

In a closed economy with no government or international trade, the real interest rate in the loanable funds market adjusts until saving equals __________.

investment

The national saving and investment identity states that the total supply of financial capital equals total demand: $S + (M - X) = \_\_\_\_\_\_\_\_\_\_$.

$$I + (G - T)$$

According to the national saving and investment identity, an economy that runs a trade deficit ($M - X > 0$) must experience a net __________ of foreign financial capital.

inflow

In the loanable funds diagram shown, increased government borrowing shifts the demand for financial capital from $D_0$ to $D_1$, causing the real interest rate to rise from $5\%$ to $6\%$ and leading to the __________ of private physical capital investment.

crowding out

The proposition that rational, forward-looking households fully offset a government budget deficit by increasing private saving to pay anticipated future taxes is the __________.

Ricardian equivalence proposition (or Ricardo-Barro effect)

Money performs three fundamental functions in an economy: medium of exchange, unit of account, and __________.

store of value

In the United States, the narrow money supply measure $M1$ consists of currency held outside banks, demand deposits, and __________.

other liquid deposits

Small-denomination time deposits and retail money market mutual funds are classified as part of the money stock measure __________ but not $M1$.

$$M2$$

Credit cards are not money because using a credit card creates an immediate __________ that must be repaid later using money.

loan

The monetary base ($MB$) is defined as currency held outside banks plus __________.

reserves of depository institutions

When the Federal Reserve executes an open market purchase of government securities, it pays with newly created bank reserves, which causes the monetary base to __________.

increase

Given a desired reserve ratio $R/D$ and a currency drain ratio $C/D$, the formula for the money multiplier ($MM$) is __________.

$$MM = \frac{1 + C/D}{R/D + C/D}$$

On the Federal Reserve balance sheet, equity is zero, meaning that total central bank assets are strictly equal to __________.

total liabilities

In the equation of exchange $MV = PY$, the variable $V$ represents the __________.

velocity of circulation

Aggregate expenditure ($AE$) is defined as total planned spending on final goods and services: $AE = \_\_\_\_\_\_\_\_\_\_$.

$$C + I + G + NX$$

In national income accounting, actual investment is always equal to planned investment plus the __________.

unplanned change in inventories

In the 45-degree-line diagram shown, the short vertical distance between the aggregate expenditure ($AE$) line and the 45-degree reference line represents the __________.

unplanned inventory change

Short-run macroeconomic equilibrium occurs where planned aggregate expenditure equals real GDP, which means the unplanned change in inventories is __________.

zero

When planned aggregate expenditure is less than total real GDP, goods go unsold, unplanned inventories rise, and firms respond by __________.

cutting production (or producing less)

Because every additional dollar of disposable income is either spent or saved, the sum of the marginal propensity to consume ($MPC$) and the marginal propensity to save satisfies the equation $MPC + \_\_\_\_\_\_\_\_\_\_ = 1$.

$$MPS$$

In the simple aggregate expenditure model without income taxes or imports, the expenditure multiplier is given by the formula __________.

$\frac{1}{1 - MPC}$ (or $\frac{1}{MPS}$)

The Keynesian concept that an attempt by all households simultaneously to save more lowers consumption, aggregate expenditure, and total income in the short run is called the __________.

paradox of thrift

The aggregate demand curve slopes downward because an increase in the price level reduces planned spending through the wealth effect, the interest-rate effect, and the __________.

international-trade effect

In the aggregate demand and aggregate expenditure framework, an increase or decrease in the price level causes a __________ the aggregate demand curve.

movement along

During the shutdown of service industries in the COVID-19 pandemic, the U.S. personal saving rate surged from $7.5\%$ in February 2020 to __________ in April 2020.

$$31.8\%$$