macroeconomics final exam

Total income households have after paying taxes and receiving government transfers

disposable income

Market failure may occur because

individual actions have side effects that are not properly taken into account by the market

A graphical representation of the relationship between the total quantity of goods and services demanded and the price level

aggregate demand curve

If banks were required to keep 100% of deposits in reserves, they could

make no loans

The point on a business cycle when real GDP stops falling and begins rising

business cycle trough

In the long run, changes in the money supply

affect only the price level but they do not change aggregate output

The double coincidence of wants problem can be solved by

money

An inflationary gap can be closed with

a decrease in government purchases

Monetary policy affects GDP and the price level by

changing aggregate demand

The short-run aggregate supply curve is positively sloped because

wages are sticky or don't readily adjust to changes in economic conditions in the short run

nominal GDP

that year's output times same year price

real GDP

base year price times that year's output

The money spent on domestically produced final goods and services

is the GDP, appears as income to someone, and appears in the circular flow model

Diminishing returns to physical capital means that as more and more physical capital is combined with a fixed amount of human capital with a fixed technology, eventually

additions to aggregate output or real GDP declines

The most important factor affecting a household's consumer spending is

current disposable income

A contractionary fiscal policy is a policy that

reduces aggregate demand by decreasing government purchases

The CPI is used for calculating payments from the U.S. government to individuals. To the extent it is biased upward, this index

raises government expenditures

Physical capital would include

the tools a worker has to work with

In the "paradox of thrift"

increased saving by individuals increases their chances of becoming unemployed

Long-run growth is the sustained upward trend in

aggregate output per person over several decades

When the value of a nation's imports exceeds the value of that nation's exports, the nation is said to have

a trade deficit

Deflation

can cause decreases in output

Among the assets of a bank are

loans

The marginal propensity to save is

the fraction of an additional dollar of disposable income that is saved

The process of bringing down inflation that has been embedded into expectations is called

disinflation

Technological improvements will

shift the production possibility frontier outward

Which of the following is included in GDP

the purchase of a ticket to a Rolling Stones concert

A key insight into macroeconomics is that in the short run the combined effect of individual decisions is

very different from what any one individual intended

The short-run Phillips curve represents the relationship between the unemployment rate and the rate of change in

aggregate price level

Which of the following demonstrates how people respond to incentives to make themselves better off?

more students major in economics when they hear that salaries for economists are rising

In the classical model, it is thought that the long-run

and short-run aggregate supply curves are both vertical

When banks borrow and lend reserves from each other, they are participating in the ______ market

federal funds

The models used in economics

emphasize basic relationships by abstracting from complexities in the everyday world

Conditional convergence suggests

poor countries' growth rates may not catch up to those of richer countries without changes in education and infrastructure

An increase in the supply of money will lead to ___ in equilibrium real GDP and ___ in equilibrium interest rate

an increase; a decrease

A liquidity trap is a situation in which

using expansionary monetary policy is not effective because, the nominal interest rate is almost zero

Contractionary monetary policy involves

decreasing the money supply, increasing interest rates, and decreasing aggregate demand

Medicaid, Medicare and Social Security are examples of

transfer payments

When a local factory closes, why does it spell bad news for the local restaurants?

Unemployed factory workers have lower incomes and are less likely to dine out

Human capital is

the improvement in labor created by education and knowledge that is embodied in the work force

Sources of funds for investment spending are

savings by households, government, and foreigners

The inflation tax is

the decrease in the real value of money held by the public caused by inflation

Long-run economic growth is

higher in countries when it has a strong rule of law and political stability

According to the liquidity preference model, if the Fed increases the money supply, the equilibrium interest rate ____, and this leads to ____ in the quantity demanded of nonmonetary interest-bearing financial assets

falls; a decrease

When the output gap is ____, reflecting an inflationary gap, the unemployment rate is ____ the natural rate of unemployment

positive; below

Among the losers with unexpected deflation are

borrowers

In the simplest circular-flow model, households supply ____ and demand ____

factors of production; goods and services

Decisions about monetary policy are made by

the Federal Open Market Committee

Examples of bank regulations designed to prevent bank runs are

capital requirements, deposit insurance, and reserve requirements

Labor productivity growth can be attributed to

improvement in technological process

The reserve ratio is the

fraction of deposits the banks hold in their vaults plus their deposits at the Federal Reserve

Inflation is a situation where

the average price level increases

An economy is said to have a comparative advantage if it

has the lowest cost for producing a particular good

The value of MPC is

greater than 0 and less than 1

A recession leads to

reduced output, income and living standards, and higher unemployment

The best currently available measure of the standard of living in a country is

the real GDP per capita

Money whose value derives entirely from its official status as a means of exchange is known as

fiat money

Suppose a panel of economists is predicting that a nation's real GDP per capita will double in approximately 20 years. Based upon the Rule of 70, what must be the predicted annual growth rate of real GDP per capita?

3.5%

A recessionary gap can be closed with

expansionary fiscal policy

Among the public goods important for economic growth are

political stability

The long-run aggregate supply curve is vertical because in the long run

all prices are flexible

A cut in taxes will have a greater impact on aggregate demand if it is given to

people with a high MPC

The opportunity cost of holding money is

the difference between interest rates on monetary assets and on nonmonetary assets

A choice made___ is a choice whether to do a little more or a little less of something

at the margin

Gains from trade arise because of

specialization in production

Monetary policy is similar among wealthy countries because the central banks of most countries

try to keep inflation between 2% and 3% per year

The idea that a 1 percentage point increase in the output gap will decrease the unemployment rate by 1/2 of a percentage point is known as

Okun's law

An increase in the aggregate price level

increases the demand for money

Gross domestic product is defined as

consumer spending + government purchases + investment spending + exports - imports

Which of the following combination of assets are considered to be money?

currency in circulation, checkable bank deposits, and travelers' checks

Economists generally believe that a country should specialize in the production of a good or service if

they can produce the product while forgoing fewer alternative products than any other country

The amount of money that people demand is

negatively related to the interest rate

Growth accounting enables us to

estimate the effects of technological progress on economic growth

As a consequence of the existence of a nonaccelerating-inflation rate of unemployment, or NAIRU

there is no long-run tradeoff between unemployment and inflation

Which of the following would shift the aggregate demand curve to the left?

an increase in the interest rate

If the Fed wants to decrease interest rates, it can

increase the money supply by buying Treasury bills

If the multiplier is 4, and investment spending falls by $100 billion, the change in equilibrium income will be

-$400 billion

When the economy is in a recession

tax receipts decrease but unemployment insurance payments increase

To ____ the money supply, the Fed could ____

increase; lower the discount rate

We have to make choices because

resources are scarce and because choices involve a trade-off

Real GDP is nominal GDP adjusted for

changes in prices

a shift to the left of the AD curve could be cause by

increased government purchases, increased government transfers and by decreased taxes

The purpose of macroeconomic policy is to

bring unemployment closer to the natural rate and to reduce the severity of recessions

Treasury bills

usually pay lower interest rates than other short-term assets because they are less risky than other assets

Which of the following is a tool used by the Fed in the conduct of monetary policy?

buying and selling federal government bonds

If the short-run macroeconomic equilibrium is ____ of the economy's potential output, then there is a(n) _____ and the aggregate price level is expected to ____

to the left; recessionary gap; fall

The convergence hypothesis helps explain why

high-income countries tend to have slower growth rates compared to lower-income countries

Monetary base is

the sum of reserves held by the banks and currency in circulation

An upward shift in the consumption function can be caused by

an increase in consumer wealth

If the money supply increases by 10%, in the long run

the price level increases by 10%