With voluntary exchange,
Both the buyer and seller are better off.
A person in the civilian labor force falls into one of two categories:
Unemployed or employed
A person is unemployed if he
Is a member of the civilian labor force, out of work, and actively seeking work.
In a market economy, what is produced is ultimately determined by
Gross domestic product is
The market value of final goods and services produced within a country during a time
Which of the following transactions would be included in GDP?
Ms. Bartolini pays $500 to fix the front end of her car damaged in a recent accident.
General Motors Corporation (a U.S. -based firm) produces a Saab vehicle in Sweden, and sells it in the United States. In which country’s GDP is it included?
Sweden because it was produced there.
A firm purchases $400,000 worth of raw materials and pays wages and salaries of $100,000 and dividends of $200,000. If the firm sells its output for $1 million, the firm’s value added to GDP is
If there are 10 job losers, 12 job leavers, 13 reentrants, and 12 new entrants, then there are ___________ employed persons.
Suppose a country had net exports of $8.3 billion and sold $52.4 billion of goods and services abroad. This country had
$52.4 billion of exports and $44.1 billion of imports
Which of the following would increase the GDP of the United States?
A resident of Germany buys a software program form a company in Washington.
Which of the following transactions would be included in this year’s GDP?
Johnson rents a five-year-old house form Smith
One bag of flour is sold for $1.50 to a bakery, which uses the flour to bake bread that is sold for $4.00 to consumers. A second bag of flour is to a consumer in a grocery store for $2.00. Taking these three transactions into account, what is the effect on GDP?
GDP increase by $6.00
Greg, a U.S. citizen, works only in Canada. The value that his labor contributes to U.S. output is
Included in U.S. GNP, but it is not included in U.S. GDP
The unemployment due to the time it takes for unemployed people to locate a job utilizing their transferable skills is called _______________ unemployment.
Double counting in the resource cost-income approach to GDP refers to
Counting the total value of a final output in addition to the value of the inputs used to make
Suppose that the consumer price index (CPI) was 160 in 2007 and 166 in 2008, inflation during 2008 was
If the consumer price index (CPI) was 120 at year end 2008 and 126 at year end 2009, inflation during 2009 was approximately
Suppose that the consumer price index at year end 2008 was 140 and by year end 2009 had risen to 150. What was the inflation rate during 2009?
Which of the following will mostly likely occur during the contractionary phase of a business cycle?
The sales of most business decline, and the unemployment rate rises
Which of the following will most likely occur during the expansionary phase of a business cycle?
Real GDP rises, and unemployment falls
The recessionary phase of the business cycle is characterized by
Decreasing real output and increasing unemployment
Economist usually use the term “recession” to refer to
Two or more consecutive quarters of declining real GDP
Sally is on temporary layoff from her factory job. If Sally participates in the BLS survey, she will be classified as
Unemployed and in the labor force
Macroeconomists define “consumption” as
Purchases by household sector
Mallory Trammell is a homemaker. Last week, she was busy with her normal household chores.
Not a member to the labor force
The population (age 16 and over) of Economic Land is 100 million; 5 million are unemployed, and 70 million hold jobs. The labor force participation rate in Economic Land is
Louise is unemployed due to a decrease in the demand for workers with knowledge of a certain word processing language. This is an example of
The type of unemployment resulting from the fact that labor market information is less than perfect is called
The type of unemployment that occurs because of a recession is called
Economist define full employment as the level of employment that result when
The rate of unemployment is normal, considering both frictional and structural factors
When full employment is present in the United States,
Approximately 95 percent of the labor force will be employed.
Structural unemployment is the result of
Non-transferable job skills
Is the result of transferable job skills
A recession is always part of a
Depreciation refers to a decrease in the value of a good caused by
Wear and tear of capital goods over time
A good that is not counted in GDP
National income equals
Compensation of employees + self-employment income + corporate profits + rental income + interest
GDP is computed by using
Current- year prices
Net exports equals
The difference between exports and imports
If a person is waiting to be called back to a job from which she has been laid off, how is she classified?
As an unemployed persons
The expenditure approach to measuring GDP sums
Consumption, gross private domestic investment, government purchases, and net exports
A dynamic, changing economy will
Experience frictional and structural unemployment
The unemployment due to changes in the type of skills employers require is called ___________ unemployment.
The number of employed persons plus the number of unemployed persons equals the number persons
In the civilian labor force
Jones lost his job in industry A, but he has skills that can be transferred to industry B (which is currently hiring). Smith Lost a job in industry C, but his skills cannot be transferred to industry B or to any other industry. Jones is _______________ unemployed and Smith is _____________ unemployed.
If a person worked at least 15 hours per week as an “unpaid” worker on a family farm house is classified?
As an employed person
In many large retail stores, price markdowns are now determined by computer. The “head manager” who used to make these decisions personally became __________________ unemployed.
The four key markets that coordinate the circular flow of income are:
Goods and services, resources, loanable funds and foreign exchange
If the price level in the current period is higher than what buyers and sellers anticipated
Profit margins will be attractive and firms will expand output.
After-tax income that is not spent on consumption.
As the U.S. price level rises relative to price levels in other countries, what would happen in the U.S.?
Consumption and net exports would decline.
The aggregate demand curve is downward sloping because
At lower price levels, net exports increase, causing an increase in quality demanded of goods and services.
Within the aggregate demand/aggregate supply framework, the quantity produced and purchased in the goods and services market represents
Real output or real GDP
For an economy, aggregate demand equals
Consumption plus investment plus government purchases plus (exports minus imports)
Other things the same, a decrease in the price level makes the dollar people held worth
More, so they are willing to spend more.
If scientific research produces a technological breakthrough in the production of memory, then
Business cost will fall, profits will improve and production will increase.
The aggregate supply curve indicates the
Quantity of goods and services producers will supply at different price levels
When an economy is in a long run equilibrium
The actual and natural rates of unemployment will be equal.
The actual rate of unemployment will be greater than the natural rate of unemployment when
The actual output is less than the economy’s potential output.
An unexpected sharp reduction in inflation will most likely result in
A temporary increase in unemployment and a decline in real output.
The “loanable funds market” is a term used by economists to describe the
Market that coordinates the borrowing and lending of individuals and firms.
The price that a person must pay in order to acquire purchasing power now rather than in the future is called
The interest rate
The nominal (money) rate of interest
Is the real rate of interest plus the inflationary premium
The money interest rate may be misleading indicator of real borrowing costs when
The inflation rate is high
Suppose people anticipate inflation will be 5 percent during the next several years. If the real rate of interest is 4 percent, the money rate of interest must be
Which of the following will most likely accompany an unanticipated increase in aggregate demand?
An increase in real output
Which of the following will most likely result from an unanticipated decrease in aggregate supply due to unfavorable weather conditions in agricultural areas?
An increase in the general level of prices
When output is less than the economy’s long-run capacity, which of the following is most likely to occur?
Reduction in real interest rates and real resource prices.
An anticipated change is an economic occurrence that
Is foreseen by most economic participants.
An unanticipated economic event is change that
Catches most people by surprise.
If a currency depreciates a country’s net export
Rise and AD increases
If a currency appreciates a country’s net export
Fall and AD decreases
If Asian economies suffer a serious economic slump, U.S. net exports will
Decrease and AD will shift leftward
Which of the falling will lead to an increase in aggregate demand in the United States?
An increase in wealth due to a substantial appreciation in the value of stocks
Which of the following factors would increase aggregate demand in the good and service market?
Increased optimism on the part of consumers and businesses.
Other things constant, a reduction in the real interest rate will
Induce businesses to increase their level of investment.
Within the framework of the AD/AS model, if consumers and investors become more pessimistic about the future direction of the economy, this will lead to a
Decrease in aggregate demand
An increase in the consumer sentiment index indicates that consumers are
Become more optimistic abut their future income and employment prospects.
An increase in the exchange rate value of the U.S. dollar, relative to the Japanese yen, will cause U.S. imports from Japan to
Increase and exports to Japan to decrease.
If the exchange rate value of the dollars depreciates relative to other currencies, we would expect
U.S. exports to increase.
An improvement in technology would shift which of the following curve(s)?
Short-run and long-run aggregate supply.
When an economy is in a recession
The unemployment rate will rise above it’s natural rate.
The 1930s were a period of
Depressed economic conditions and prolonged high rates of unemployment
An analysis of housing prices between 1987 and 2008 indicated that prices
Increased sharply in the five years leading up to the housing bust in 2007
During 1979 – 2005, the mortgage default rate
Was generally between 1 and 2 percent
Which of the following is most central to the understanding of the economic crisis of 2008?
The housing boom (2001-2005) and bust (2007-2008)
The persistence of budget deficits during the last several decades is not surprising because politicians will find
Budget deficits more attractive than budget surpluses
Other things being constant, countries with higher rates of saving
Will have higher rates of investment and growth
The supply-side effects of a reduction in taxes are the result of
Increased attractiveness of productive activity relative to leisure and tax avoidance
The tax reductions increases in defense expenditures, and budget deficits of the 1980s are characteristics of
Expansionary fiscal policy
According to the crowding-out theory, expansionary fiscal policy will lead to
Higher interest rates, an appreciated dollar, and reduced net exports
Crowding out refers to the situation in which
Borrowing by the federal government raises interest rates and causes firms to invest less
Which of the following will be most likely to dampen the expansionary effects of an increase in government spending financed by borrowing?
The increase in demand for loanable funds as the result of borrowing will cause interest rates to rise and private investment to fall
Which of the following is true?
The FDIC sets the reserve requirements for commercial banks
Advocates of the crowding-out effect maintain that the large budget deficits during the recession of 2008-2009
Will lead to a slower recovery than would have been the case if government borrowing had been more restrained
According to new classical economists, the most appropriate policy during a recession would be for the government to
New classical economists believe that an increase in deficit financing by the government will
New classical economists stress that an increase in government expenditures financed by borrowing rather than taxes will
Affect the timing of taxes but not their magnitude
As the marginal propensity to consume (MPC) decreases, the spending multiplier
As the marginal propensity to consume (MPC) increases, the spending multiplier
Which of the following most accurately indicates the political incentive to spend and/or tax?
Politicians are rewarded for providing programs that benefit their constituents and punished for raising taxes
According to the Keynesian view, the proper response to a severe recession would be
An increase in government spending financed by borrowing
According to non-Keynesians, how will an increase in government spending financed by borrowing during a recession affect recovery?
Higher future taxes and interest rates will be required to finance the larger debt and this will weaken the recovery
Supply-side economics stresses that
Changes in marginal tax rates, exert important effects on real output and employment
Which of the following is a problem with discretionary fiscal policy as an economic stabilization tool?
It is difficult to properly time discretionary changes in fiscal policy
Which of the following is an important insight of Keynesian analysis?
When widespread unemployment is present, increases in aggregate demand will exert a larger impact on real output than when the economy is operating at near full employment
A major advantage of built in or automatic stabilizers is that they
Require no Congressional action to be effective
The 1930s were a period of
Depressed economic conditions and prolonged high rates of unemployment
The Keynesian model provided an explanation for
The prolonged unemployment of the 1930s
Keynes rejected the view that lower wages would direct a recessionary economy back to full employment because
Powerful trade unions and large corporations made wages highly inflexible
In the Keynesian view, equilibrium takes place when
The level of total spending in the economy is equal to current output
Within the framework of the Keynesian model,
Changes in output rather than changes in price direct the economy to equilibrium
Keynesian analysis indicates that an unexpected decline in aggregate demand will lead to
An increase in inventories and a reduction in output
When aggregate demand exceeds current output, Keynesian analysis indicates that
Unplanned inventory reductions will cause output to fall
The marginal propensity to consume is defined as the
Proportion of any change in income that is spent on consumption
The primary tool of fiscal policy is
The federal budget
A balanced budget is present when
Government revenues equal government expenditures
When the federal government is running a budget deficit,
Government expenditures exceed government revenues
If the federal government is running a budget surplus,
It will be able to reduce its outstanding debt
Changes in government spending and/or taxes as the result of legislation is called
Discretionary fiscal policy
Fiscal policy designed to increase aggregate demand during economic downturns and decrease aggregate demand during economic booms is called
Countercyclical fiscal policy
Unemployment compensation payments
Rise during a recession and thereby help stimulate consumption
When an economy dips into recession, automatic stabilizers will tend to
Enlarge the budget deficit (or reduce the surplus)
When an economy expands into an economic boom, automatic stabilizers will tend to
Reduce the budget deficit (or increase the surplus)
Long lags make discretionary policy less effective because
By the time the impact of policy is felt, the problem may have been corrected by market forces
Higher standards of living are the result of
An increase in the availability of goods and services that people value
Public choice analysis indicates that politicians will find
Budget deficits more attractive than budget surpluses
Both Keynesian and non-Keynesians now recognize
The difficulties involved in timing discretionary changes in fiscal policy in a stabilizing manner
Which of the following is most likely to increase the incentive to invest, produce, and employ others?
A reduction in tax rates
Within the framework of the AD-AS model, an increase in savings by households will
Increase the supply of loanable funds and reduce interest rates
Since the mid-1980s, the debt-to-income ration of American households
Has rapidly increased
When families are heavily indebted and have little or no savings,
They are in a poor position to deal with unanticipated expenses
As measured by the budget deficit as a share of GDP, fiscal policy was
More expansionary during the 1980s than the 1990s
Keynesian critics would argue the expansion in government debt during a recession would lead to
Higher future interest payments and tax rates
According to the paradox of thrift, if many families decide to save an additional $200 a month, this would lead to
A reduction in total output and little or no increase in total savings
A person’s marginal tax rate determines the percentage of
Additional earnings that the individual is permitted to keep
Whatever is generally accepted in exchange for goods and services
In the United States, the purchasing power of money is determined by
The value of U.S. treasury bonds that back each unite of currency.
Which of the following in not a part of the M1 money supply?
Outstanding balances on credit cards.
Ordinary commercial banks can expand the supply of money by
Using a portion of their deposits to extend additional loans.
Why did the monetary base increase rapidly during the economic crisis of 2008?
The Fed increased both its purchase of assets and quantity of loans extended.
One advantage of a money system compare to a barter system is that
Money is more efficient.
In the modern U.S. economy, most transaction are made with
Stores need not accept your check but must accept currency because
Checks are not money but currency is.
In order for barter to occur, trader must have a
Coincidence of wants.
Which of the following is the best definition of money?
Anything generally accepted as a payment for goods or repayment of debt.
If money were not used as a medium of exchange
The gains from trade would be severely limited
A barter economy is one in which
Goods are traded directly for other goods.
Which of the following assets is most liquid?
Funds in a checking account
Money is used as a unit of account. This means
Money is used to measure the exchange value and costs of goods, services, assets and resources.
When the interest rate decreases, the opportunity cost of holding money
Decreases, so the quantity of the money demanded increases
The value (purchasing power) of each unit of money
Is inversely related to the general level of prices.
When the monetary authorities expand the supply of money rapidly,
Holding money is a poor method of storing value.
In the United States, the money supply (M1) consists of
Coins, paper currency, demand deposits, other checkable deposits and traveler’s checks.
Which of the following compose the M2 money supply?
M1 plus savings deposits, small-denomination time deposits, and money market mutual funds.
Are outstanding credit card balances counted as part of the money supply?
No; money is an asset, while the credit card balances are a liability. Thus, they are not including in the money supply figures.
Which of the following is not a depository institution?
Hold only a fractions of their assets in the form of reserves against their deposits.
A system that permits banks to hold less than 100 percent of their deposits as reserves is called a
Fractional reserve banking system.
Banks are considered a safer place to deposit money now than they were prior to 1933 because
The creation of the FDIC reduced the likelihood of banks runs.
The immediate effect of a member bank’s sale of the U.S. government securities to the Fed is
An increase in that bank’s excess reserves.
The conduct of monetary policy is the responsibility of
The federal reserve system
What is the length of the term of the member of the Board of Governors of the Federal Reserve System?
Decisions to buy or sell securities at the Fed are made by
The federal open market committees.
The primary source of revenue for the federal reserve is
The interest earned on the bonds held by the Fed.
Which of the following would cause the money supply in the United States to expand?
A decrease in reserve requirements
The discount rate is the interest rate
The federal Reserve charges banking institution for borrowing its funds
The federal funds market is the market where
Commercial banks with excess reserves make loans to commercial banks seeking reserves.
During the economic crisis of 2008, the Fed acquired the authority to
Pay interest to commercials banks on their reserve
If the Fed wanted to shift to a restrictive monetary policy and reduce the money supply, it could
Increase the interest rate on excess reserves encouraging banks to hold excess reserve rather than extend more loans.
During the financial crisis of 2008, Fed policy
Approx. double the monetary base
The three basic functions of money are
A medium of exchange, a store of value, and unit of account.
The velocity of money is
The average number of times one dollar is used to buy goods and services during a year.
When the actual federal funds rate is substantially below the rate called for by the Taylor rule, this indicates that
Monetary policy is overly expansionary and a shift toward a ore restrictive policy would be appropriate.
According to monetarists, which of the following would be most important for control of inflation?
Keeping the growth rate of the money supply low and steady.
The cost of holding money balances increases when
The nominal interest rate increases
If the federal Reserve sells bonds, the short run effects will be
A decrease in the money supply and higher real interest rates
In the short run, an unanticipated shift to a more expansionary monetary policy is most likely to result in
An increase in employment
In the Fed unexpectedly shifts to a more expansionary monetary policy, which of the following will most likely occur in the short run?
A decrease in real interest rate.
When the Fed buys bonds and injects additional reserves into the banking system, this action will
Place downward pressure on short term interest rates.
Unanticipated restrictive monetary policy would tend to cause
Real interest rates to rise
If the fed unexpectedly shifts to a more restrictive monetary policy, which of the following will most likely occur in the short run?
An increase in unemployment
If the Fed seeks to constrain inflation, it would be most likely to
Sell government bonds to banks in order to reduce the amount of loanable funds.
If there is a recession, the Fed would most likely
Increase bank reserves by buying government securities
If the economy is in an inflationary boom, the Fed would most likely
Restrict bank lending by selling government securities
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