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Exam 3 Questions
| Question | Answer |
|---|---|
| A bank acts as ____ between buyers and sellers | an intermediary |
| A budget deficit is | the amount of money the government spends beyong the net revenue it brings in |
| A default happens when | a borrower fails to pay back a loan according to the agreed upon terms |
| The demand for loanable funds comes from ____ | investment |
| Diversification is | the process by which risks are shared among many different assets or people |
| A dividend is | a payment paid periodically to all shareholders of a company |
| A financial market is where people trade ____ | future claims on funds or goods |
| Government decisions about the level of taxation and public spending are called ____ | fiscal policy |
| Graph: Assuming the economy is represented by the graph shown, if the government were to enact an expansionary fiscal policy, it would be most likely to move from | equilibrium A to B |
| The idea that if government cut taxes, but not spending, people will not change their behavior, and expansionary policy will have little expansionary effect is known as | Ricardian equivalence |
| If an asset is considered liquid, then it ____ | can be sold quickly for cash without much loss of value |
| If Howard takes a $400 loan for one year at 5 percent interest annually, he will pay back a total of ____ | $420 |
| If the government undertakes expansionary fiscal policy, it | must want to encourage economic activity |
| If the government were to increase its spending, it would expect | aggregate demand, shift to the right |
| If the government were to increase taxes, it would be enacting | contractionary fiscal policy |
| If the government wishes to increase GDP by $1200b, and the MPC is .75, it should | increase its spending by $300b |
| If the MPC is .75, then the taxation multiplier must be | -3 |
| If the MPC were to increase from .75 to .80, then the government spending multiplier would | increase from 4 to 5 |
| In general, financial assets that have a __________ amount of risk have a ___________ rate of return. | higher; higher |
| The interest rate | 1. is the price for borrowing money for a specified period of time 2. is expressed as a percentage per dollar borrowed and per unit of time 3. determines the total amount that must be paid back on a loan |
| Intermediation is the process of | bringing together buyers and sellers in a market |
| The marginal propensity to consumer 0.8, the government spending multiplier must be | 5 |
| One reason the government enacts fiscal policy instead of waiting for the economy to correct itself is | the automatic adjustment can take a very long time |
| The process of deciding on and passing fiscal policy legislation creates | a formulation lag |
| The reduction in private borrowing that is caused by an increase in government borrowing is called | the crowding out effect |
| The risk free rate is | the interest rate at which one would lend if there were risk of default |
| Speculators in the financial market | buy and sell assets for financial gain |
| When an economy is in a recession, discretionary fiscal policy would call for _________, and the automatic stabilizers would __________. | lowering tax rates; lower tax revenues |
| When current economic conditions are bad, people are _________ inclined to save, and when they predict bad future economic conditions they are ________ inclined to save now. | less; more |
| When the U.S. economy hits a recession, fiscal policy | automatically become expansionary because average tax rates go down and spending on welfare programs goes up |
| 3 reasons why SRAS is upward | Contracts make some wages and prices "sticky" Firms are often slow to adjust wages Menu costs make some prices sticky |
| 4 monetary goals of the FED | Price stability High employment Stability of financial markets and institutions Economic growth |
| Aggregate demand (AD) curve: | A curve that shows the relationship between the price level and the quantity of real GDP demanded by households, firms, and the government. |
| Aggregate demand and aggregate supply model: | A model that explains short-run fluctuations in real GDP and the price level. |
| The aggregate demand curve shows the relationship between the price level and real GDP demanded, holding_______ | everything else constant |
| Banks might choose to hold reserves over and above the legal requirement; | these are excess reserves. |
| But knowledge capital is nonrival and nonexcludable—a public good—and hence results in | increasing returns—not at the firm level, but at the economy level. |
| By lowering the discount rate, the Fed encourages | banks to borrow (and hence lend out) more money, increasing the money supply. Raising the discount rate has the opposite effect. |
| A change in some component of aggregate demand, | will shift the AD curve. |
| A change in the price level not caused by factors that would otherwise affect short-run aggregate supply | results in a movement along a stationary SRAS curve. |
| expansionary monetary policy when it | takes actions to decrease interest rates to increase real GDP. |
| An economic growth model seeks to | explain growth rates in real GDP per capita over the long run. |
| expansionary monetary policy when it | takes actions to decrease interest rates to increase real GDP. |
| FED causes interest rates to FALL | investment spending will rise |
| Greater government expenditures and lower taxes describe __________ policy | Expansionary Fiscal |
| What would Expansionary Fiscal policy do to the budget deficit? (increase or decrease) | increase |
| ___________ , Political business cycle, Consumer expectations are three real world problems that limit the effectiveness of fiscal policy? | Time lags |
| The purpose of expansionary fiscal policy on the macro-economy is to stimulate ____ in order to increase employment, output/real GDP. | AD |
| (Increased or Decreased) government spending and (Increased or Decreased) taxes is fiscal policy from the federal government that signals that it is trying to slow down the economy? | Decreased, Increased |
| What is the central bank that is in charge of monetary policy called? | Federal Reserve |
| _____________, reserve requirements, the discount rate are the three tools of monetary policy mentioned in class? | Open market transactions |
| If the Fed do if they were trying to slow down or contract the economy they could ________ discount rate, ______ bonds to _______ the federal funds rate. | increase, sell, increase |
| What is the most commonly used tool of monetary policy and who votes on it? | Open market operations |
| The Fed targets the _____________ because this interest rate is the rate which member banks charge each other for overnight, short-term loans and thereby affects all other interest rates in the economy in the same direction. | federal funds rate |
| What are the functions of money? | Unit of account, store of value, medium of exchange |
| What do you call money that doesn't have intrinsic value? | Fiat money |
| What action taken by the Fed in the open market operations that would increases the money supply? | Buy bonds |
| When the Fed buys bonds to increase the money supply this (increase or decrease) the Federal funds rate which causes price or interest rates to (increase or decrease). This would also (increase or decrease) aggregate demand | decreases, decrease, increase |
| The supply of money curve is _______ and the vertical axis measures the _____________. | perfectly inelastic, Interest Rate |
| AS is _______-sloping and AD is _________-sloping | upward, downward |
| An increase in AD leads to __________ GDP, economic growth but danger of __________ inflation. | increased, demand-pull |
| _________ inflation depicted on the AS-AD graph by AS shifting left. | Cost-push |
| An advancement in technology would (increase or decrease) price level and (increase or decrease) real GDP. | decrease, increase |
| The business cycle is defined as alternating rises and declines of economic activity as measured by real GDP, caused by shifts in AS and AD, which are caused by _________, __________, and _________ factors | internal, external, policy |
| What is the title of the graph that indicates the different combinations of goods and services an economy can produce given the available resources? | Production Possibilities Curve |
| A price ceiling placed under the market-clearing price leads to _____________ | shortage |
| When the federal government needs to borrow money to finance deficit spending, what happens when interest rates rise and private investment drops? | Crowding out |
| An institution where buyers and sellers can meet and transactions take place. | market |
| The market clears and there are no shortages or surpluses must mean that a market is in ___________. | equilibrium |
| GDP, expenditure approach formula | GDP = C + I + G + (EX - IM) |
| expenditures by consumers on goods and services | personal consumption expenditures (C) |
| the difference between exports and imports; can be positive or negative | net exports (EX - IM) |
| The two topics of primary concern in macroeconomics are: | Short-run fluctuations in output and employment and long-run economic growth. |
| The term "recessions" describes a situation where: | Output and living standards decline. |
| Which of them following statements is most accurate about advanced economies? | Economies experience a positive growth trend over the long run but experience significant variability in the short run. |
| Real GDP measures the: | Value of final goods and services produced within the borders of a country, corrected for price changes. |
| If the prices of all goods and services rose, but the quantity produced remained unchanged, what would happen to nominal and real GDP? | Nominal GDP would rise, but real GDP would be unchanged. |
| Why are high rates of unemployment of concern to economists? | There is lost output that could have been produced if the unemployed had been working. |
| Why are economists concerned about inflation? | Inflation lowers the standard of living for people whose income does not increase as fast as the price level. |
| The 3 statistics that are the main focus for those measuring macroeconomic health are: | real GDP, Inflation, and unemployment. |
| Before the period of modern economic growth: | Rates of population growth virtually matched rates of output growth. |
| Which of the following is used to measure directly the average standard of living across countries? | GDP per person. |
| Savings are generated whenever: | current income exceeds current spending. |
| When economists refer to "investment", they are describing a situation where: | resources are devoted to increasing future output. |
| For an economy to increase investment, it must: | Increase saving. |
| Banks and other financial institutions: | promote economic growth by helping to direct household saving to business that want to invest. |
| Shocks to the economy occur: | when the expectations are unmet. |
| Which of the following is an example of a demand shock? | Consumers become worried about job loss and buy fewer goods and services than expected. |
| Supply shocks: | occur when sellers face unexpected changes in the availability and/or prices of key inputs. |
| When demand shocks lead to recessions, it is mainly due to: | price inflexibility. |
| What is a way of measuring an economy's performance? | The level of economic activity |
| What happens in the product market of a circular flow? | Final goods and services come from businesses to households and Money for goods and services come from households to businesses |
| Why must the dollar value of total output equal total income? | Every transaction simultaneously involves an expenditure and a business receipt |
| What are the two concepts of the circular flow? | The seller receives exactly the same amount that the buyer spends, money payments flow in one direction while goods and services flow in the other |
| What is the expenditure approach? | Adding up the dollar value at current market prices of all final goods and services |
| What is the income approach? | Adding up all components of national income including wages, interest, rent, and profits |
| What is the equation for GDP using the expenditure approach? | Consumption + Investment + Government + Net Exports |
| What is the purpose of GDP? | The value of output (based on price of product) and how much expenditures people make |
| What is GDP measured by? | Geographical area |
| What does the GDP measure the dollar value of? | Final output |
| What is excluded from the calculations of GDP? | Financial transactions, Government and Private transfer payments, Secondhand goods, Black market transactions (Legal and Illegal), Household Production |
| What are indirect business taxes? | All business taxes except the tax on profits, sales and property |
| What are nominal values? | Measurements in terms of the actual market prices at which goods are sold; expressed in current dollars |
| How can measuring economic activity using GDP be misleading? | Prices might change |
| How do you calculate an accurate measurement of GDP? | Base it on a constant price |
| How do we define economic growth? | Can be shown graphically by shifting the PPC outward, reflects the fact that more of all goods can be produced within the economy |
| What are the factors that affect economic growth? | Increase in labor productivity, Amount of savings, International trade, Level of technology, Innovation, Human Capital |
| What is the economic growth equation? | Rate of growth of capital + Rate of growth of labor + Rate of growth in the productivity of capital and labor |
| What does distance of shift represent in economic growth? | An increase in productive capacity |
| What is the labor productivity equation? | Real GDP divided by the number of workers |
| What happens when labor productivity increases? | Average output produced per worker increases |
| What is the open economy and economic growth? | Free trade encourages spread of technology |
| Firms should hire workers until the ____________. | value of the marginal product of labor is at least as great as the wage paid. |
| The labor demand curve shows the quantity of labor demanded will decrease as | wages increase |
| Which of the following people are counted as potential workers? | People who are already employed full-time |
| Which of the following would be classified as unemployed? | Someone who is not working and looked for work two weeks ago. |
| The labor force equation is equal to the number employed | plus the number unemployed |
| Structural unemployment can be caused by ____________. | Minimum wage laws, labor unions |
| Which of the following is not true regarding the natural rate of unemployment? | The natural rate of unemployment is 0 percent when the U.S. economy is not in a recession. |
| Unemployment statistics are measured and released by the Bureau of Labor Statistics (BLS), a division of the U.S. Department of Labor. The BLS officially classifies a person as being employed ____________. | if that person holds either a part-time or full-time paid job. |
| The fact that unemployment is lower among workers with a relatively higher level of education can be explained in part by the | principle of optimization |
| Which of the following would not be an example of someone in the labor force? | Mark, 45, a self-made millionaire, who volunteers full-time between several local charities |
| The value of the marginal product of labor is the ____________. | market value of a worker's additional output for a firm. |
| Which of the following factors does not cause a shift in the labor demand curve? | Changes in the wage rate. |
| Which of the following does not cause the labor supply curve to shift? | Changes in the wage rate paid to workers. |
| The demand for labor ____________. | reflects diminishing marginal productivity. |
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tacobatman
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