The business cycle has two phases,
| The business cycle has two phases, | E) recession and expansion. |
| 2) Identifying and dating business cycles is | ) done by a private organization, the NBER |
| A fall in the real wage rate ________ firms’ profits and leads to ________ in the quantity 3)supplied. | E) raises; an increase Reason: firms hire cheap labor => more output will be produced |
| Moving along the A S curve, when the price level increases the | real wage rate falls and there is an increase in the quantity of real GDP supplied |
| ) A change in the price level | ) changes the quantity of real GDP supplied. |
| Which of the following changes aggregate supply and shifts the aggregate supply curve? | i. change in the price levelii. change in potential GDPiii. change in the money wage rateA ) ii onlyB) iii onlyC) ii and iiiD ) i, ii, and iiiE) i onlyAnswer :C |
| ) Which of the following statements is true? | A ) An increase in potential GDP increases aggregate supply and shifts the A S curveleftward.B) An increase in the money wage rate increases potential GDP.C) A fall in the price level shifts the A S curve leftward.D ) A decrease in potential GDP decreases aggregate supply and shifts the A S curveleftward.E) An increase in the money wage rate shifts the A S curve rightward.Answer : D |
| ) The aggregate supply curve will shift | ) rightward if the money wage rate falls |
| A rise in the price level | decreases the quantity of real GDP demanded. |
| An increase in the price level leads to a | ) movement upward along the aggregate demand curve. |
| Last year the price level increased from 118 to 122. The increase in the price level leads to a 11)decrease in | the buying power of money |
| When the price level rises and increases the demand for money, the nominal interest rate 12)________ and the real interest rate ________. | falls; falls |
| ) When the domestic price level increases, exports decrease and imports increase. Other things 13)the same, this change is illustrated by a | movement upward along the aggregate demand curve |
| If firms’ expectations about the future become pessimistic so that they think future profits will 14)be lower, then | aggregate demand decreases and the AD curve shifts leftward |
| If people’s expectations about future income improve so they think their future income will be 15)higher than previously believed, then the AD curve | will shift rightward because people will increase spending now |
| ) If the Fed increases the quantity of money, then | aggregate demand increases and the AD curve shifts rightward. |
| ) If European economies enter a recession | ) U.S. aggregate demand decreases and the U.S. AD curve shifts leftward. |
| An economy is at a full 18) -employment equilibrium, and then the aggregate demand curve shiftsleftward. As a result, the price level ________ and real GDP ________. | ) falls; decreases |
| ) A combination of declining real GDP and rising price level is referred to as | ) stagflation. |
| If real GDP exceeds potential GDP, then the money wage rate ________, aggregate supply 20)________, and the price level ________. | ) rises; decreases; rises We have Inflationary Gap. To get ride of it, we should reduce the AS by increasingwage rate( less workers will be hired, due to high cost of hiring for firms). |
| A recessionary gap occurs when ________ so that real GDP is ________ potential GDP | aggregate demand decreases; less than |
| When OPEC nearly tripled the price of oil in late 1973 | ) the U.S. price level rose and real GDP decreased.D higher oil prices lowers AS(shifts it leftward) |
| The federal budget is defined as | ) an annual statement of expenditures and tax revenues of the U.S. government. |
| If the federal government has a budget surplus, then it is definitely the case that | tax receipts exceed government expenditures |
| The national debt is the amount | of debt outstanding that arises from past budget deficits |
| Which of the following are two types of fiscal policy? | discretionary, automatic |
| Which of the following is an example of a discretionary fiscal policy? | a decision to increase funding to NASA to send people to Mars(example of govt. expenditure multiplier) |
| In 2001, Congress passed tax laws to reduce income tax rates for all taxpayers. This action is 28)called | a discretionary fiscal policy(example of tax multiplier) |
| The government expenditure multiplier is used to determine the | amount aggregate demand is affected by a change in government expenditure. |
| ) If the government reduces expenditure on goods and services by $30 billion, then aggregate 30)demand | decreases and real GDP decreases. |
| If the economy is in equilibrium with real GDP less than potential GDP, there is ________ gap 31)and a fiscal policy that ________ is appropriate | a recessionary; increases aggregate demand(we can change AD(by increasing G or tax cut: discretionary fiscal policy) instead ofchanging AS.) |
| To eliminate a recessionary gap, the government can ________ government expenditures on 32)goods and services or ________ taxes | increase; decrease(Tax cut and increase in govt. Expenditure increases AD and eliminated the gap) |
| When an economy faces an inflationary gap, an appropriate fiscal policy is to | decrease government expenditure |
| ) Automatic stabilizers are defined as | ) policy that stabilizes without the need for action by the government. |
| An increase in government expenditure can ________ potential GDP and an increase in taxescan ________ potential GDP. | ) increase; decrease |
| ) An increase in taxes on labor income shifts the labor supply curve ________ and the ________. | leftward; after-tax wage rate falls |
| If a tax cut increases people’s labor supply, then | ) tax cuts increase potential GDP |
| ) The monetary policy instrument the Federal Reserve choose to use is the | federal funds rate |
| ) Monetary policy decisions are made by the | Federal Open Market Committee |
| Monetary policy decisions in the United States are made by the | Federal Reserve |
| To change the federal funds rate, the Fed | uses open market operations to change the quantity of money |
| ) In the short run, if the Fed wants to raise the federal funds rate, it | ) instructs the New York Fed to sell government securities in the open market. |
| Which of the following is NOT an effect from a change in the federal funds rate? | change in government expenditures |
| The Fed ________ influence the real interest rate in the short run and ________ influence the 45)real interest rate in the long run. | ) can; cannot |
| In the short run, to decrease the interest rate the Federal Reserve ________ the quantity of 46)money by ________ government securities. | increases; buying |
| When the Federal Reserve increases the Federal funds rate, the quantity of reserves ________,the quantity of money ________, and the quantity of loans ________. | decreases; decreases; decreases |
| ) A change in monetary policy affect | consumption expenditure, investment, and net exports. |
| If the Fed raises the federal funds rate | exports decrease and imports increase because of higher price of dollar |
| ) If the Fed’s policies aim to increase aggregate demand, the Fed must fear | ) recession. |
| If the Fed fears a recession, it | buys government securities.(Buying securities increases the money supply and and lowers interst rate. So,investment, consumption expenditures & net export will increase and boost the AD.) |
| As the Fed lowers the federal funds rate | aggregate demand increases |
| To fight a recession, an appropriate monetary policy would be that the Fed conducts an openmarket operation that ________ government securities, ________ the federal funds rate, and________ aggregate demand. | buys; lowers; increases |
| If the Fed fears inflation, it ________ by ________ government securities. | decreases aggregate demand; selling |
| ) The Fed is concerned that inflation might occur. To help eliminate this possibility, the Fedcould ________ government securities to ________ the federal funds rate in the short run. | sell; raise |
| ) If the A S and the AD curve intersect at a level of real GDP that exceeds potential GDP, then theappropriate monetary policy is one that ________ the federal funds rate and ________ | raises; decreases(n this case, we are above full-employment equilibrium and FED wants to deal withinflation.(we have inflationary gap) |
| If the Fed raises the federal funds rate, eventually the | AD curve shifts leftward and real GDP decreases. |
| If the expected profit rate falls, the demand for loanable funds curve shifts _____ and the real interest rate_____ | leftward; falls |
| The annual growth rate of an economy is 5%. The economy’s GDP will double in about ____ years. | 14 years |
| What is gross investment? | Gross investment is the total spent on capital |
| Government saving is equal to | net taxes minus government expenditures |
| The crowding out effect is the tendency for | higher government budget deficits to decrease investment |
| If real GDP is $6,460 billion, the population is 184.6 million people, and the total labor hours are 170 billion, labor productivity is | $38.00 an hour |
| All of the following are preconditions for economic growth EXCEPT | 1. Property Rights2. democracy3. Free markets (2 only) |
| Growth in the standard of living is measured by the increase in | Real GDP per person |
| The demand for loanable funds curve shows that the higher the real interest rate, the | smaller the quantity of loanable funds demanded |
| In India last year, the growth rate of real GDP was 3.5% and the population grew from 1,000 million people to 1,100 million people. Real GDP per person | decreased by 6.5% |
| If wealth ___ then saving increases, which is shown by a _____ | decreases, rightward shift of the supply of loanable funds curve |
| The neoclassical growth theory predicts that | Real GDP per person grows as long as technology keeps advancing |
| Evidence to support the Ricardo-Barro effect would show that | Government budget deficits have no effect on the real interest rate or investment. |
| Money performs all of the following function EXCEPT serving as a | 1. Medium of exchange2. Unit of Account3. Barter mechanism (Barter Mechanism) |
| An official measure of money in the United States is M1, which consists of the sum of | currency plus traveler’s checks plus checkable deposits |
| What type of deposits can a commercial banks accept? | A commercial bank accepts checking, savings and time deposits. |
| What is the central bank of the United States? | The Federal Reserve System |
| What is not one of the Fed’s monetary policy tools? | Changing the coupon rate |
| The required reserve ratio is the | amount of reserves banks are required by the Fed to be held as a percentage of the bank’s deposits |
| The monetary base is equal to | the sum of coins, Federal Reserve notes, and bank reserves at the Fed |
| The quantity of money demanded will decrease if the | nominal interest rate increases |
| The demand for money does not depend on | the equation of exchange |
| Other things the same, if the Fed increases the quantity of money, the supply of money curve shifts | rightward and the nominal interest rate decreases |
| In the long run, when the Fed increases the quantity of money, the | price level rises |
| Shoe leather costs of inflation arise from the | increase of velocity as inflation rises |
| Inflation at a rate that exceeds 50% per month is called | Hyperinflation |
| The equation of exchange shows that | P=(MxV)/Y |
| The medium of exchange is defined as | ) an object that is accepted in return for goods and services |
| A barter system of payment is | different from a money system of payment because money does not require a doublecoincidence of wants |
| The functions of money are | medium of exchange, unit of account, and store of value. |
| The unit of account is defined as | an agreed upon measure for stating prices of goods and services. |
| Which statement most accurately captures the state of money today? | ) Money today includes bank deposits and currency but not checks. |
| Which of the following statements is true about different methods of payment? | Checks, credit cards, debit cards, and e-checks are all not money |
| M2 consists of | ) M1 plus saving deposits, small time deposits, and money market funds. |
| In part, M1 consists of | i. individual and business checking accounts.ii. currency |
| ________ the quantity of money in the United States. | The Federal Reserve System regulates |
| The Federal Reserve System is organized into | 12 districts, dividing up the United States |
| The Board of Governors of the Federal Reserve is | ) a seven-member board, each one serving a 14-year term |
| Which of the following Federal Reserve banks carries out the decisions of the FOMC | B) the New York Federal Reserve bank |
| The main policymaking committee of the Federal Reserve System is the | ) Federal Open Market Committee |
| The Federal Open Market Committee consists of | ) 12 members, seven of whom are the members of the Board of Governors and five ofwhom are presidents of Federal Reserve banks. |
| The three main policy tools the Federal Reserve System uses to influence the interest rate aresetting the | ) discount rate, open market operations, and setting the required reserve ratio |
| The discount rate is the | price of borrowing funds from the Fed |
| Open market operations are when the Fed buys or sells | ) government securities from banks and the non-bank public |
| The monetary base is equal to | Federal Reserve notes plus coins plus banks’ reserves at the Fed. |
| When the opportunity cost of holding money increases, then | people want to hold less money |
| The relationship between the nominal interest rate, the real interest rate, and the inflation rate is that the | ) nominal interest rate is equal to the real interest rate plus the inflation rate. |
| An increase in the nominal interest rate leads to a | movement upward along the demand for money curve. |
| The demand for money depends on all of the following EXCEPT | the equation of exchange. |
| The relationship between the price level and the demand for money is | ) direct. |
| An increase in the price level leads to a | rightward shift in the demand for money curve |
| When real GDP increases, the demand for money ________ and the demand for money curve________ | increases; shifts rightward |
| The increased use of credit cards leads to | a leftward shift in the demand for money curve. |
| ) The supply of money curve is | vertical because the quantity of money is fixed at any one point |
| ) In the money market, if the interest rate is below the equilibrium level | ) the quantity of money demanded exceeds the quantity of money supplied |
| In the money market, if real GDP increases, then the demand for money ________ and theequilibrium nominal interest rate ________. | ) increases; rises |
| In the long run, an increase in the quantity of money leads to | ) an equal percentage increase in the price level |
| When real GDP equals potential GDP, the quantity theory of money says that an increase inthe quantity of money brings an equal percentage | increase in the price level. |
| The velocity of circulation is defined as the | average speed that dollars circulate in an economy as people use them to buy goods andservices |
| Velocity is V, the quantity of money is M, the price level is P , and real GDP is Y. Which of thefollowing formulas is correct? | ) V = (P × Y) ÷ M |
| Hyperinflation is defined as periods of | inflation over 50 percent per month |
| ) Shoe 39) -leather costs of inflation arise from the | increase of velocity as inflation rises. |
| If inflation is making it difficult for people to estimate the true marginal benefits and truemarginal costs of activities, inflation is leading to | confusion costs |
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