Economics - Macro Flashcards
Macroeconomists are least concerned with?
individual market prices
Since 1900, U.S. real gross domestic product has increased by a factor of?
forty
A historical event that produced a notable decline in the U.S. real gross domestic product?
the Great Depression
The Latin term “per capita” translates most literally to
per head
What equation gives average labor productivity?
Total output in an economy divided by total number of workers employed
In what region of the world is production per person lowest?
South Asia
What term refers to the fluctuation between troughs and peaks in economic activity?
business cyle
Recessions are most associated with?
declining employment opportunities
During which of the following periods did the U.S. aggregate prices fall?
a. 1929 to 1933
b. 1975 to 1979
c. 1939 to 1942
d. 1996 to 2000
e. 2013 to 2017
1929 to 1933
The labor force is made up of the
employed and the unemployed
If a country runs a trade surplus, it is most likely that
exports exceed imports
In 2019, the average output per person in the U.S. economy was closest to?
a. $65,000
b. $110,000
c. $82,000
d. $37,000
e. $173,000
$65,000
What statist appears in the denominator of the unemployment rate?
the labor force
At what rate did inflation during World War I peak?
20%
Since which decade has the U.S. run a trade deficit?
the 1970s
What term refers to the process of combining many different things into a single economic variable?
aggregation
Gross domestic product is defined as the
market value of all final goods and services produced within a country during a specified period
An ice cream shop owner purchases milk from a local dairy farmer to make her product. In this example milk is a?
intermediate good
(goods used in the process of producing a final good)
NewAuto Co. purchases $100,000 worth of steel from a steel producer and converts it into $500,000 worth of automobiles. What is the total value contributed to GDP?
a. $500,000
b. $400,000
c. $1,100,000
d. $100,000
e. $600,000
500,000
(steel is an intermediate good - additions to GDP are the total of the final good in this case the automobile)
In the mid-1600s, Sir William Petty attempted to measure national output to?
assess the Irish’s ability to pay taxes to the British government
Whom did the U.S. Department of Commerce commission in 1932 to develop a system to measure national output?
Simon Kuznets
Which of the following exchanges would be counted towards this year’s GDP?
a. A couple buys plane tickets to Europe.
b. A domestic energy company imports oil from abroad.
c. A family sells a home they have lived in for ten years.
d. A business owner buys a five-year-old piece of capital equipment.
e. A firm sells steel to an auto manufacturer.
A couple buys plane tickets to Europe
Brenda is a local cow farmer. In one year, she produces $500 worth of milk. She sells $250 at a local farmers market and uses the other $250 to make ice cream, which she sells for $400. What is Brenda’s contribution to GDP?
a. $900
b. $150
c. $400
d. $500
e. $650
$650
How do economists conventionally account for national defense when calculating GDP?
They include all national defense expenditures in GDP
How has the increase in women in the paid labor force most affected GDP?
It has resulted in a shift from non-market to market activity
Spending by firms on final goods and services is counted towards GDP as?
Investment
Government purchases do not include?
Social Security payments
(does include public infrastructure investment, military spending, teacher salary, wages to police & firefighters)
For what purpose do economists use REAL GDP?
to isolate the effects of changes in production
Suppose a country produces two goods: jeans and shirts. In 2015, the country produced 20 shirts at $10 each and 10 jeans at $25 each. In 2016, the country produced 30 shirts at $15 each and 15 jeans at $20 each. Using 2015 as the base year, real GDP in 2016 is
a. $450
b. $500
c. $900
d. $750
e. $675
$675
What group calculates the Consumer Price Index in the U.S.?
The Bureau of Labor Statistics
By what means are the components of the market basket for the Consumer price Index determined?
Household surveys
The Consumer Price Index is calculated every?
month
What term appears in the denominator in the calculation of CPI (Consumer Price Index)?
cost of the bundle in base year
According to the substitution effect, if the price of apples increases, then?
households will shift consumption to oranges
What commission found that CPI overstated the rate of price inflation by 1.3% per year?
the Boskin Commission (in 1996)
(3 areas of upward bias are substitution bias, unmeasured quality change, introduction of new goods & services)
What term appears in the numerator in the calculation of GDP deflator?
nominal GDP
What would be a good explanation of why the GDP deflator has risen less than the CPI?
The GDP deflator adjusts to changing consumption patterns
Which of the following adults would the Bureau of Labor Statistics NOT consider to be employed?
a. a basketball player who plays three games per week
b. a financial planner who is on a beach vacation with his family
c. a doctor who has been on sick leave for two weeks due to an injury
d. a research assistant working as an unpaid intern
e. a part-time math tutor who works 10 hours per week
A research assistant working as an unpaid intern (if you make wages/get paid you are employed)
The labor force participation rate is calculated as the ratio of the
labor force to the working-age population - currently about 61%
New workers entering the labor force would be counted in measures of?
frictional unemployment
What causes structural unemployment?
mismatch between job openings and job seekers
The criteria for being considered unemployed state that a person without a job must have looked for one within the past?
four weeks
What group in the U.S. had the highest unemployment rate as of July 2020?
a. women 25 to 35 years old
b. Asian women
c. African American men
d. teenagers
e. Hispanic adults
Teenagers
The diagram that illustrates the set of interactions between the major sets of economic actors in our economy is called the
Circular flow model
Households do not use income to?
buy factors of production
(do use income for: saving money, buy goods & services, paying taxes)
What accounts for most of the variation in GDP per capita?
average labor productivity
Economic growth most directly leads to
improvements in living standards
What do firms receive in return for selling goods and services?
revenue
Machinery is an example of?
Physical capital
(tools & machinery that workers use to produce goods and services)
How is human capital most similar to physical capital?
It is created by sacrificing the current consumption
Human capital is?
a person’s knowledge and skills gained which they use to produce a good/service
What country has a high standard of living due to oil reserves?
Mexico, Saudi Arabia, Germany, England, India
Saudi Arabia
(also Kuwait)
If China’s economy is larger than that of Taiwan, then it MUST be true that
a. China has an absolute advantage over Taiwan
b. Chinese citizens are more productive than Taiwanese citizens
c. China has a higher GDP per capita than Taiwan
d. Chinese citizens have greater consumer surplus than Taiwanese citizens
e. China has fewer trade barriers than Taiwan
China has an absolute advantage over Taiwan
Which of the following countries has the LEAST amount of natural resources?
a. Democratic Republic of Congo
b. the United States
c. Kuwait
d. Japan
e. Russia
Japan
What factor has contributed the most to raising average labor productivity historically?
technology
MOST of the difference in standards of living between North and South Korea can be attributed to differences in
governmental institutions
Why would it be unwise for an economy to invest all its money in human and physical capital?
No goods and sercices would be available to consume
How could an economy incentivize advancements in human capital?
offering subsidies for college education
What primary factors of production do households provide?
land, labor, capital (provide in exchange for income)
To economists the term “investment” refers to
purchasing new capital equipment
Households save money through?
financial markets
When a company borrows money, it issues
bonds
What does a bond’s date of maturity state?
when the loan will be repaid
What term refers to the original amount of an investment?
principal (this is the amount that bonds repay on their date of maturity)
What does it mean for a company to default on its bonds?
The company fails to make its promised payments
How are stockholders most different from bondholders
Stockholders have a greater potential for high returns
A bank is an example of a
financial intermediary
Who primarily bears the risk of a bank’s lending operations?
its stockholders
Which of the following bonds would carry the highest interest rate?
a. a bond from a government set to mature in 3 years
b. a bond from a reputable company set to mature in 10 years
c. a bond from a notorious company set to mature in 1 year
d. a bond from a risky company set to mature in 10 years
e. a bond from a risky company set to mature in 5 years
a bond from a risky company set to mature in 10 years
Which of the following investors would benefit MOST from a mutual fund?
a. a 55-year-old financial planner who prefers to hold individual stocks
b. a 45-year-old millionaire with a diversified portfolio
c. a 67-year-old retiree who does not want to invest in stocks
d. a large insurance company that needs to invest its cash
e. a 21-year-old college student who has a small amount of money to save
a 21-year-old college student who has a small amount of money to save
Mutual funds do not allow investors to?
eliminate risk
Who determines the price of a stock?
buyers and sellers
A company would most likely pay a divident if?
it enjoys good economic prospects
Which of the following scenarios is an example of equity finance?
a. An investor sells Walmart stock to pay for a house.
b. An investor purchases a mutual fund to save money.
c. A bank lends money to Starbucks to expand its footprint.
d. Nike issues bonds to facilitate a company acquisition.
e. Costco sells stock to build a new department store.
Costco sells stock to build a new department store
(equity finance refers to the sale of stock by a company)
If an economy is closed, then it must be true that?
net exports are zero
(closed economies do not engage in international trade)
An expression that illustrates the equality of income and expenditures?
income = consumption expenditures + investment + government purchases (in a closed economy)
Private saving is expressed as
income - consumption expenditures - taxes
What must be true if the government runs a budget surplus?
Taxes exceed government purchases
What company purchased Anheuser-Busch?
Inbev (a Brazilian & Belgian owned brewing company in 2008)(this was a foreign purchase of domestic assets, reducing the U.S. net capital outflows)
What company purchased Rockefeller Center in 1989?
Mitsubishi (this was a foreign purchase of domestic assets, reducing the U.S. net capital outflows)
How is foreign direct investment most different from portfolio investment?
The buyer plans to actively manage the assets
In an open economy, if net capital outflows are negative, then?
investment exceeds saving
Which of the following transactions would increase the United States’ net capital outflow?
a. A U.S. resident purchases a home in New York.
b. A French technology company sells its products in the United States.
c. A British wine company purchases a vineyard in California.
d. Intel sells its manufacturing in China.
e. Microsoft purchases property in Germany.
Microsoft purchases property in Germany
(net capital outflow increases from domestic purchases of foreign assets)
Suppose a British company purchased $3,000 worth of grapes from a German company and sold $1,000 worth of spirits to France. What is the change in England’s net capital outflows?
a. $1,000
b. $3,000
c. -$2,000
d. $0
e. $4,000
-$2,000
What variable appears on the y-axis of a supply and demand graph for savings?
interest rate
The real interest rate equals
the nominal interest rate less inflation
Crowding out is defined as the
tendency of government deficits to reduce private investment
How would a reduction in the tax rate on interest income affect the market for saving?
The supply of savings would increase
An investor would be more likely to borrow money if?
the expected return exceeds the interest rate
Why do people usually hold onto money?
to complete transactions easily
Like money, stocks function as a
store of value
As a unit of account, money
facilitates comparisons of economic value
What term do economists use to describe all of the different stores of value in an economy?
wealth
What does liquidity measure?
the ease with which an asset can be converted into a medium of exchange
Which of the following assets has the GREATEST liquidity?
a. a vacant plot of land
b. a share of supermarket stock
c. a vacation home
d. a limited partnership interest
e. an antique art painting
a share of supermarket stock
Most restaurants express prices on their menus in dollars. The practice illustrates money’s use as a
unit of account
How does commodity money most differ from fiat money?
commodity money holds intrinsic value
Items that represent commodity money
gold, silver, rocks, cowrie shells, jewels
What good functioned as a medium of exchange in World War II prisons?
cigarettes
Assets that could be considered money
savings account, dollar bill, checking account, mutual fund account
(credit cards act as a loan to be paid back)
Fiat money’s value most depends on
government decree
Assets in M1 and M2 most differ in their
liquidity
Together, M1 and M2 constitute
the stock of money (in an economy)
What assets are part of M2?
savings deposits, small denomination time deposits, retail money funds, and all of M1
What entity regulates the supply of money in the United States?
central bank (ours is the Federal Reserve)
How many members are on the Federal Reserve’s board of governors?
seven
What regional bank’s president is a permanent member of the FOMC (Federal Open Market Committee)?
New York (due to the location of the New York stock exchange)
The FOMC meets every?
six weeks
How does the Federal Reserve increase the money supply through open market operations?
It purchases United States government bonds
A bank’s assets consist of?
reserves and loans
Banks that use fractional reserves can?
make the economy more liquid (by creating more money)
High-powered money includes?
currency and reserves
The money multiplier is calculated as?
the reciprocal of the reserve ratio
Why does the Federal Reserve rarely adjust reserve requirements?
It is disruptive to the banking industry
The discount rate is the interest rate
the Federal Reserve charges on loans made to banks
How can the Federal Reserve decrease the money supply?
raising reserve requirements, selling U.S. government bonds, and increasing key interest rates
A bank has $50 in deposits. It creates money until total deposits equal $200. What is the reserve ratio?
a. 3
b. 0.5
c. 4
d. 0.1
e. 0.25
0.25
A bank is considered solvent if?
Assets exceed liabilities
The Federal Reserve has most control over?
the discount rate
How much did the U.S. price level fall during the Great Depression?
25%
In addition to the Great Depression, the U.S. price level fell during?
the 2008 financial crisis
Inflation primarily reflects changes in?
the value of money (a reduction in the value of moeny)
What magnifies the effect of open market operations?
Fractional reserves
How is moeny most similar to other items in an economy?
Its value is derived by supply and demand interactions
How did the development of Apply Pay affect the market for money?
It decreased demand
Why is demand for money downward sloping?
As the value of money decreases, people need more money to buy goods
If the Federal Reserve purchases government bonds, it is most likely that
prices increase
(the supply of money increase - which results in an increase in demand for goods & services which results in higher prices)
What term reflects that changes in the quantity of money have no effect on real quantities in the economy in the long run?
neutrality of money
Items that represent real quantities (in physical units)
tons of steel, gallons of oil, pounds of pork, bushels of wheat
Which of the following equations represents the quantity equation?
a. V x M = P x Y
b. V / M = Y / P
c. V x Y = M x P
d. M / V = P x Y
e. V x P = M x Y
V x M = P x Y
The velocity of money is best defined as the?
number of times a dollar bill is used during a year
If the money supply increase, ti is least likely that?
nominal GDP decreases
Which of the following issues does NOT represent a cost of inflation?
a. Cash users have to visit the ATM more often.
b. Rising prices distort the long-run neutrality of money.
c. Borrowers and lenders face increased risk in credit markets.
d. Relative prices may not reflect the relative costs of production.
e. Firms have to adjust prices frequently
Rising prices distort the long-run neutrality of money
Suppose an economy’s nominal GDP is $2,000 and its supply of money is $500. What is the velocity of money?
a. 5
b. 10
c. 50
d. 2
e. 4
4
What term refers to a period between a peak and a trough in economic activity?
recession
The recurrent alternation between peaks and troughs in economic activity is called the
business cycle
For a recession to occur, real GDP growth must decline for at least
two consecutive quarters (or 6 months)
What entity officially determines the start and end dates of expansions and recession int he United States economy?
The nNational Bureau of Economic Research
Why primarily do declines in unemployment lag the onset of expansions?
Businesses are slow to hire
What term refers to the quantity of goods & services that the economy can produce when using its resources at normal rates?
potential output
What expression yields the value of the output gap?
Y - Y *
(Y represents actual output, and Y* is potential output)
The natural rate of unemployment could be best described as?
frictional unemployment plus structural unemployment
Why did the natural rate of unemployment increase in the 1970s?
More women entered the paid workforce
Arthur Okun was a chief economic advisor to?
President Kennedy
Okun’s Law describes the relationship between the output gap and?
cyclical unemployment
(a 1% increase in cyclical unemployment is associated with a 2% increase in the output gap)
Growth in potential output depends least on?
changes in the output gap
(growth depends on - technological advancements, growth in the population, growth in productive resources)
What can account for deviations between actual output and potential output?
Prices do not adjust immediately
John Maynard Keynes developed a new economic model in response to?
the Great Depression
What is depicted on the y-axis in the Keynesian model?
aggregate price level
(x-axis is real GDP)
Why do shifts in relative prices not explain the downward-sloping aggregate demand curve?
A drop in the aggregate price level means that all goods have gotten cheaper
What is a likely effect of a lower price level on the market for savings?
Lower interest rates encourage people to borrow money
Exports are likely to increase when?
Domestic price level decreases
Who owns the SpaceX company?
Elon Musk
The SpaceX company’s construction of satellites most directly incentivizes increased?
investment spending
Why was the supply curve upward sloping in the microeconomic analysis of markets?
As price increases, more resources are diverted toward the particular market
The Keynesian model represents short-term aggregate supply as a
upward-sloping line
Resources are fully employed where
the short-run aggregate supply curve intersects potential output
What component of GDP does the foreign exchange rate most affect?
net expo
Which of the following events would be LEAST likely to shift the aggregate demand curve to the right?
a. Consumers’ disposable income increases.
b. The government lowers taxes.
c. Interest rates increase.
d. The government passes a major infrastructure spending bill.
e. Stock prices increase
Interest rates increase
How does an increase in the expected price level affect the Keynesian model?
aggregate supply shifts up
The 1973 OPEC oil embargo best illustrates a?
aggregate supply shock (causing the aggregate supply to shift to the left)
Holding the velocity and quantity of money constant, a lowered price level will most likely?
increase real GDP
Factors that affect the aggregate demand curve
Consumer sentiment, monetary policy, fiscal policy, new technologies
(does not include long-run potential output)
How would the Keynesian model adjust to account for long-run growth of real GDP?
potential output shifts to the right
Suppose the aggregate demand curve shifts to the left. How does output return to potential?
Prices fall
Which of the following statements BEST describes the effect of a negative aggregate supply shock?
a. Aggregate demand shifts to the right.
b. Potential output shifts to the left.
c. The economy is producing beyond its potential.
d. Aggregate demand shifts to the left.
e. The output gap is negative
The output gap is negative
What is the basic explanation for recessions and expansions in the Keynesian model?
short-run inflexibility of prices
The intersection of aggregate demand and short-run aggregate supply in the Keynesian model most directly influences?
aggregate production (and price level)
Suppose the money supply increases at 6% per year, and potential output increases at 4% per year. Holding the velocity of money constant, the inflation rate is CLOSEST to
a. 4%
b. 10%
c. 2%
d. 0%
e. 6%
2%
If an economy perfectly anticipates the level of inflation, then?
the ouput gap will equal zero
Examples of expansionary fiscal policy
increasing the amount of government spending, reducing taxes (actions designed to stimulate the economy as a whole)
What component of GDP is most directly affected when the government lowers income taxes?
consumption
(people will have more money in their pockets and will usually spend it)
To slow down an economy producing above its potential, the Federal Reserve could
raise interest rates
(causing firms and consumers to reduce spending)
If a nation’s aggregate demand curve intersects the short-run aggregate supply curve at a point on the long-run aggregate supply curve, then the nation
Has an output gap of zero
Why are fiscal and monetary policy controversial
The effects of their actions take time to be felt
What U.S. president financed a military buildup in the 1960s?
Johnson
The Federal Reserve varies the money supply to influence
interest rates
In the Keynesian model, an increase in the money supply manifests as a
rightward shift in aggregate demand
Expansionary fiscal policy is most likely to be counterproductive due to?
time lag
(takes a while for the effects to be felt)
Net exports are always equal to
net capital outflow
In a closed economy, investment is equal to
Y - C - G
New knowledge created by R & D is considered a _______ good.
Public
How do you calculate real GDP per capita?
Real GDP per capita is equal to labor productivity multiplied by employment rate
Ex: Average labor productivity is $200, and 75% of the population is employed. What is real GDP per capita?
200*.75 = 150
When a household wishes to save, they become a member of the ______ market.
Financial market
Bureau of Labor Statistics contacts how many households every month to determine the Unemployment Rate?
60,000 households
How do you calculate CPI?
CPI is calculated as 100 x (current basket price) / (base year basket price)
Ex: A market basket cost $200 in the base year, and now costs $250.
100 x 200 / 250 - 20,000 / 250 = 125
Boskin commission calculated CPI overstates change in price level by how much?
1.3%
Who headed the Boskin Commission?
Michael Boskin back in 1996
How do you calculate nominal GDP?
To calculate nominal GDP, current year output is multiplied by current year prices. Base year prices only matter for real GDP
The government project to compile a system to measure nation output happened concurrently with what event in U.S. history?
the Great Depression
Goods used as inputs in production of other goods are called
Intermediate goods
The space between a peak and a trough in an economic cycle is called
recession
When imports exceed exports, it’s called
a trade surplus
How do you calculate GDP deflator?
The GDP deflator is calculated as 100*(nominal GDP)/(real GDP)
Ex: Nominal GDP is $5 million and the GDP deflator is 250. What is real GDP?
Solve for real GDP gives you $2 million
When was the Federal Reserve created
1913
The money multiplier has an inverse relationship to
reserve requirement
The money multiplier is calculated as one over the reserve requirement
Federal Reserve charges an interest rate on overnight loans, it’s called _____ rate
Discount rate
When people quickly remove money from their banks a ________ could occur.
Bank run
Since 1960, CPI has increased by a factor of
8.6
The supply of money is considered ____
perfectly inelastic (supply of money is vertical on a graph)
The property of money that causes it to have no effect on real values is called the
neutrality of money
average number of times that a dollar is spent in a year is known as the
velocity of money
The velocity of money times the money supply is equal to
GDP
V x M = Y x P = nominal GDP
What decade did inflation reach double digits?
1970s
How long did the Great Depression last, in months?
43 months from 1929 to 1933
During recessions, what economic indicator increases?
Unemployment
What is potential output?
Potential output is the GDP when an economy is using its resources at normal, sustainable rates and is in neither a recession nor an expansion.
What is the natural rate of unemployment?
rate of unemployment when cyclical unemployment is zero and is comprised of structural and frictional unemployment.
The AS/AD model is also called
Keynesian Model
On the AS/AD model, what is measured on the vertical axis
price level
On the AS/AD model, what is measured on the horizontal axis
real GDP
The General Theory of Employment, Interest, and Money was written by
John Maynard Keynes
