First MCQ Exam

Question 1

Budget deficit

Answer 1

A situation where the flow of expenditures exceeds the flow of income for the federal government. A deficit occurs when taxes on income and expenditures are insufficient to meet the payments for goods and services and interest on the national debt. Contrast with national debt

Question 2

Consumer Price Index (CPI)

Answer 2

A measure of the average price of a fixed “market basket” of consumer goods and services that are commonly bought by households. This statistic is computed monthly by the Bureau of Labor Statistics

Question 3

Contractionary policy

Answer 3

A decrease in aggregate demand or supply that is brought about by a decrease in government spending, an increase in taxes, or a combination of the two (fiscal policy) or a decrease in money supply (monetary policy). Contractionary policies are used when the economy is overheating

Question 4

Cost-push inflation

Answer 4

arises with sustained increases in the cost of production that cause the price of the product to increase

Question 5

“Crowding out”

Answer 5

When the federal government borrows money, the associated rise in interest rates decreases planned investment spending by private firms and individuals. As a result, government expenditures are said to “crowd out” those by private firms

Question 6

Demand

Answer 6

Purchases of a good or service that people are able and willing to make given prices and choices available to them. The “law of demand” states that there is a negative (or inverse) relationship between price and quantity demanded. That is, as price increases (decreases) the amount of a good purchased decreases (increases). Consumers’ demand is determined by their tastes, income, and price of other goods. The demand schedule is a table showing the quantities of a good that will be purchased at various prices. The demand curve is a curve that relates the price of a product and the quantity of the product that individuals are able and willing to purchase. Aggregate demand is the total demand for goods and services in the economy by households (for consumer goods), by firms and government (for investment goods), and by other countries (exports)

Question 7

Demand-push inflation

Answer 7

arises when aggregate demand exceeds aggregate supply and consumers bid up prices

Question 8

Demand-side theories

Answer 8

Views that emphasize increasing aggregate demand as a means of maintaining economic stability in the economy. Should the economy be at the downturn of the business cycle, demand-side theorists believe that aggregate demand should be stimulated through expansionary policies. Should the economy be overheating, demand-side theorists believe that aggregate demand should be slowed through contractionary policies

Question 9

Discount rate

Answer 9

The rate of interest at which the Federal Reserve lends to the banking system. Short-term interest rates are geared to the discount rate through the banking system. If the capital market thinks that changes in the rate are likely to last for some time, long-term rates will also change

Question 10

Economic indicators

Answer 10

Statistics about the economy that allow analysis of current economic performance and predictions of future performance

Question 11

Expansionary policy

Answer 11

An increase in aggregate demand or supply brought about by an increase in government spending, a decrease in taxes, or a combination of the two (fiscal policy) or an increase in money supply (monetary policy). Expansionary policies are used when the economy needs to be stimulated.

Question 12

Federal Reserve System

Answer 12

The central banking system in the United States. The system consists of 1 2 regional banks and branches under control of the Federal Reserve Board. Although the Governors of the Board are appointed by the President of the United States, the financial capital of the reserve banks is owned by the member banks, making the “Fed” an independent agency. The Board effectively acts as a central bank and approves the discount rate and reserve ratio, and generally regulates the operation of the banking system. The Federal Open Market Committee, a subcommittee of the Board, effectively has the power to influence money supply through open market operations

Question 13

Fiscal policy

Answer 13

An attempt to attain certain economic goals, such as achieving full employment and increasing Gross Domestic Product (GDP), by varying the government’s purchases of goods and services and its rate of taxation. The spending authorization and rates of taxation are established by Congress

Question 14

Government spending

Answer 14

Payments for goods, services, and interest made by the government. Fiscal policy includes the amount spent for goods and services by the federal government. The multiplier effect associated with government spending results from spending by any level of government

Question 15

Gross Domestic Product (GDP)

Answer 15

The dollar value of all final goods and services produced by resources located in the country during a year

Question 16

Inflation

Answer 16

An upward movement in the average level of prices. The result is diminished purchasing power of a given sum of money. Inflation is contrasted with deflation, which is a downward movement in the average level of prices. Demand-push inflation arises when aggregate demand exceeds aggregate supply and consumers bid up prices. Cost-push inflation arises with sustained increases in the cost of production that cause the price of the product to increase.

Question 17

Interest rates

Answer 17

The price of loanable funds, which is usually expressed as annual percentage and measures the yearly cost of borrowing. The price paid per dollar borrowed per period of time. Nominal interest rates: The interest rate taken at its face value (that is, the interest rate expressed in current dollars and not adjusted for inflation). Real interest rates: The actual return to capital. Because comparing nominal interest rates includes a purely monetary component, the value of the rate must be purged of changes in prices to be compared over time. The rate obtained after eliminating the element of price change is the real interest rate.

Question 18

Monetary policy

Answer 18

An attempt to attain certain economic goals, such as lowering the rate of unemployment or inflation. This can be done by varying the money supply, interest, and (in some cases) conditions of credit. The Board of Governors of the Federal Reserve establishes the policies

Question 19

Multiplier

Answer 19

recipients of income will save a portion and spend a portion of it. Of the portion spent, the income generated to the next recipient will be partially saved and partially spent. The result of this continued pattern is that the total increase in aggregate income will, in the end, be several times larger than the increase in the initial income received (that is, it will be some multiple of the increase in initial income). The expression that gives the value of this multiple is the multiplier.

Question 20

National debt

Answer 20

The total amount of money owed by the federal government to the owners of government securities. It is equal to the sum of the past budget deficits (less budget surpluses). Contrast with budget deficit

Question 21

Open market operations

Answer 21

The buying and selling of federal government securities by the Federal Reserve banks

Question 22

Opportunity costs

Answer 22

The real sacrifice involved in achieving something. The value of the next best opportunity that is foregone in order to achieve a particular thing.

Question 23

Reserve requirements

Answer 23

The proportion of deposits that a bank or other depository institution is legally required to hold in cash reserve. The proportion is set by the Federal Reserve as a monetary policy tool

Question 24

Scarcity

Answer 24

A condition where less of something exists than people would like if the good had no cost. Scarcity arises because resources are limited and cannot accommodate all of our unlimited wants

Question 25

Supply

Answer 25

The amount of a good or service that firms are prepared to sell at a given price. The firm determines how much of a good to supply using its marginal cost curve. Industry supply is the summation of all individual firms’ marginal cost curves (in a constant cost industry). The supply schedule is a table showing the amount of a product that will be produced at a given price. The supply curve relates the quantity of a good supplied by a firm (or market) and each price. The law of supply dictates that the curve is upsloping, indicating that more will be produced as the price of the good increases. Aggregate supply is the total amount of goods and services available for consumption and consists of both domestically produced goods and services and imports.

Question 26

Supply-side theories

Answer 26

Views that emphasize increasing aggregate supply as a means of maintaining economic stability. Should the economy be at the downturn of the business cycle, supply-side theorists believe that aggregate supply should be stimulated through expansionary policies. Should the economy be overheating, supply-side theorists believe that aggregate supply should be slowed through contractionary policies

Question 27

Tax

Answer 27

A compulsory transfer of money from individuals, institutions, or groups to the government. The tax may be based on either wealth or income or as a surcharge to prices. Taxation is one of the key elements in fiscal policy and a primary means by which a government finances its expenditures

Question 28

Tradeoff

Answer 28

An exchange relationship denoting how much of one good (or resource) is needed to get another good (or resource).

Question 29

Unemployment rate

Answer 29

The number of people able and willing to work expressed as a percentage of the labor force. Labor force includes working individuals and unemployed individuals but does not include individuals who do not wish to work (e.g., retirees)