Macroeconomics (M42)

Question 1

This is the price of all (goods and services produced by a domestic economy for a year at current market prices

Answer 1

Nominal Gross Domestic Product (GDP)

Question 2

This is the price of all goods and services produced by the economy at price level adjusted (constant) prices. Price level adjustment eliminates the effect of inflation on the measure

Answer 2

Real GDP

Question 3

This is the maximum amount of production that could take place in an economy without putting pressure on the general level of prices

Answer 3

Potential GDP

Question 4

What is the difference between Potential GDP and Real GDP?

Answer 4

GDP Gap

Question 5

When the GDP Gap is positive, what does it indicate?

Answer 5

That there are unemployed resources in the economy - therefore we would expect unemployment

Question 6

When the GDP Gap is negative, what does it indicate?

Answer 6

That the economy is running above normal capacity and we would expect prices should begin to rise (inflation)

Question 7

This is GDP minus depreciation

Answer 7

Net Domestic Product (NDP)

Question 8

This is the price of all goods and services produced by labor and property supplied by the nation’s residents

Answer 8

Gross National Product (GNP)

Question 9

What are the two ways to calculate GDP?

Answer 9

1) Income Approach

2) Expenditure Approach

Question 10

This approach of calculating GDP adds up all incomes earned in the production of final goods and services, such as wages, interest, rents, dividends, etc.

Answer 10

Income Approach

Question 11

This approach of calculating GDP adds up all expenditures to purchase final goods and services by house-holds, business, and the government. Specifically it includes personal consumption expenditures, gross private investment in capital goods, & the country’s net exports.

Answer 11

Expenditure Approach

Question 12

This depicts the demand of consumers, businesses, and government as well as foreign purchasers for the goods and services of the economy at different price levels

Answer 12

Aggregate Demand Curve

Question 13

As price levels increase (inflation increases) nominal interest rates increase causing a decrease in interest sensitive spending, such as houses, automobiles, and appliances

Answer 13

Interest Rate Effect

Question 14

When price levels increase, the market value of certain financial assets decreases causing individuals to have less wealth and therefore they reduce their consumption

Answer 14

Wealth Effect

Question 15

When domestic price levels increase relative to foreign currencies, foreign products become less expensive causing an increase in imported goods and a decrease in exported goods. This decreases the aggregate demand for domestic products

Answer 15

International Purchasing Power Effect

Question 16

This happens when consumers, businesses, or governments are willing to spend more or less, or when there is an increase or decrease in the demand for domestic products abroad

Answer 16

Aggregate Demand Curve Shifts

Question 17

Marginal Propensity to Consume + Marginal Propensity to Save = …

Answer 17

1

Question 18

[ 1 / MPS ] *

Change in Spending =

Answer 18

Increase in Equilibrium GDP

Question 19

This is a fluctuation in aggregate economic output that lasts for several years

Answer 19

Business Cycle

Question 20

This is a period of negative GDP growth - at least 2 consecutive quarters of negative GDP growth

Answer 20

Recession

Question 21

A deep and long-lasting recession is referred to as…

Answer 21

a Depression

Question 22

In periods of high technology growth, firms tend to invest more because new products and innovations tend to be more profitable. This is known as what factor affecting investment spending…

Answer 22

the rate of technology growth

Question 23

Lower real interest rates reduce the cost of investment, known as what factor affecting investment spending…

Answer 23

The real interest rate (nominal rate minus the inflation premium)

Question 24

If there are already enough capital goods in the economy to meet aggregate demand there is little incentive to invest, known as what factor affecting investment spending…

Answer 24

The stock of capital goods

Question 25

This is the most volatile portion of GDP

Answer 25

Investment Spending

Question 26

As the purchase price or operating cost of plant and equipment decreases, firms will invest more, known as what factor affecting investment spending...

Answer 26

The acquisition and operating cost of capital goods

Question 27

Government policy can be used to stimulate investment spending, which is known as what factor affecting investment spending...

Answer 27

Actions by the government

Question 28

Unemployment can be because of what? (3)

Answer 28

1) Frictional Causes 2) Structural Causes 3) Cyclical Causes

Question 29

This occurs because individuals are forced or voluntarily change jobs - perhaps while looking for a job or when they are new entrants into the workforce

Answer 29

Frictional Unemployment

Question 30

This occurs due to changes in demand for products or services, or technological advances causing not as many individuals with a particular skill to be needed

Answer 30

Structural Unemployment

Question 31

T/F Structural unemployment is reduced by retraining programs

Answer 31

TRUE

Question 32

This is caused by the condition in which real GDP is less than potential GDP. Therefore, such unemployment increases during recessions and decreases during expansions

Answer 32

Cyclical Unemployment

Question 33

This is the rate of increase in the price level of goods and services, usually measured on an annual basis.

Answer 33

Inflation

Question 34

______ is a very high, unusually increasing level of inflation

Answer 34

Hyperinflation

Question 35

This is a term used to describe a decrease in the price levels

Answer 35

Deflation

Question 36

Why is deflation so damaging?

Answer 36

Businesses do not want to borrow money and pay it back with money that has more purchasing power. Businesses do not want to invest in plant and equipment given that the cost of plant and equipment is declining

Question 37

This measures the price that urban consumers paid for a fixed basket of goods and services in relation to the price of the same goods and services purchased in some base period

Answer 37

Consumer Price Index (CPI)

Question 38

This measures the prices of finished goods and materials at the wholesale level

Answer 38

Producer Price Index (PPI)

Question 39

This measures the prices for net exports, investment, government expenditures, and consumer spending. It is the most comprehensive measure of price level

Answer 39

GDP Deflator

Question 40

What is M1

Answer 40

M1 includes only currency and demand deposits

Question 41

What is M2

Answer 41

M2 is equal to M1 plus savings accounts and small-time deposits

Question 42

How do you define a small-time deposit?

Answer 42

Less than $100,000

Question 43

What is M3?

Answer 43

M3 is equal to M2 plus other larger time deposits

Question 44

In regulating the economy, what does the Federal Reserve focus on? (M1, M2, or M3?)

Answer 44

M2

Question 45

What is the most common instrument of monetary policy?

Answer 45

Open-Market Operations

Question 46

When a bank has a reserve deficiency, it may borrow funds from a Federal Reserve Bank. By setting ____ for such borrowing, the Federal Reserve can influence interest rates in the economy

Answer 46

Discount Rate

Question 47

This instrument of monetary policy involves the purchase or sale of government securities using the Federal Reserve Bank Deposits

Answer 47

Open-Market Operations

Question 48

Which of the following is a tool of monetary policy that a nation’s central bank could use to stabilize the economy during an inflationary period? a) Selling government securities b) Lowering bank reserve requirements c) Lowering bank discount rates d) Encouraging higher tax rates

Answer 48

A is correct a) Reduces the money in the market - money is being put back into the government b) Again this increases the money supply, causing more inflation. Additionally this approach is rarely used c) This increases lending, which increases inflation d) This is fiscal policy, not monetary policy

Question 49

This includes government actions, such as taxes, subsidies, and government spending, designed to achieve economic goals

Answer 49

Fiscal Policy

Question 50

This is levied by a government based on two principles 1) ability to pay 2) derived benefit

Answer 50

Taxes

Question 51

The US Income Tax Rate, in general, is _____

Answer 51

Progressive

Question 52

The US Property Tax Rate, in general, is ______

Answer 52

Progressive

Question 53

The US Sales Tax Rate, in general, is _______

Answer 53

Regressive

Question 54

What is the most significant wage tax in the US?

Answer 54

Social Security Tax

Question 55

This economic theory holds that market equilibrium will eventually result in full employment over the long run without government intervention - this does not support the use of fiscal policy to stimulate the economy

Answer 55

Classical Economic Theory

Question 56

This economic theory holds that the economy does not necessarily move towards full employment on its own. It focuses on the use of fiscal policy to stimulate the economy

Answer 56

Keynesian Theory

Question 57

This economic theory holds that the fiscal policy is too crude a tool for control of the economy. It focuses on the use of monetary policy to control economic growth

Answer 57

Monetarist Theory

Question 58

This economic theory holds that bolstering an economy's ability to supply more goods is the most effective way to stimulate growth

Answer 58

Supply-Side Theory

Question 59

This economic theory combines Keynesian and monetarist theories. It focuses on using a combination of fiscal and monetary policy to stimulate the economy and control inflation

Answer 59

Neo-Keynesian Theory

Question 60

T/F When there is reciprocal (a vs. b) absolute advantage between two countries, specialization will make it possible to produce more of each product

Answer 60

TRUE

Question 61

T/F Absolute advantage is defined as the ability of one nation to produce a product at a relatively lower opportunity cost than another nation

Answer 61

FALSE This is comparative advantage

Question 62

T/F Absolute advantage without comparative advantage does not result in gains from international trade

Answer 62

TRUE

Question 63

T/F The gains from international trade depend on specialization with comparative advantage

Answer 63

TRUE

Question 64

This is a restriction on the amount of a good that may be imported during a period

Answer 64

Import Quota

Question 65

This is a tax on an imported product

Answer 65

Tariff

Question 66

This is a total ban on the importation of specific goods

Answer 66

Embargo

Question 67

This limits the quantity of goods that can be exported to appease importing countries and keep them from imposing stiffer import restrictions

Answer 67

Voluntary Export Restraint

Question 68

What are 4 factors that influence foreign exchange rates?

Answer 68

1) Inflation 2) Interest Rates 3) Balance of Payments (flow of goods between the residents of two countries) 4) Government Intervention

Question 69

This is the exchange rate of the currency for immediate delivery

Answer 69

Spot Rate

Question 70

This is the exchange rate for currency for future delivery

Answer 70

Forward Rate

Question 71

What is the difference between a foreign currency transaction and a foreign currency translation?

Answer 71

Foreign Currency Translation - reverting over the financial statements Foreign Currency Transaction - one piece of the financial statements (a/p, a/r) in which the money exchanging hands is not USD

Question 72

This is the risk due to exposure that a multinational company has because its financial statements must be converted to its functional currency

Answer 72

Translation Risk

Question 73

This risk relates to the possibility of gains and losses resulting from income transactions occurring during the year

Answer 73

Transaction Risk

Question 74

What are the different kinds of ways to hedge foreign currency risk?

Answer 74

1) Options 2) Forwards 3) Futures 4) Currency Swaps 5) Money Market Hedge

Question 75

This allows, but does not require, the holder to buy (call) or sell (put) a specific or standard commodity or financial instrument at a specified price during a specified period of time or at a specified date

Answer 75

Option

Question 76

These are negotiated contracts to purchase and sell a specific *quantity* of a financial instrument, foreign currency, or commodity at a price specified at origination of the contract, with delivery and payment at a specified future date

Answer 76

Forwards

Question 77

If the US dollar declines in value relative to the currencies of many of its trading partners, the likely result is that: a) Foreign currencies will depreciate against the dollar b) The US balance of payments deficit will become worse c) US exports will tend to increase d) US imports will tend to increase

Answer 77

C a) Foreign Currencies will appreciate against the dollar, not depreciate b) Because the US Exports tend to increase, the deficit will not become worse but it will become better c) Because the US Dollar declines in value relative to other countries, our goods will be cheaper to other countries d) US imports will tend to decrease, not increase, because the US Dollar is weaker and importing becomes more expensive

Question 78

These are forward-based standardized contracts to take delivery of a *specified* financial instrument, foreign currency, or commodity at a specified future date or during a specified period generally at the then-market price

Answer 78

Futures A slightly more specific/standardized Forward Contract

Question 79

This is a forward-based contract in which two parties agree to exchange an obligation to pay cash flows in one currency for an obligation to pay in another currency

Answer 79

Currency Swaps

Question 80

This is a way of eliminating transaction risk by borrowing foreign currency when an agreement is executed. This strategy immediately converts the foreign currency to USD. Then, when the foreign currency is collected from the sale, the loan can be repaid - resulting in no foreign exchange loss or gain over the loan period

Answer 80

Money Market Hedge

Question 81

How do you calculate the Forward Premium or Discount (of one currency with respect to another currency)

Answer 81

Forward Premium/Discount = [(Forward Rate - Spot Rate) / Spot Rate] * (Months or Days in Year / Months or Days in Forward Period)