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Business Cycle
answer
Alternating periods of economic expansion and economic recession
1. Peak (top of economic activity)
2. Downturn or Contraction (falling activity)
3. Trough (bottom of economic activity)
4. Upturn or Expansion (increasing activity)
1. Peak (top of economic activity)
2. Downturn or Contraction (falling activity)
3. Trough (bottom of economic activity)
4. Upturn or Expansion (increasing activity)
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Cassical Theory
answer
Leave the economy alone it will self-regulate and fix itself.
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Keynesian Theory
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The government should help the economy out.
"It may fix itself in the long run, but we may all be dead by then." Keynes.
"It may fix itself in the long run, but we may all be dead by then." Keynes.
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Which of the following individuals is part of the labor force?
answer
The CEO of General Motors
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Who among the following would be counted as unemployed?
answer
Bob, a college student looking for summer work.
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A decline in real GDP for at least two consecutive quarters is referred to as:
answer
A recession.
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If the population of a country is 1,000,000 people, its labor force consists of 500,000, and 40,000 people are unemployed, the unemployment rate is:
answer
8.0 percent.
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A basic purpose of macroeconomic theory is to:
answer
Explain the business cycle.
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Business cycles in the United States:
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Vary greatly in length, frequency, and magnitude.
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The total value of goods and services produced within a nation's borders, measured in constant prices refers to:
answer
Real GDP.
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Which of the following is not a basic measure of macroeconomic performance
answer
Public goods
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An extremely deep and long period of negative economic growth is most accurately called:
answer
A depression.
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To be officially counted as unemployed, one must be:
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Actively seeking employment and currently not working.
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Who is part of the Civilian Labor Force?
answer
Any person over 16 who are working or actively seeking paid employment.
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Who is not part of the Civilian Labor Force?
answer
Military Personal
Children under 16
People that do not want to work like retired, housewife, househusband, etc.
People that can not work like disabled, in Prison, Institutionalized, etc.
Children under 16
People that do not want to work like retired, housewife, househusband, etc.
People that can not work like disabled, in Prison, Institutionalized, etc.
question
Labor Force
answer
= Unemployed + Employed
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Unemployment Rate
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= Unemployed / Labor Force
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Frictional Unemployment
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You lose your job you find a new job doing the same task.
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Structural Unemployment
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You lose your job and most learn new skills to get a job doing a different task.
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Cyclical Unemployment
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You lose your job because the economy is not doing well. You will find work doing the same task when the economy is better
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Inflation
answer
An increase in the average level of prices of goods and services.
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Consumer Price Index
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An index of changes in the average price of consumer goods and services.
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Automobile workers in Detroit are unemployed because robots are now being used on assembly lines but, at the same time, job vacancies exist for computer programmers. In this case, the automobile workers are an example of:
answer
Structural unemployment.
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After graduating from college, it takes Kim several months to find a professional job. This is an example of which type of unemployment?
answer
Frictional unemployment
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A stock person who is laid off by a department store because retail sales across the country have decreased is _______ unemployed.
answer
Cyclically
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If the price of computers falls during a period when the average price level remains constant, which of the following has occurred?
answer
A change in relative prices
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Suppose a recent college graduate has an annual nominal income of $42,000 for the first year she works. If the annual inflation rate is 5 percent, what salary would she need in the second year to maintain the same real income?
answer
$44,100
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A decrease in the average level of prices of goods and services is known as:
answer
Deflation.
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An office worker who loses her job because she does not have the necessary computer skills is, ceteris paribus:
answer
Structurally unemployed.
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A plumber quits his job in Dallas and moves to San Francisco where additional plumbers are needed, but it takes a couple of months for him to find a job. He is said to be:
answer
Frictionally unemployed
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The uncertainty that results from inflation causes changes in:
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Consumption, saving, and investment behavior.
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Inflation is defined as:
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An increase in the average level of prices.
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Aggregate demand
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is the total quantity of output demanded at alternative price levels in a given time period, ceteris paribus.
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Aggregate supply
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is the total quantity of output producers are willing and able to supply at alternative price levels in a given time period, ceteris paribus.
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Fiscal policy
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the use of government taxes and spending to alter macroeconomic outcomes.
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Monetary policy
answer
the use of money and credit controls to influence macroeconomic activity.
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Supply-side policy
answer
the use of tax rates, (de)regulation, and other mechanisms to increase the ability and willingness to produce goods and services.
question
inflation/stagflation
answer
If demand increases this is regular inflation. Higher price and higher quantity is produced.
If supply decreases this is stagflation. Higher price but lower quantity is produced.
We can also have hyper inflation if prices are raising very quickly.
If supply decreases this is stagflation. Higher price but lower quantity is produced.
We can also have hyper inflation if prices are raising very quickly.
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Monetary policy:
answer
Is controlled by the Federal Reserve.
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External shocks to an economy include:
answer
Disruptions in trade, wars, and natural disasters.
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Which of the following would cause the aggregate demand curve to decrease, ceteris paribus?
answer
An increase in income taxes.
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Which of the following is a mechanism Keynes advocated for dealing with a situation of depressed output?
answer
Increasing government expenditure
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According to Keynes:
answer
Government intervention in the economy is necessary at times.
question
The aggregate demand curve shows the relationship between the volume of purchases and:
answer
The price level.
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Which of the following suggests that lower average prices stimulate more borrowing?
answer
The interest rate effect
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The Classical view of the economy is characterized by:
answer
A laissez-faire approach.
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The various quantities of output that all market participants are willing and able to buy at alternative price levels in a given time period is:
answer
Aggregate demand.
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Which of the following is necessary for an economy to self-adjust fairly quickly, according to classical economists?
answer
Flexible wages and prices
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Fiscal Policy
answer
The use of government taxes and spending to alter macroeconomic outcomes.
question
lowering taxes
answer
give more disposable income to people, and an increase in Spending will create jobs. They both help expand the economy.
question
raising taxes
answer
give less disposable income to people, and a decrease in Spending will destroy jobs. They both help contract the economy.
question
Deficit
answer
Suppose we have a balanced budget.
If we cut Taxes and hold Spending constant we will end up with a Deficit.
If we hold Taxes constant and increase Spending we will end up with a Deficit.
If we have a Deficit the Debt will grow. If we have a Surplus of Money the Debt will shrink.
If we cut Taxes and hold Spending constant we will end up with a Deficit.
If we hold Taxes constant and increase Spending we will end up with a Deficit.
If we have a Deficit the Debt will grow. If we have a Surplus of Money the Debt will shrink.
question
Debt
answer
How much you borrowed and must pay back.
question
Which of the following does not meet the economic definition of saving?
answer
A graduate assistant spends all of his income on tuition
question
Net exports for the United States are:
answer
Negative if American exports are less than imports.
question
Which of the following is the largest component of aggregate demand for the U.S. economy?
answer
Consumption
question
The marginal propensity to save is equal to:
answer
1 - MPC.
question
Which of the following relies on government taxes and spending to change macro outcomes?
answer
Fiscal policy
question
Fiscal stimulus is:
answer
An increase in government spending or a decrease in taxes.
question
Which of the following helps explain the multiplier effect?
answer
Income is spent and re-spent in the circular flow model.
question
The fraction of each additional dollar of disposable income not spent on consumption is referred to as:
answer
The MPS.
question
If consumers spend 98 cents out of every extra dollar received, the:
answer
MPC is 0.98.
question
The GDP gap is:
answer
The difference between equilibrium output and full-employment output.
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Medium of Exchange
answer
People will accept it in exchange for goods and services.
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Store of Value
answer
Money can be saved and used in the future.
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Standard of Value (account)
answer
People can set a price on how much they want for something.
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M1
answer
is the most Liquid - It includes Cash, Checks, Debit Cards.
question
M2
answer
is less Liquid - It includes M1, Savings Accounts, Money Market Accounts.
question
Deposit creation occurs when:
answer
Money enters the banking system and a portion of it is lent out.
question
The assets held by a bank to fulfill its deposit obligations are known as:
answer
Bank reserves.
question
Which of the following is a direct result of a fractional reserve banking system?
answer
The money multiplier is greater than 1.
question
If you deposit $1,000 in your checking account, your bank is only required to hold a portion of the deposit and is allowed to lend out the balance. This illustrates the concept known as:
answer
Fractional reserves.
question
The reserve ratio is the:
answer
Percentage of total deposits that are held as bank reserves.
question
Money is functioning as a store of value when you:
answer
Decide to save your cash to pay for tuition next semester.
question
Money is functioning as a standard of value when you:
answer
Use it to compare two houses in different price ranges.
question
Which of the following is not part of M1 but is included in "near money" according to the text?
answer
Savings accounts
question
Which of the following is not true about money?
answer
It must be minted by the government in order to have value.
question
Martin takes $150 out of his checking account and hides it in his house as cash. The immediate result of this transaction is that M1:
answer
Does not change in value.
question
Barter:
answer
Is the direct exchange of one good or service for another.
question
Which of the following has not served as a form of money for the United States?
answer
Eggs
question
Suppose a bank has $50,000 in transactions accounts and a minimum reserve requirement of 10 percent. Then required reserves are:
answer
$5,000
question
Excess reserves are calculated as:
answer
Total reserves minus required reserves.
question
Money is functioning as a medium of exchange when you:
answer
Buy lunch at a fast food restaurant for yourself and your friend.
question
Monetary Policy
answer
The three things the Federal Reserve Bank can do to help the economy are
1. Set the Reserve Ratio for banks.
2. Set the Discount Rate (Interest Rates).
3. Buy and Sell Bonds via the (FOMC) Federal Open Market Committee.
Lowering the Reserve Ratio, or Lowering Interest Rates or Buying Bonds will increase the amount of money expanding the economy.
Raising the Reserve Ratio, or Raising Interest Rates or Selling Bonds will decrease the amount of money contracting the economy.
1. Set the Reserve Ratio for banks.
2. Set the Discount Rate (Interest Rates).
3. Buy and Sell Bonds via the (FOMC) Federal Open Market Committee.
Lowering the Reserve Ratio, or Lowering Interest Rates or Buying Bonds will increase the amount of money expanding the economy.
Raising the Reserve Ratio, or Raising Interest Rates or Selling Bonds will decrease the amount of money contracting the economy.
question
Money Multiplier
answer
= 1/reserve ratio
question
Money Supply
answer
= Money Multiplier x Monetary Base
question
What are the Federal Reserve's objectives in conducting monetary policy?
answer
"The Congress established the statutory objectives for monetary policy--maximum employment, stable prices, and moderate long-term interest rates--in the Federal Reserve Act."
question
What is the purpose of the Federal Reserve System?
answer
Conducting the nation's monetary policy by influencing money and credit conditions in the economy in pursuit of full employment and stable prices.
Supervising and regulating banks and other important financial institutions to ensure the safety and soundness of the nation's banking and financial system and to protect the credit rights of consumers.
Maintaining the stability of the financial system and containing systemic risk that may arise in financial markets.
Providing certain financial services to the U.S. government, U.S. financial institutions, and foreign official institutions, and playing a major role in operating and overseeing the nation's payments systems.
Supervising and regulating banks and other important financial institutions to ensure the safety and soundness of the nation's banking and financial system and to protect the credit rights of consumers.
Maintaining the stability of the financial system and containing systemic risk that may arise in financial markets.
Providing certain financial services to the U.S. government, U.S. financial institutions, and foreign official institutions, and playing a major role in operating and overseeing the nation's payments systems.
question
The policy lever most commonly used by the Fed is:
answer
Buying and selling bonds.
question
Checks are cleared between private banks by:
answer
The 12 regional Federal Reserve banks.
question
The Board of Governors has ___ members, and they are appointed for ___ year terms.
answer
7; 14
question
Which of the following is often described as the most powerful person in the U.S. economy?
answer
The chairman of the Federal Reserve.
question
The 12 regional Fed banks do all of the following except:
answer
Lend money to individuals.
question
The use of money and credit controls to change macroeconomic activity is known as:
answer
Monetary Policy.
question
Which of the following is not a basic monetary policy tool used by the Fed?
answer
Deposit insurance
question
A change in the reserve requirement is the tool used least often by the Fed because it:
answer
Can cause abrupt changes in the money supply.
question
The key decision maker for general Federal Reserve policy is the:
answer
Board of Governors.
question
By raising or lowering the ______, the Fed changes the cost of money for banks, which impacts the incentive to borrow reserves.
answer
Discount rate
question
Which of the following policies supports the concept of continual adjustment of the money supply to achieve macroeconomic goals?
answer
Discretionary policy.
question
The money multiplier:
answer
Is the reciprocal of the required reserve ratio.
question
Ceteris paribus, if the Fed raises the reserve requirement, then:
answer
The lending capacity of the banking system decreases.
question
Expansionary monetary policy will:
answer
Encourage people to borrow more money.
question
The principal mechanism for directly changing the reserves of the banking system is:
answer
Open-market operations.
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