|
Physical capital is ______. Financial capital is ______. |
the tools, instruments, machines, buildings, and other items that have been produced in the past and that are used today to produce goods and services; the funds that firms use to buy physical capital |
|
Examples of physical capital are ______. |
ovens used by Pizza Hut and lawn mowers used by Larry’s Mowing; bonds issued by Wal-Mart and stocks issued by Boeing |
|
Gross investment is ______. Net investment is ______. |
the total amount spent on new capital; the change in the value of capital |
|
The three main types of markets for financial capital are _______. |
loan markets, bond markets, and stock markets |
|
Choose the correct statement. |
When the price of an asset rises, the interest rate falls, everything else remaining the same. |
|
Michael is an Internet service provider. On December 31, 2010, he bought an existing business with servers and a building worth $500,000. During his first year of operation, his business grew and he bought new servers for $300,000. The market value of some of his older servers fell by $150,000. Calculate Michael’s gross investment, net investment, and depreciation during 2011. |
Michael’s gross investment during 2011 was $300,000 Michael’s depreciation during 2011 was $150,000 Michael’s net investment during 2011 was $150,000 |
|
Treasury Yields Fall to Two-Week Low Treasury bond prices rose on Monday, pushing interest rates down. The interest rate on 10-year bonds fell 4 basis points to 1.65%. Choose the statement that is incorrect. |
if the demand for Treasury bonds increases, , the interest rate on the Treasury bond rises |
|
The following items are (approximate) facts about the U.S. economy: What was the inflation rate in 2005 and 2009? How do you know? The price of a bond _____ between 2005 and 2009 because the _____. |
3; 0; nominal interest rate minus real interest rate remained unchanged; nominal interest rate remained unchanged |
|
G-20 Leaders Look to Shake off Lingering Economic Troubles The G-20 aims to take stock of the economic recovery. One achievement in Pittsburgh could be a deal to require that financial institutions hold more capital. The "capital" referred to in the news clip is ______. The financial institutions that the G-20 might require to hold more capital are ______. The requirement to hold more capital can make financial institutions safer because by using more of its own funds and less borrowed funds, a financial institution ______. |
the institutions own funds; banks and insurance companies decreases its risk of insolvency |
|
Which of the following is an example of financial capital? |
Rachel has taken a loan to buy a new home. |
|
Using a Federal grant of $150,000, a research lab buys equipment for $75,000 that has depreciated by $11,000 after two years. Calculate gross investment and net investment. |
$75,000; $64,000. |
|
Wealth is the value of all the things that people _____. |
own |
|
Saving is the amount of income that is _____ in net taxes or spent on _____ goods and services. |
not paid; consumption |
|
A mortgage is a legal contract that gives ownership of a _____ to the _____ in the event that the _____ fails to meet the agreed loan payments (repayments and interest). |
home; lender; borrower |
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A bond is a promise to pay _____ sums of money on _____ dates. |
specified; specified |
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Bonds issued by _____ are traded in the bond market. |
firms and governments |
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A type of _____ is a mortgage-backed security, which entitles _____ to the income from a package of mortgages. |
a bond; its holder |
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A stock is a certificate of _____ and claim to the _____ that a firm makes. |
ownership; profits |
|
A stock market is a financial market in which shares of stocks of _____ are traded. |
corporations |
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A financial institution is a firm that operates on both sides of the markets for _____: It _____ in one market and _____ in another. |
inancial capital; borrows; lends |
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The Federal Reserve (usually called the Fed) is the central bank of the United States, a _____ authority whose main role is the regulation of _____. |
public; banks and money |
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Net worth is the total market value of what a financial institution has _____ minus the market value of what it has _____. |
lent; borrowed |
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The loanable funds market is ______. |
the aggregate of all the individual financial market |
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The ______ interest rate is the opportunity cost of loanable funds because ______. |
real; the real interest paid on borrowed funds is the opportunity cost of borrowing and the real interest rate forgone is the opportunity cost of not saving or not lending those funds |
|
Choose the statement concerning firms’ investment decisions that is incorrect. |
The higher the real interest rate, the greater is the demand for loanable funds, other things remaining the same. |
|
The demand for loanable funds is determined by ______. |
the real interest rate and expected profit; expected profit |
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Households make saving decisions by considering all of the following factors except _______. |
expected profit |
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Choose the statement that is incorrect. |
The greater the default risk, the greater is the supply of loanable funds. |
|
The demand for loanable funds increases and the supply of loanable funds increases. As a result, the equilibrium real interest rate ______ and the equilibrium quantity of loanable funds ______. |
rises, falls, or remains the same; increases |
|
The demand for loanable funds increases and the supply of loanable funds decreases. As a result, the equilibrium real interest rate ______ and the equilibrium quantity of loanable funds ______. |
rises; increases, decreases, or remains the same |
|
First Call, Inc. is a smartphone company. First Call expects its profit to double next year. If everything else remains the same, how does this increase in expected profit influence First Call’s demand for loanable funds? |
increases; a rightward shift of |
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In a speech at the CFA Society of Nebraska in February 2007, William Poole, former Chairman of the St. Louis Federal Reserve said: U.S. household income has grown considerably since 1984. U.S. saving has ______ because wealth has ______. |
decreased; increased due to capital gains |
|
Households preferred to buy corporate equities rather than bonds because ______. |
corporate equities deliver capital gains, which increases wealth |
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The loanable funds market is the aggregate of all the individual _____ markets. |
financial |
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Net taxes are taxes paid to the government minus _____. |
the cash transfers received from gov |
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The sum of _____ is called national saving. |
private saving and gov saving |
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If the annual interest paid on a $500 loan is $25, the nominal interest rate is _____ percent per year. |
5; 3 |
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The demand for loanable funds is the relationship between _____ demanded and the _____ when all other influences on borrowing plans remain the same. |
the quantity of loanable funds; real interest rate |
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The supply of loanable funds is the relationship between _____ supplied and the _____ when all other influences on lending plans remain the same. |
the quantity of loanable funds; real interest rate |
|
A government budget surplus |
increases |
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A government budget surplus _______ the real interest rate, decreases ______. |
decreases; private saving and increases investment |
|
A government budget deficit |
increases |
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A government budget deficit _______ the real interest rate, increases ______. |
increases; private saving and decreases investment |
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The crowding-out effect is the tendency for a government budget deficit to ______ the real interest rate and decrease ______. |
raise; investment |
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A government budget deficit ______ the real interest rate because ______. |
raises; the demand for loanable funds increases |
|
According to the Ricardo-Barro effect, a government budget deficit ______ the real interest rate. |
has no effect on |
|
According to the Ricardo-Barro effect, when a government budget deficit occurs today, ______. |
saving increases, the supply of loanable funds increases, and the real interest rate does not change |
|
The crowding-out effect is the tendency for a government budget deficit to raise the _____ and _____ investment. |
real interest rate; decrease |
|
1. The "fiscal cliff" is all of the following except _________. |
what happens whenever the economy enters a recession |
|
A government budget deficit |
increases, rises, private saving, investment |
|
The economy is in a recession and with incomes falling, ________. |
saving decreases, which decreases the supply of loanable funds; the demand for loanable funds will decrease and the real interest rate might rise of fall |
|
At full employment, a decrease in the government budget deficit _______ the real interest rate and _______ investment. |
lowers; increases |
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Suppose if when the United States hits its "fiscal cliff," the governments in Europe, China, and Japan also were to cut their budget deficits. As a result, the world interest rate _______. |
falls; decreases and world investment increases |
|
Suppose if when the United States hits its "fiscal cliff," the governments in Europe, China, and Japan were to increase their budget deficits. As a result, the world interest rate _______. |
rises; increases and world investment decreases |
|
The news article draws attention to the long-term problems of ______. |
the growth of U.S. government debt and U.S. international debt |
|
The major event in the global and U.S. loanable funds markets in 2009 was the growth of world government budget |
deficits, increased, did not change, increased |
|
This major event in the global and U.S. loanable funds markets |
did not change, increased, decreased |
|
If governments in other countries lower their budget deficits but the U.S. government does not lower its deficit, the world real interest rate |
falls, does not change, does not change, increases |
|
If the United States lowers its budget deficit but the governments in other countries do not lower their deficits, the world real interest rate ______ and the amount that the United States borrows from the rest of the world ______. |
falls; decreases |
|
Money is any commodity or token that is generally acceptable as a ______. |
means of payment |
|
Choose the correct statements. 1. |
3 & 4 are correct |
|
A problem with using a commodity as money is ______. |
a commodity’s value changes over time |
|
The main components of money in the United States today are ______. |
currency and deposits at banks and other depository institutions |
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The two main official measures of money in the United States today are ______. The two main official measures of money in the United States ______ really money. |
M1 and M2; are |
|
Choose the correct statement. |
a credit card is not a means of payment |
|
Cash in Citibank’s cash machines |
not money; money; not money; not money |
|
Which of the following is money? |
Charlie’s checking account deposit at the Bank of America. |
|
A means of payment is a method of _____ a debt. |
settling |
|
Currency consists of _____. |
notes (dollar bills) and coins |
|
M1 consists of currency held by _____ and _____, _____, and _____ owned by individuals and businesses. |
individuals; businesses; traveler’s check; checkable deposits |
|
M2 consists of _____ plus _____ and _____ deposits, _____, and other deposits. |
M1; savings deposits; small time; money market funds |
|
Choose the statement that is incorrect. |
if a depository institution fails, its depository are guaranteed up to a max of $250,000 per deposited per bank |
|
The functions of depository institutions include all of the following except ______. |
providing insurance on loans |
|
Depository institutions balance risk and return by _______. |
placing some funds into safe low interest-earning assets and other funds into high-interest risky assets |
|
A depository institution creates liquidity by ______. |
borrowing short and lending long |
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Depository institutions pool risk because they use funds obtained from ______ depositors to make loans to ______ borrowers. |
many; many |
|
Depository institutions minimize the cost of monitoring borrowers by ______. |
using specialized resources that have a much lower cost than what households would incur if they had to undertake the activity individually |
|
Depository institutions have made innovations that have changed the composition of money in all of the following ways except ______. |
the use of currency has fallen significantly |
|
Europe’s Banks Must Be Forced to Recapitalize E.U. banks must hold more capital. Where private funding is not forthcoming, recapitalization must be imposed by E.U. governments. European banks need more capital because _______. |
they risk failing if loans they hold are not repaid or if other assets lose value; owners’ investment in the bank |
|
Requirements to hold more capital make banks safer because _______. |
the requirement to hold more capital makes the possibility of failure less likely |
|
Regulators Give Bleak Forecast for Banks A bank’s "balancing act" balances _______. The over-pursuit of profit or underestimation of risk can lead to bank failure because _______. |
return against risk; some borrowers default and never repay , which can lead to bank insolvency |
|
During times of uncertainty, it might be necessary for a bank to hold large cash reserves and to have a large percentage of its assets purchased by its own capital because ______. |
its depositors may decide to make large withdrawals |
|
A depository institution is a financial firm that takes deposits from _____. |
households and firms |
|
Reserves consist of the currency in the _____ plus the balance on its _____ account at _____. |
bank’s vaults; reserve; a Federal Reserve Bank |
|
The federal funds rate is the _____ rate on _____ loans. |
interest; interbank |
|
The central bank of the United States is the ______. |
Federal Reserve System |
|
A central bank performs all of the following functions except ______. |
it provides general banking services for businesses and individual citizens |
|
The monetary base is the sum of _______. |
Federal Reserve notes, coins, and depository institution deposits at the Fed; the liabilities of the Fed plus coins issued by the Treasury |
|
The required reserve ratio is the ______. |
minimum % of deposits that depository institutions are required to hold as reserves |
|
The Fed is the lender of last resort, which means _______. |
if depository institutions are short of reserves, they can borrow from the Fed |
|
Choose the correct statements. 1. The President of the United States is a member of the FOMC. |
statements 3 & 4 are correct |
|
An open market purchase ______ the monetary base. |
increases; decreases |
|
Risky Assets: Counting to a Trillion Prior to the financial crisis, the Fed held less than $1 trillion in assets and most were in safe U.S. government securities. By mid-December 2008, the Fed’s balance sheet had increased to over $2.3 trillion. The massive expansion began when the Fed rolled out its lending program: sending banks cash in exchange for risky assets. The Fed’s policy tools include all of the following except ______. |
changing government expenditure |
|
To increase its assets to $2.3 trillion in 2008, the Fed used ______. |
last resort loans |
|
In September 2007 before the financial crisis and recession, the Fed had assets of $800 billion, mainly short-term government securities. In June 2012 after two rounds of quantitative easing, the Fed’s assets totaled $2,600 billion. Many of those assets were long-term securities and not all of them were government securities. Choose the statement that is incorrect. |
quantitative easing decreased bank reserves |
|
Between 2007 and 2012 the monetary base _______. |
increased |
|
A central bank is a banks bank and a _____ authority that regulates a nation’s depository institutions and conducts _____ policy, which means that it adjusts the _____ and influences _____________ |
public; monetary; quantity of money in circulation; interest rates |
|
A central bank is a bank’s bank and a _____ authority that regulates a nation’s depository institutions and conducts _____ policy, which means that it adjusts the _____ and influences _____. |
public; monetary; quantity of money in circulation; interest rates; |
|
The Federal Reserve System (the Fed) is the _____ of the United States. |
central bank |
|
The Federal Open Market Committee is the Fed’s _____ committee. |
main policy making |
|
The monetary base is the sum of _____, _____, and _____ at the Fed. |
coins; Federal Reserve notes; banks’ reserves |
|
An open market operation is the purchase or sale of _____ - _____ – by the _____ in the open market. |
gov securities; US treasury bills and bonds; NY Fed |
|
The Fed is the lender of last resort, which means that if _____ is short of reserves, it can borrow from the _____. |
a bank; Fed |
|
The required reserve ratio is the minimum percentage of _____ that _____ are required to hold as reserves. |
deposits; depository institutions |
|
Banks create money by ______. |
making loans |
|
The quantity of money that the banking system can create is limited by _______. |
the monetary base, desired reserves, and desired currency holdings |
|
A bank manager tells you that she doesn’t create money. She just lends the money that people deposit. |
incorrect; every new loan creates a new deposit |
|
China Cuts Banks’ Reserve Ratios The People’s Bank of China announces it will cut the required reserve ratio. Lowering the required reserve ratio ______, which ______ the quantity of loans that China’s banks can make and the quantity of money created. |
increases excess reserves; increases |
|
China Cuts Banks’ Reserve Ratios The People’s Bank of China made a long-awaited move to boost lending in the country’s slowing economy with the announcement that it would lower the required reserve ratio by 50 basis points from February 24. The cut will bring the ratio down to 20.5 percent for the largest banks. A lower required reserve ratio increases bank profits because ______. |
the banks hold fewer reserves |
|
The quantity of desired reserves depends on the level of deposits and is determined by the desired reserve ratio - the ratio of _____ to _____ that the _____ plan to hold. |
reserves; deposits; banks |
|
We call the leakage of bank reserves into currency the currency drain, and we call the ratio of _____ to _____ the currency drain ratio. |
currency; deposits |
|
Excess reserves are a bank’s _____ reserves minus its _____ reserves. |
actual; desired |
|
If the monetary base increases by $1 million and the quantity of money increases by $2.5 million, then the money multiplier is _____. |
2.5 |
|
The main influences on the quantity of money that people and businesses plan to hold include all of the following |
the quantity of reserves |
|
In the short run, ______ and ______ adjusts to achieve equilibrium. |
real GDP determines the demand for money curve and the Fed determines the quantity of real money supplied; the nominal interest rate |
|
In the short run, when the Fed decreases the quantity of money, people enter the loanable funds market and |
sell |
|
The price of a bond ______ and the interest rate ______. |
falls; rises |
|
In the long run, an increase in the quantity of money _______. |
raises the price level and lowers the value of money |
|
If the interest rate is greater than 4 percent a year, the price of a bond ______, and the interest rate ______. |
rises; falls |
|
The demand for money is the relationship between the quantity of money demanded and the _____, when all other influences on the amount of money that people wish to _____ remain the same. |
nominal interest rate; hold |
|
According to the quantity theory of money, in the long run an increase in the quantity of money of 5 percent, |
a 5% increase |
|
The velocity of circulation is the average number of times a dollar of money is used annually to buy ______. |
the goods and services that make up GDP; V = (P ×Y) ÷M |
|
The equation of exchange is ______ and it is true ______. |
MV=PY; by definition |
|
The long-run historical evidence and international evidence show us that the relationship between money growth and the inflation rate ______. |
supports the quantity theory, but the correlation is not perfect |
|
The quantity theory of money is the proposition that when real GDP _____ potential GDP, an increase in |
equals; an equal; price level |
|
The velocity of circulation is the _____ number of times in a _____ that each dollar of money gets used to buy final goods and services. |
average; year |
|
How can the change in U.S. wealth differ from U.S. saving? |
The change in wealth includes changes in the prices of assets owned and saving excludes these items. |
|
An increase in current income taxes ______ the supply of loanable funds today because it ______. |
decreases; decreases disposable income, which decreases saving |
|
An increase in expected future income ______. |
decreases the supply of loanable funds today because households with larger expected future income will save lessless today |
|
A government budget surplus occurs, which increases the |
supply of |
|
The real interest rate ______, household saving ______, |
falls; decreases and investment increases |
|
A government budget deficit occurs, which ______. |
increases the demand for loanable funds; rises |
|
Private saving |
increases; decreases |
|
Physical capital is ______. Financial capital is ______. |
the tools, instruments, machines, buildings, and other items that have been produced in the past and that are used today to produce goods and services; the funds that firms use to buy physical capital |
|
Examples of physical capital are ______. |
ovens used by Pizza Hut and lawn mowers used by Larry’s Mowing; bonds issued by Wal-Mart and stocks issued by Boeing |
|
The three main types of markets for financial capital are _______. |
loan markets, bond markets, and stock markets |
|
G-20 Leaders Look to Shake off Lingering Economic Troubles The G-20 aims to take stock of the economic recovery. One achievement in Pittsburgh could be a deal to require that financial institutions hold more capital. |
the institutions’ own funds; banks and insurance companies |
|
The requirement to hold more capital can make financial institutions safer because by using more of its own funds and less borrowed funds, a financial institution ______. |
decreases its risk of insolvency |
|
A mortgage is _______. |
a legal contract that gives ownership of a home to the lender in the event that the borrower fails to meet the agreed loan payments (repayments and interest) |
|
Choose the correct statement. |
Commercial banks are financial institutions that accept deposits, provide payment services, and make loans to firms and households. |
|
Choose the statement that is incorrect. |
If a financial institution’s net worth is positive, the institution must be solvent and liquid. |
|
What are the three sources of global investment funds? |
household saving, government budget surplus, borrowing from the rest of the world |
|
Suppose that Sara withdraws $1,000 from her savings account at the Lucky S&L, keeps $50 in cash, and deposits the balance in her checking account at the Bank of Illinois. |
an increase; no change |
|
Rapid inflation in Brazil in the early 1990s caused the cruzerio to lose its ability to function as money. |
packs of cigarettes because they are a good medium of exchange |
|
From Paper-Clip to House, in 14 Trades Barter ______ a means of payment. |
is; is not as efficient as money because barter requires a double coincidence of wants |
|
Money serves as a ______. |
medium of exchange, which means that it is generally accepted in exchange for goods and services |
|
Choose the correct statement. |
Deposits are money, checks are not money, and credit cards are not money. |
|
Choose the statement that is incorrect. |
Deposits are not money because you cannot settle a debt with a deposit. |
|
U.S. Bank Earnings up 21% as Loan Losses Decline, FDIC Says A bank’s attempts to pursue profit can sometimes lead to bank failure because _______. |
a combination of all of the above |
|
U.S. Bank Earnings up 21% as Loan Losses Decline, FDIC Says FDIC insurance helps to minimize bank failures and bring more stability to the banking system because _______. |
depositors know that money they have deposited with a bank will be repaid |
|
Choose the statement that is incorrect. |
Liquid assets have a higher interest rate than securities. |
|
A central bank is ______. |
a bank’s bank and a public authority that regulates a nation’s depository institutions and conducts monetary policy; Federal Reserve System |
|
One of the Fed’s main policy tools is ______. |
the last resort loan, which means that if a bank is short of reserves, it can borrow from the Fed |
|
Choose the statement about the Fed that is incorrect. |
The policy decisions of the Federal Open Market Committee are implemented each month by a different Federal Reserve Bank. |
|
An open market operation is ______. |
the purchase or sale of securities by the Federal Reserve System in the loanable funds market |
|
The ratio of reserves to deposits that a bank plans to hold is its ______. |
desired reserve ratio; excess reserves |
|
The money multiplier is the ratio of the change in the quantity of ______ to the change in the quantity of ______. |
money; monetary base |
|
When the Fed buys securities from a bank, ______. |
the bank’s reserves increase but its deposits do not change |
|
If the interest rate is 5 percent, people will ______. |
buy bonds, bid up their price, and the interest rate will fall |
|
Suppose the Fed increases the quantity of money. |
loanable funds; price level |
|
When the interest rate falls, other things remaining the same, the opportunity cost of holding money ______ and ______. |
falls; the quantity of money demanded increases |
|
In the short run, the quantity of real money and real GDP are given and the ______ adjusts to achieve equilibrium. |
interest rate; real interest rate |
|
In the long run, |
the price level |
|
An economy at a full-employment equilibrium experiences an increase in aggregate demand. |
falls below; rise |
|
A cost-push rise in the price level can arise from an increase in _______. |
the money wage rate or money prices of raw materials |
|
An economy is at potential GDP when it experiences an increase in costs. |
stagflation |
|
A stagflation can turn into a cost-push inflation process when _______. |
the quantity of money persistently increases |
|
If inflation is expected, _______. |
either a cost-push inflation nor a demand-pull inflation occur |
|
The best forecast available, which is based on all the relevant information is called _______. |
a rational expectation |
|
If the government increases its expenditure on goods and services and as a result, the money wage rate increases, the economy has experienced _______. |
a demand-pull rise in the price level |
|
A rise in the price of oil creates _______. |
a one-time cost-push rise in the price level |
|
A stagflation can turn into a cost-push inflation process when _______. |
the quantity of money persistently increases |
|
Along the short-run Phillips curve, ______. |
the expected inflation rate and the natural unemployment rate are constant |
|
Along the long-run Phillips curve, _______. |
the unemployment rate is constant at the natural unemployment rate |
|
A movement ______ along the short-run Phillips curve occurs when there is an ______ increase in aggregate demand. |
up; unexpected |
|
If the natural unemployment rate increases and the expected inflation rate remains constant, then ______. |
the long-run Phillips curve shifts rightward and the short-run Phillips curve shifts rightward |
|
Choose the statement about the long-run Phillips curve that is incorrect. |
An unexpected increase in aggregate demand shifts the long-run Phillips curve rightward |
|
If the expected inflation rate increases and the natural rate of unemployment remains constant, then _______. |
the short-run Phillips curve shifts upward and the long-run Phillips curve does not shift |
|
Deflation is _______. |
a persistently falling price level |
|
Choose the statement that is incorrect. |
In a deflation, the inflation rate is positive but decreasing in consequent years. |
|
Deflation occurs when _______. |
aggregate demand increases at a persistently slower rate than aggregate supply |
|
The consequences of deflation include all of the following except _______. |
falling real wage rates for workers with long-term wage contracts |
|
The mainstream business cycle theory is that ______ grows at a steady rate while ______ grows at a fluctuating rate. |
potential GDP; aggregate demand |
|
In mainstream business cycle theory, the money wage rate is |
sticky |
|
If aggregate demand grows faster than potential GDP, ______ gap emerges and if it grows more slowly than potential GDP, ______ gap emerges. |
an inflationary; a recessionary |
|
In ______ cycle theory, fluctuations in investment driven by fluctuations in business confidence are the main source of fluctuations in aggregate demand. In ______ cycle theory, fluctuations in both investment and consumption expenditure, driven by fluctuations in the growth rate of the quantity of money, are the main source of fluctuations in aggregate demand. |
Keynesian; monetarist |
|
In ______ cycle theory, the rational expectation of the price level, which is determined by potential GDP and expected aggregate demand, determines the money wage rate and the position of the SAS curve. In ______ cycle theory, past rational expectations of the current price level influence the money wage rate and the position of the SAS curve. |
new classical; new Keynesian |
|
According to RBC theory, the source of the business cycle is _______, which result mainly from _______. |
fluctuations in productivity; fluctuations in the pace of technological change |
|
According to RBC theory, the main source of economic fluctuations is a decrease in ______ |
productivity growth |
|
The effect of this decrease is |
a decrease; a decrease; a decrease |
|
The effect of this decrease is |
a decrease; a decrease; a decrease; a decrease |
|
The main criticisms of RBC theory include all of the following except ______. |
real business cycle theory relies too heavily on the role of money in the economy to make its predicitons |
|
Defenders of RBC theory claim all of the following except _______. |
RBC theory is consistent with a negligible intertemporal substitution effect |
|
Debate on Causes of Joblessness Grows What is the cause of the high unemployment rate? One side says there is not enough government spending. The other says it’s a structural problemlong dash—people who can’t move to take new jobs because they are tied down to burdensome mortgages or firms that can’t find workers with the requisite skills to fill job openings. ______ cycle theory would say that the rise in unemployment is not cyclical but is a change in the natural unemployment rate. |
real business |
|
Suppose that the business cycle in the United States is best described by RBC theory. The when-to-work decision depends on the real interest rate. The _____ the real interest rate, other things remaining the same, the _____ is the supply of labor today. |
higher; larger |
|
RBC theorists believe the when-to-work effect is |
large |
|
Real Wages Fail to Match a Rise in Productivity For most of the last century, wages and productivitylong dash—the key measure of the economy’s efficiencylong dash—have risen together, increasing rapidly through the 1950s and ’60s and far more slowly in the 1970s and ’80s. But in recent years, the productivity gains have continued while the pay increases have not kept up. In real business cycle theory, an increase in productivity ______ the demand for labor by more than it ______ the supply of labor. |
increases; increases |
|
In the news clip, productivity gains exceed pay increases because the demand for labor ______ than the ______ in the supply of labor. |
increase by less; increase |
|
The analysis of macroeconomic performance in the news clip reflects the ______ business cycle theory because it discusses ______. |
real; factors that change potential GDP |
|
In Keynesian cycle theory, fluctuations in _____ driven by fluctuations in business confidence – summarized by the phrase "animal spirits" – are the main source of fluctuations in _____. |
investment; aggregate demand |
|
In monetarist cycle theory, fluctuations in both _____, driven by fluctuations in the growth rate of the quantity of money, are the main source of fluctuation in aggregate demand. |
investment and consumption expenditure |
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In new classical cycle theory, the rational expectation of the price level, which is determined by potential GDP and expected aggregate _____, determines the _____ and the position of the SAS curve. |
demand; money wage rate |
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The new Keynesian cycle theory emphasizes the fact that today’s money wage rates were negotiated at many past dates, which means that _____ rational expectations of the _____ price level influence the money wage rate and the position of the SAS curve. |
past; current |
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The newest theory of the business cycle, known as real business cycle theory (or RBC theory), regards random fluctuations in _____ as the main source of economic fluctuations. |
productivity |
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A demand-pull inflation begins with _______. |
an increase in aggregate demand |
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A cost-push inflation begins with ______ as the result of an increase in the money wage rate or an increase in the money prices of raw materials. |
a decrease in short-run aggregate supply |
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A cost-push rise in the price level will initially move the economy to point ______ and to point ______ |
C when the money prices of raw materials rise; D when aggregate demand increases |
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Stagflation is a combination of a ______ in the price level and ______ in real GDP. |
rise; a decrease |
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Stagflation occurs when _______. |
costs increase |
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An economy is at potential GDP and the price level is 100 in the figure. |
3 percent a year |
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All of the following events except an increase in ______ might cause a demand-pull inflation. |
the money wage rate |
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Starting at point A, the initial effect of a demand-pull inflation is a move to point ______. As a demand-pull inflation spiral proceeds, it follows the path ______. |
C; E, H, I |
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Which of the following events might cause a cost-push inflation? |
an increase in the money wage rate or an increase in the money prices of raw materials |
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Starting at point A, the initial effect of a cost-push inflation is a move to point ______. As a cost-push inflation spiral proceeds, it follows the path ______. |
B; E, G, I |
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The economy starts out on the curves AD0 and SAS0. Some events then occur that generate an expected inflation. |
an expected increase in taxes |
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Starting at point A, the initial effects of an expected inflation is a movement to point ______. As an expected inflation proceeds, it follows the path ______. |
E; I |
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Pakistan: Is it Cost-Push Inflation? With CPI already spiking 11.8 percent for the first ten months of the fiscal year, the average CPI inflation for the same period last year stood at 22.35 percent. Some economists insist the current bout of inflationary pressures is spawned by increasing prices of fuel, food, raw materials, Pakistan is experiencing ______ inflation. |
cost-push |
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Tight Money Won’t Slay Food, Energy Inflation It’s important to differentiate between a general increase in priceslong dash—a situation in which aggregate demand exceeds their aggregate supplylong dash—and a relative price shock. For example, a specific shock to energy prices can become generalized if producers are able to pass on the higher costs. So far, global competition has made that difficult for companies, while higher input costs have largely been neutralized by rising labor productivity. Since 2003, core inflation has averaged less than 2 percent a year in the 30 major economies. History also suggests the Fed’s gamble The news clip refers to ______ inflation when it discusses rising production costs. "Rising labor productivity" can neutralize the effect on the inflation rate of "higher input costs" because ______. |
cost-push; it increases short-run aggregate supply and long-run aggregate supply with no slowdown in aggregate demand growth |
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Choose the correct statement. |
"slowing growth" can reduce inflationary pressure if aggregate demand growth slows |
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Official: China May Face Heavy Inflation Pressure China is expected to face great inflationary pressure in the future due to higher costs and an abundant global money supply, a senior Chinese official said in an article published Tuesday. China is experiencing a ______ inflation caused by ______. |
demand-pull; loose monetary policy, which increases aggregate demand |
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Getting a Raise: Why It’s Not Happening Didn’t get a raise this year? Blame inflation. American wages didn’t budge last month, according to Labor Department data released Wednesday. And with inflation remaining at near zero, experts say it could be quite a while before many workers see their next raise. While stagnant prices are a boon for consumers on supermarket checkout lines, they can be hard on workers’ bottom lines. Wages typically track inflation, soaring higher when prices take off. In fact, some say wages tend to feed inflation. That was the case in the 1970s, when wage growth picked up after prices soared. But pricing pressures are weaker today, with the consumer price index, a measure of inflation, unchanged in July from the previous month. Choose the statement that is incorrect. |
if the percentage change in the money wage rate equals the percentage change in the unemployment rate, the economy remains at full employment |
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"Wages typically track inflation, soaring higher when prices take off." In this situation, the economy is experiencing _______ inflation. |
demand- pull |
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An economy experiences _______ inflation when "wages tend to feed inflation." |
demand- pull |
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An inflation that starts because _____ is called demand-pull inflation. |
aggregate demand increases |
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An inflation that is kicked off by an increase in _____ is called cost-push inflation. |
costs |
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The combination of a rising _____ and decreasing _____ is called stagflation. |
price level; real GDP |
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A rational expectation is a forecast that results from the use of all the relevant data and _____. |
economic science |
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Deflation is _______. |
a persistently falling price level |
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Choose the statement that is incorrect. |
in a deflation, the inflation rate is positive but decreasing in consequent years |
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Deflation occurs when _______. |
aggregate demand increases at a persistantly slower rate than aggregate supply |
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The quantity theory of money tells us that _______. |
a change in the money growth rate brings an equal change in the inflation rate |
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The consequences of deflation include all of the following except _______. |
falling real wage rates for workers with long-term wage contracts |
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Deflation can be ended by _______. |
increasing the growth rate of the quantity of money |
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The short-run Phillips curve is a curve that shows the relationship between the _____ rate and _____ when _____ and the _____ remain constant. |
inflation; the unemployment rate; the natural unemployment rate; expected inflation rate |
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The long-run Phillips curve is the relationship between _____ and _____ when the economy is at full employment. The long-run Phillips curve is a _____ line at the _____ unemployment rate. |
inflation; unemployment; vertical; natural |
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An unexpected increase in aggregate demand ______ rate, which is shown by ______ the short-run Phillips curve. |
decreases unemployment and increases the inflation; a movement up along |
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A change in the actual inflation rate brings a movement along the ______. A change in the expected inflation rate brings ______. |
SRPC; a shift of the SRPC |
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If the natural unemployment rate increases, the long-run Phillips curve _______ and the short-run Phillips curve ______ |
shifts rightward; shifts rightward |
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The expected inflation rate |
does not change |
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he U.S. short-run Phillips curve ______ when the expected inflation rate rises. The U.S. short-run Phillips curve ______ when the natural unemployment rate increases. |
shifts upward; shifts rightward |
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The U.S. long-run Phillips curve ______ when the expected inflation rate rises. The U.S. long-run Phillips curve ______ when the natural unemployment rate increases. |
does not shift; shifts rightward |
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Eurozone Unemployment Hits Record High As Inflation Rises Unexpectedly Eurozone unemployment rose to 10.7 percent. At the same time, Eurozone inflation unexpectedly rose to 2.7 percent a year, up from the previous month’s 2.6 percent a year A very high unemployment rate can be accounted for by the Phillips curve model by all of the following except_______. |
a movement up along the long-run Phillips curve if the natural unemployment rate increases |
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Choose the statement that is incorrect about the Eurozone economy. |
A rise in the expected inflation rate shifts the short-run Phillips curve rightward |
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From the Fed’s Minutes Members expected real GDP growth to be moderate over coming quarters and then to pick up very gradually, with the unemployment rate declining only slowly. With longer-term inflation expectations stable, members anticipated that inflation over the medium run would be at or below 2 percent a year. FOMC members are predicting that the U.S. economy ______. |
is on a short-run Phillips curve to the right of the LRPC and will move leftward up along the SRPC |
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Recession? Maybe. Depression? Get Real. The unemployment rate during the Great Depression peaked at nearly 25 percent in 1933, after an initial spike from 3 percent in 1929 to nearly 8.7 percent in 1930. The unemployment rate is just 5 percent, only up from 4.5 percent a The inflation and unemployment trends during the Great Depression can be explained by a movement along the ______ Phillips curve that ______. |
short run; lowers the inflation rate and increases the unemployment rate |
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During 2008, the inflation rate increased and the unemployment rate increased. These events ______. |
cannot be explained by a movement along the SRPC because along this curve the inflation rate and unemployment rate move in opposite directions |
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