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EARL N. PHILLIPS SCHOOL OF BUSINESS HIGH POINT UNIVERSITY ECO 2030 Course Materials Principles of Macroeconomics Professor Jerry Fox 1 Table of Contents Table of Contents ...................................................................................................................... 2 ECO 2030 COURSE SYLLABUS ........................................................................................... 4 HPU Final Exam Schedule ..................................................................................................... 11 Guidelines for Term Paper ...................................................................................................... 12 Research Paper Outline Assignment ....................................................................................... 13 Chapters 1 & 2: Introductory Concepts .................................................................................. 14 Circular Flow Diagram ....................................................................................................... 16 Production Possibilities Model ........................................................................................... 18 Chapter 3: Market Supply and Demand Model ...................................................................... 24 Demand and Supply worksheets ......................................................................................... 32 Macroeconomic Equations from chapters 24 & 26 ................................................................ 37 Calculations using Macroeconomic measurements ............................................................ 39 Macroeconomic data at BEA.gov ........................................................................................... 42 Macroeconomic data at BLS.gov ............................................................................................ 43 Business cycle ......................................................................................................................... 44 Unemployment Demographics ............................................................................................... 47 Types of Unemployment and Related Issues (Chapter 26) .................................................... 48 Consumption, Investment, and the Multiplier Effect.............................................................. 49 Multiplier Assignment ........................................................................................................ 55 Aggregate supply and demand-chapter 29 .............................................................................. 56 Fiscal Policy—Chapter 30 ...................................................................................................... 63 Monetary Policy: ..................................................................................................................... 64 Federal Reserve and Banking System: chapters 31-32 ........................................................... 66 Classical and Keynesian Perspectives on the Macroeconomy ............................................... 67 International Trade: chapter 37 ............................................................................................... 68 International Finance: chapter 38............................................................................................ 69 Video Segments ...................................................................................................................... 71 Review Test Questions for First Test...................................................................................... 72 Practice Supply and Demand Questions ................................................................................. 76 Review Questions for the Second test .................................................................................... 78 Review Questions for Third Test ............................................................................................ 85 Review Test Questions for Final Exam .................................................................................. 90 Additional Review Questions for Final Exam ...................................................................... 103 Further Review Questions for Final Exam. ............................................................................ 95 2 Creating a trendline in a scatter graph using Numbers ......................................................... 103 Midterm Student Evaluation ................................................................................................. 106 Additional Macroeconomic Essays....................................................................................... 107 3 EARL N. PHILLIPS SCHOOL OF BUSINESS HIGH POINT UNIVERSITY ECO 2030 COURSE SYLLABUS Principles of Macroeconomics: sections 1 & 2 Professor: Jerry Fox, Ph.D. Semester: Spring 2014 Credits: Four Semester Hours Time: Section 1: MWF 3:25 – 4:35pm, Phillips 222 Location: Section 2: TTh 1:35 – 3:15pm, Phillips 221 Office Hours: MWF 4:35 – 5:35pm; TTh 5:10 – 6:10pm Office: Phillips 228 Phone: 841-4559 (office), 841-4521 (Business School) Email: [email protected] Prerequisites: Sophomore Standing Textbook: ECONOMICS, 19TH Edition, by McConnell and Brue Additional -- blackboard files; worksheets, various handouts, DVD or video segments, Materials: Computer Lab: Computers and software are available in the business computer lab to be used for completion of homework and writing assignments. -Please a bring notebook computer to class as much as possible for classwork assignments. Computer classwork and homework involves use of the internet, MS Excel, and MSWord. 4 CATALOG DESCRIPTION: Demand and supply, free enterprise and capitalism, GDP and the business cycle, unemployment, inflation, fiscal and monetary policy, banking, international trade and finance, and other related topics. The course will help students understand current economic problems and policy debates. Four credits. Prerequisite: Sophomore standing. COURSE CONTENTS: Course material and class discussions are categorized into five general subjects. Refer to table of contents in the text for a more detailed description. I. Introduction, chapters 1-3 Definitions, Methodology, Opportunity Cost, Production Possibilities, Circular Flow, Market (microeconomic) Supply and Demand, Private Sector, Public Sector II. Macroeconomic Measurements and Problems, chapters 23-26 National Income Accounting, Inflation, Unemployment, GDP Okun’s Law, Business Cycle, Modern Phillips Curve III. Macroeconomic Supply and Demand, chapters 27-29 Average and marginal propensities to Consume and Save, Multiplier Effect, Investment Behavior, Consumer Behavior, Aggregate Supply & Demand, Classicism, Keynesianism IV. Macroeconomic Policy, chapters 30-34 Fiscal Policy: taxes and government spending (President and Congress), Monetary Policy: money supply and interest rates (Federal Reserve), Monetarism V. International Economics and Other Issues, chapters 37-38 International Aspects of Macroeconomics, International Trade, International Finance, International Debt, exchange rates Supply Side Economics, National Deficits and Debt COURSE OBJECTIVES: This course provides an introduction to the major topical areas of macroeconomics, including an emphasis upon differing macroeconomic perspectives, the application of macroeconomic theories, and the effects of macroeconomic policies. The course provides a conceptual framework for understanding the influence of macroeconomics upon business and society. 5 As a result of this course, students should gain proficiency in each of the following areas: Be able to use the demand and supply graph to predict equilibrium price and quantity, and their changes over time. Discuss the basic institutions of a free-market system. Explain the concept of GDP, how it is calculated, and whether it can be used as a measure of social well-being. Define the business cycle and describe its related patterns in GDP, unemployment, and inflation. Explain how unemployment is measured, debates about this measurement, and major types of unemployment and their causes. Be able to find recent unemployment statistics. Be able to explain how we measure inflation, debates about this measurement, and inflation’s causes. Be able to find recent inflation figures. Be able to identify and define basic macro theories of consumption and investment and their predictions. Be able to describe the concept of an aggregate demand and supply graph. Debate whether the macro-economy can self-correct from business-cycle problems. Describe fiscal policy and debate its usefulness. Explain budget deficits and surpluses, and the public debt. Describe the Federal Reserve System and explain how and why the Fed conducts expansionary and contractionary policy. Describe the basic concepts of world trade, trade barriers, balance-of-payments, and exchange rates. TEACHING METHODS: Instructional methods consist of lectures, discussions, text and other readings, blackboard documents, homework assignments, short analytical papers, group work, worksheets, classwork, video segments, class demonstrations, library and internet research, three exams and a comprehensive final test, and a research paper. ATTENDANCE POLICY: Attendance will be recorded at the beginning of each class period. Success in this course depends on regular attendance, active participation during class discussions and study. Students should come prepared for each class period by bringing their textbooks, notes, relevant handouts, worksheets and calculators. The Phillips School of Business has adopted a universal attendance policy. The Phillips School of Business at HPU has adopted a universal attendance policy. Following the third absence, a student will be placed on Class Attendance Probation. If the student misses one more class after being placed on probation, the student may be dropped from the class with a grade of W, WA, or FA as appropriate (see 2013-2014 Undergraduate Bulletin, p. 46). Please inform the professor ahead of time if you must miss class, especially for exams. 6 OUT-OF-CLASS WORK: In addition to attending class, students are expected to spend at least 2 hours each week engaged in out-of-class work (i.e., reading, studying, doing homework, etc.) for every hour of credit earned in this course. THE WRITING CENTER provides writing assistance for students at any level of study – from freshman to graduate – at any stage in the writing process, from invention through revision. The Writing Center staff will be available in a variety of locations during various hours throughout the day, Sunday through Thursday. Go to https://highpoint.mywconline.com/ to make an appointment. Appointments can only be made through the online portal. Appointments will be available starting September 2, 2013. Writing consultants do not proofread or edit students’ papers for them, but they do work with students to help them develop strategies for improving their writing in light of their respective assignments, instructors, and writing styles. For more information, contact the Writing Center Director, Dr. Leah Schweitzer, at [email protected] or (336) 841-9106. Economics tutors are available by appointment on 4th floor of library. GRADING POLICY: Course grades are based on homework assignments, three midterm exams, a comprehensive final exam, research paper, class participation and individual effort. The final exam consists of 50 percent new material and 50 percent review material from previous exams. Students should bring a calculator to all exams. The overall course grade is determined according to the following criteria: Requirements Percentage of Course Grade Examination Dates 1. First exam 16% Section 1: 1/27 Section 2: 1/28 2. Second exam 16% Section 1: 2/26 Section 2: 2/27 3. Third exam 16% Section 1: 3/31 Section 2: 4/1 4. Homework, Class Work, Class Participation, Individual Effort 16% Throughout semester 5. Research Paper 16% Section 1: 4/23 Section 2: 4/22 6. Comprehensive final exam 20% Section 1: 4/26, 4-7pm Section 2: 4/29, 12noon-3pm Total: 100% 7 Grading scale for exams and research paper: A+ A AF 97-100 93-96 90-92 below 60 B+ B B- 87-89 83-86 80-82 C+ C C- 77-79 73-76 70-72 D+ D D- 67-69 63-66 60-62 STUDENTS WITH DISABILITIES: Students who require classroom accommodations due to a diagnosed disability must submit the appropriate documentation to Disability Support in the Office of Academic Development, 4th Floor Smith Library. A student’s need for accommodations must be made at the beginning of a course. Accommodations are not retroactive. ELECTRONIC DEVICES IN THE CLASSROOM: Laptops and other computers are to be used in the classroom for note taking or other teacherassigned activities. Text messaging, web browsing or e-mailing should not occur during class time. Please do not accept phone calls or use your phone for picture taking or videos during class time. Any such activities during an exam will be considered as cheating. COURSE EVALUATIONS: All students are expected to complete course evaluations in the week preceding final exams. These evaluations, which are delivered online, are an important part of High Point University’s assessment program, so your cooperation in completing them is greatly appreciated. As the end of the semester or academic session draws near, you will receive information from the Office of Institutional Research and Assessment about how to complete the online evaluations. IMPORTANT NOTE: All communications from the Office of Institutional Research and Assessment will be sent to your High Point University e-mail account, so please be sure to check and maintain your account regularly. 8 HONOR CODE: The High Point University Honor Code expects all students to act in a manner so as not to infringe upon the rights and responsibilities of others. It is crucial to the development of a college student that one have the right to learn and prosper in a society free from fraudulence and dishonesty. It is the responsibility of each student to help maintain such a society. The High Point University Honor Code affirms that: Every student is honor-bound to refrain from conduct which is unbecoming of a High Point University student and which brings discredit to the student and/or to the University; Every student is honor-bound to refrain from cheating; Every student is honor-bound to refrain from collusion; Every student is honor-bound to refrain from plagiarism; Every student is honor-bound to confront a violation of the University Honor Code; Every student is honor-bound to report a violation of the University Honor Code. Full details of the High Point University Honor Code are found in the Student Handbook. 9 10 HPU Final Exam Schedule 11 Guidelines for Term Paper Format 1. Double-spaced, 12 point font 2. 1 inch margins—top, bottom and sides 3. Subheadings (e.g., introduction, conclusion, main subtopics) 4. Bibliography—five or more references, including textbook 5. Footnotes or endnotes: reference all statistics, quotes and key ideas 6. Tables, graphs, relevant data and statistics, and direct quotes are useful 7. Term paper should be 5 pages of text in length (4.5-7 pages), excluding bibliography, endnotes, tables, graphs. 8. Term paper counts for 16 percent of the course grade. Subject Matter 1. Choose a macroeconomics topic from one of the later chapters in the textbook. (unemployment, inflation, GDP, international trade, international finance, consumer spending, overall state of the US economy or some other country, fiscal policy, monetary policy or the Federal Reserve, Banking industry, Great Recession, interest rates, stock market, etc) Submit term paper topic using Blackboard 2. Narrow your topic. Give examples and elaborate on the key concepts. 3. Use critical thinking. 4. Submit the topic to the professor for approval on the assigned date. 5. Submit an outline to the professor for approval on the assigned date. 6. You may submit a rough draft of your term paper prior to the final paper due date, so as to receive feedback from the professor regarding possible improvements for your final paper. 12 Research Paper Outline Assignment (Outline should be ¾ -2 pages in length) I. Title: provide a tentative title for your term paper. For example, Issues on Unemployment (Identify the chapter from the textbook or special topic) II. Introduction: brief explanation on what the term paper is about (For the actual term paper, the introduction should be ½ page to1 page in length) -For example, from the chapter you selected, identify 1, 2, or 3 sub-sections in the chapter (or review points) to be the focus of your term paper. ***You may refer to summary points at the end of the chapter to narrow your term paper topic. Due Feb 13 by end of day. III. For example, relation between population and labor force: brief paraphrase or explanation (For the actual term paper, each of the main sections should be about 1-2 pages in length) IV. For example, relation between employed and unemployed (For the actual term paper, each of the main sections should be about 1-2 pages in length) V. For example, calculation of unemployment rate, and trend over time (For the actual term paper, each of the main sections should be about 1-2 pages in length) VI. Conclusion: main points or results; you may express your opinion on any major results (For the actual term paper, the conclusion, implications, and opinions should be 1-2 pages in length) VII. Bibliography: 5 or more references for actual term paper Tips for the actual term paper due at the end of the semester: -Make use of graphs, tables, important statistics, direct quotes. -You may submit a rough draft of the term paper for feedback from the professor. -Term paper text should be approximately 4 ½ - 7 pages in length, double-spaced, 12 point font, 1 inch margins (excludes graphs, long quotes, tables, charts, bibliography) -Make sure to use subheadings on the actual term paper. 13 Chapters 1 & 2: Introductory Concepts I. Definition of Economics: What is economics? (p.4) “Social Science concerned with individuals, business firms, government, and other institutions make economic decisions (hopefully optimal) under conditions of scarcity” Social science—study of society Individuals + institutions (government, democracy) + groups of people (business firms, government) = economic society Optimal (best or rational) economic choices for individuals, businesses, government = = economic efficiency or economic rationality How do we know if an economic choice is optimal? Make the choice that gives the greatest net benefit. Net benefit of an economic choice = total opportunity benefit minus total opportunity cost Under the condition of scarcity = limited resources What are the economic resources (factors of production)? (economic capital, natural resources or land, labor, entrepreneurship) a. Economic or real capital (equipment, tools, factories) b. financial capital (e.g., stocks, bonds, money) Market economy as illustrated by circular flow diagram, p40 (two players, demand and supply, flow of money, production process, two markets) II. Macroeconomics Versus Microeconomics III. Positive Economics (facts) Versus Normative Economics (opinions) IV. Opportunity Cost-everything you give up to get something else. V. Economic Trade-Offs VI. Production Possibilities Model, pp11-15 14 1. 2. 3. 4. 5. 6. 7. 8. Economic tradeoff Shift of the curve—changes in resources, technology, productivity Movement along the curve—change in priorities Point inside the curve—inefficiency Point outside the curve—unattainable Economic Growth—greater production potential Economic contraction—reduced production potential Productive and Allocative Efficiency—point on the curve versus the best point on the curve. VII. Circular Flow Diagram (p.40)—two types of markets and two types of participants, production process, supply and demand; relates to market economy only. VIII. Market economy, command economy, mixed economy has elements of both private sector and public sector. 15 Circular Flow Diagram 16 Circular flow diagram ( 2 markets, 2participants, 2 economic functions, 2 economic roles for households and business firms Economic Resource Market (Labor Market) Demanders of resources 3 types of resources = natural resources, labor, capital Households are suppliers of resources (labor) Flow of money from employers To employees in labor market Business Firms (Employers and Producers) Production Process or manufacturing process Flow of money from consumers to producers in product market Product Market = goods and services Firms are suppliers or sellers Individuals or Households ( 2 economic roles of households = consumers and workers) Households are consumers; they demand products 17 Production Possibilities Model 18 19 20 21 22 23 Chapter 3: Market Supply and Demand Model Economic Market: Location or mechanism where buyers and sellers interact to exchange economic goods or resources for money in the form of prices. Law of Demand: inverse relation between price and quantity demanded. If price goes up, people want to buy less of a product. If price goes down, people want to buy more of a product. 24 A movement along the demand curve illustrates the law of demand. A movement along demand curve is caused by a change in the price (cause). This change in price will lead to a change in quantity demanded (effect). 25 Shift of demand curve causes a change in demand. (a movement along the demand curve cause a change in quantity demanded) What causes the demand curve to shift? Answer: determinants of demand What is a demand determinant? Answer: Anything that affects buyer behavior, except for price. 26 27 Law of supply: direct relation between price and quantity supplied If price goes up, sellers will produce and sell more of the good (so as to make more profits; also another explanation) 28 Supply determinants: anything that affects seller behavior, except for price 29 Supply Determinants 30 Additional Concepts: Disequilibrium: when a market is not at the equilibrium level Invisible hand (supply and demand), visible hand (government economic policy), Change in demand (shift of D curve) versus change in quantity demanded (movement along D curve) Change in supply versus change in quantity supplied Opportunity cost Economic Resources Market economy (invisible hand, market forces of supply and demand) Command economy (visible hand, government control of an economy) Mixed economy (actual economies have both market forces and government) 31 Demand and Supply worksheets 32 33 Supply-Demand Table Q 0 100 200 300 400 500 600 700 800 900 1000 1100 1200 1300 1400 1500 1600 1700 1800 1900 2000 Ps 0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100 Pd 120 115 110 105 100 95 90 85 80 75 70 65 60 55 50 45 40 35 30 25 20 34 s p e2 $100 S1 e1 e1 D2 e2 D1 D1 D2 2500 q Increase in demand Decrease in demand S2 S1 S1 S2 e2 e1 e1 e2 Increase in supply Decrease in supply 35 Supply-Demand Problem Sets (Equilibrium Analysis: effects on P and Q) I. Explain and illustrate the effects upon price and quantity in each of these five situations relating to the market for big screen 3-D TVs. Draw a separate graph for each situation. a. No-interest loans for three years to buyers (answer: higher price and higher quantity) -rightward shift of demand curve b. Technological advance increases productivity (answer: lower price and higher quantity) -rightward shift of supply curve c. The government increases income taxes upon consumers. (answer: lower price and lower quantity) -leftward shift of demand curve d. The number of consumers increases. (answer: higher price and higher quantity) -rightward shift of demand curve e. Production costs rise (answer: higher price and lower quantity) -leftward shift of supply curve II. Explain and illustrate the effects upon price and quantity in each of these five situations relating to the market for digital camcorders. Draw a separate graph for each situation. a. The price of digital cameras fall. (cameras and camcorders two goods are substitutes) b. The quality of video capabilities in digital camcorders improves dramatically (from a buyer perspective). c. Technological advance reduces the cost of electronic components in digital camcorders d. The number of sellers increases. e. Consumer income declines because of a recession (Graphical answers to Question II) 36 Macroeconomic Equations from chapters 24 & 26 Chapter 24 1. NGDP = Nominal GDP; total new production measured in terms of the actual prices of the goods and services) Nominal GDP = C + I + G + NX = C + I + G + (X – M) Nominal GDP = Consumption + Economic Investment + Government Purchases + Net Exports = Consumption + Investment + Government Purchases + (Exports – Imports) 2. Net Exports (NX) = trade balance = X – M NX > 0 then trade surplus; NX < 0, then trade deficit ***Consumption = durables + nondurables + services ***Economic Investment = business investment + residential investment + . . . . ***GDP excludes used goods, financial investment (stocks, bonds, bank deposits, paper assets) ***GDP does not take into account leisure, distribution of taxes, damage to the natural environment, crime, social ills, etc. 3. RGDP (Real GDP; GDP adjusted for inflation; quantity measurement for the size of the economy) RGDP = NGDP/ PI where PI is the price index (average price level of goods in the economy) ***(adjust price index by moving the decimal point 2 places to left) ***average RDP growth in recent decades is about 2.5-3.0 %. This is sometimes referred to as natural economic growth. 37 Macroeconomic Equations (continued) Chapter 26 4. Inflation Rate = percentage change in price index P% = 100*(PI this year – PI last year) ÷ (PI last year) 5. Labor Force = number employed plus number unemployed #LF = #E + #U 6. Unemployment Rate = percentage of labor force who are unemployed U% = 100*(#U/#LF) = 100*#U/(#E + #U) 7. Nominal GDP growth = percentage change in NGDP 8. Real GDP Growth = NGDP % - inflation 9. Real Income Growth = nominal income growth minus inflation 10. Real Interest Rate = nominal interest rate minus inflation 11. Rule of 70 = 70/(rate of return or inflation); pp.506-507, chapter 25 *Number of years required for monetary amount to double in value 38 Calculations using Macroeconomic measurements Government Transfers. . . . . . . . . . . . .$800 billion Social Security Contributions . . . . . . $200 billion Depreciation. . . . . . . . . . . . . . . . . . . . $100 billion Government Spending . . . . . . . . . . . $3200 billion Investment. . . . . . . . . . . . . . . . . . . . . $2800 billion Imports. . . . . . . . . . . . . . . . . . . . . . . . $1600 billion Consumption. . . . . . . . . . . . . . . . . . . $8000 billion Exports. . . . . . . . . . . . . . . . . . . . . . . . $1250 billion Price index this year. . . . . . . . . . . . . 225 Price index last year. . . . . . . . . . . . . 205 Unemployed Persons. . . . . . . . . . . . . .15 million persons Adult Population. . . . . . . . . . . . . . . . . 310 million persons Employed Persons . . . . . . . . . . . . . . .180 million persons Nominal interest rate . . . . . . . . . . . . . 8 percent Nominal GDP growth . . . . . . . . . . . . . 2 percent 1. $NGDP = C + I + G + NX = C + I + G + (X – M) = 8000 + 2800 + 3200 + (1250 – 1600) = $13,650 2. $NX = (X – M) = (1250 – 1600) = -$350 9 (trade deficit, which reduces GDP) 3. $RGDP = NGDP/PI for this year = $13,650/2.25 = $6,067 (*make sure to move decimal 2 places to the left from 225 to 2.25) 4. Inflation rate = 100*(PI this year – PI last year) / PI last year = 100*(225-205)/205 = 9.76% 5. Unemployment rate = 100*#U/#LF = 100*15/(180+15) = 7.69% 6. Labor Force = number employed plus number unemployed = 180 +15 = 195 million 7. Labor force participation rate = % of population that is working or looking for work = 100*#LF/#Population = 100*195/310 =62.9% 8. Rule of 70 = Number of years required for some monetary amount to double in value A. Number of years for prices to double = 70/inflation = 70/9.76 = 7.2 years B. Number of years for wealth (financial investment) to double in value? = 70/nominal interest rate = 70/8 = 8.75 years 9. Real interest rate = nominal interest rate minus inflation = 8% – 9.76% = -1.76 % -actual burden of the loan from a borrower perspective 10. Real GDP growth rate = %Nominal GDP – inflation = 2% - 9.76% = - 7.76%. Economic Expansion or Recession ; economy in recession b/c of negative RGDP growth 39 40 Other topics: Shortcomings of GDP, pp499-500 Important measurements of income: 1. National income = income earned by the economic resources 2. personal income = income received by economic resources (sales tax subtracted out) 3. disposable income = best measurement of income; after-tax & after-transfer income; best measure of spending power 4. disposable income per capita = disposable income divided by population 41 Macroeconomic data at BEA.gov Nominal GDP in current dollars: table 1.1.5 http://bea.gov/iTable/iTable.cfm?ReqID=9&step=1#reqid=9&step=3&isuri=1&903=5 Real GDP: table 1.1.6 http://bea.gov/iTable/iTable.cfm?ReqID=9&step=1#reqid=9&step=3&isuri=1&903=5 Real GDP growth rate: table 1.1.1 http://bea.gov/iTable/iTable.cfm?ReqID=9&step=1#reqid=9&step=3&isuri=1&903=5 Nominal National Income: table 1.7.5 http://bea.gov/iTable/iTable.cfm?ReqID=9&step=1#reqid=9&step=3&isuri=1&903=5 Real Personal Income, Disposable Income, Disposable income per capita: table 2.6 http://bea.gov/iTable/iTable.cfm?ReqID=9&step=1#reqid=9&step=3&isuri=1&903=5 Gross domestic product 25000 y = 958.22e0.0356x R² = 0.9798 20000 15000 Gross domestic product Expon. ( Gross domestic product) 10000 5000 2009 2004 1999 1994 1989 1984 1979 1974 1969 1964 1959 1954 1949 1944 1939 1934 1929 0 42 Macroeconomic data at BLS.gov Unemployment rate: http://data.bls.gov/timeseries/LNS14000000 Inflation rate: http://data.bls.gov/timeseries/CUSR0000SA0?output_view=pct_1mth Labor force, number of employed, number of unemployed, labor participation rate: 43 Business cycle Growth Trend = secular trend = average GDP growth rate = natural economic growth = 2.53.0% 44 Actual GDP, Potential GDP, GDP gap = Actual GDP – Potential GDP 45 Types of Inflation and Related Issues (Chapter 26) 1. Creeping Inflation—low inflation (less than 15% or single digit inflation) 2. Galloping Inflation—higher inflation (e.g., 100% inflation) 3. Hyperinflation-1000% or higher Cause: government (Fed or Central Bank) prints excessive cash to pay government debt 4. Disinflation: declining inflation (e.g., inflation of 4% decreases to 3%) 5. Deflation: negative inflation (e.g., inflation of 3% decreases to -1%) 6. (p.541) Cost-push Inflation: -decrease in aggregate supply PI Demand-pull Inflation: - increase in aggregate demand PI AS1 AS AD RGDP AS AD RGDP AD1 RGDP 7. Economic costs of inflation—nominal price effect (you must pay more money to buy a good) and Real price effects (a) Real income growth = nominal income growth minus inflation (e.g., 10% increase in wages, but also 10% increase in prices; so you are essentially as well off as before) (b) Real interest rate = nominal interest rate minus (wage) inflation (e.g., 10% loan, inflation is 3%; so the real interest rate is 7%. (refer to macroeconomic equations page) 8. Calculation of inflation rate = percentage change in the aggregate price index 46 Unemployment Demographics 47 Types of Unemployment and Related Issues (Chapter 26) 1. Actual Unemployment Rate = natural rate plus cyclical unemployment rate (as measured by the BLS) 2. Natural Unemployment Rate = structural unemployment plus frictional unemployment = 5 to 6 % (efficient level of unemployment) Corresponds with the natural real GDP growth rate of 2.5-3.0% 3. Frictional Unemployment Rate—individuals who are temporarily out of work. -individuals with job skills that will be rehired soon (2.5-3.0 % of labor force) -beneficial type of unemployment because it promotes mobility or flexibility in the labor force 4. Structural Unemployment Rate-- individuals who are long-term out of work. -individuals lacking job skills who likely will not be rehired soon. (2.5-3.0 % of labor force) 5. Natural unemployment = frictional unemployment rate + structural unemployment rate (e.g., 5 = 2.5 + 2.5) 6. Cyclical Unemployment Rate = actual unemployment rate minus natural unemployment rate (e.g., actual unemployment rate is 7.3 %, then cyclical rate = 2.3% if natural rate is 5%) (e.g., actual unemployment rate is 6.7 %, then cyclical rate = 1.7% if natural rate is 5%) 7. Unemployment Gap = actual unemployment rate minus natural rate = cyclical unemployment 8. Labor force participation rate = % of population that are working or looking for work 9. Discouraged workers = people who are actually unemployed, but they stopped looking for work because they got discouraged or frustrated. 10. GDP gap = actual GDP minus potential GDP Okun’s Law: inverse relation between unemployment gap and real GDP gap -if real GDP increases, then unemployment decreases -if real GDP declines (recession), then unemployment increases Recession = declining real GDP for six months 11. Personal and Societal Economic Costs of Unemployment 12. Personal and Societal Non-Economic Costs of Unemployment 13. Calculation of unemployment rate 14. Natural real GDP growth = 2 ½ to 3 % 48 Consumption, Investment, and the Multiplier Effect (Chapters 27-28) Determinants (factors of influence) of Consumption and Saving 1. Disposable Income (Y): the most important effect; direct effect (+) on consumer spending and consumer saving) ***For test 2, make sure to know the difference between national income, personal income and disposable income If disposable income rises, then consumption and saving will go up. If disposable income declines, then consumption and saving will go down. (consumption function: graph of impact of disposable income on consumption) 49 2. Wealth = accumulation of savings over time ((+) on spending; (-) on saving) 3. Consumer Expectations or Survey of Consumer Sentiment (+) (optimistic expectations cause more spending and less saving) 4. Real Interest Rates: inverse effect (-) (higher interest rates cause lower consumer borrowing and lower spending, but higher saving) 5. Consumer Debt (-) (to pay off debt, consumer spending and saving go down) 50 Determinants of Economic Investment: something that influences business and residential investment; causes it to go up or down 1. Important influence: Real Interest Rates; from a borrower perspective (-) (Investment demand curve) What is the effect of interest rates on investment? Inverse: an increase in interest rates causes investment to go down. Other determinants of investment 2. Important influence: Profits (+) -more profits lead to more economic investment 3. Business Expectations (+) (optimism or pessimism affects investment) -Business expectations become pessimistic, and consequently business investment would tend to decline 4. Excess Capacity of capital or unemployment of capital (-) -If machines and equipment in a business are not being used, then investment in new machines and equipment would likely decrease, 51 Macroeconomic Accounting for a simple macroeconomy, without G and NX DI = C + S GDP = C + I GDP = DI = C + S = C + I S=I Consumption and Saving Propensities -Average propensities are important b/c they provide information about the characteristics of the macroeconomy a. APC (average propensity to consume) = C/DI b. APS (average propensity to save) = S/DI c. APC + APS = 1 or APS = 1 – APC -Marginal propensities are important b/c they provide information relating to the spending multiplier d. MPC (marginal propensity to consume) = ∆C/∆DI e. MPS (marginal propensity to save) = ∆S/∆DI f. MPC + MPS = 1 or MPS = 1 - MPC Numerical Example: DI = 8 C=6 S=2 I=2 GDP = 8 APC = C/DI =.75 APS = S/DI = 2/8 =.25 DI2 = 10 C2 = 7.5 S2 = 2.5 I2= 2.5 GDP2 = 10 MPC = ∆C/∆DI = 1.5/2 = .75 MPS = ∆S/∆DI = 0.5/2 = .25 Spending Multiplier Effect: new spending will trigger additional spending in the economy 1. Impact on Aggregate Demand 2. Full Multiplier Effect = (change in AD for GDP)/(new macroeconomic spending) = 1/mps = 1/(1-mpc) 52 3. Paradox of Thrift: saving is beneficial for individuals; however, if everyone saves more, then everyone will be spending less. Consequently, the multiplier becomes smaller. This could cause RGDP to decrease. Multiplier Effect Above example: Spending multiplier = (∆AD for GDP)/(∆ initial spending) = 20/5 = 4 =1/mps = 1/(1-mpc) = 4 b/c mps + mpc = 1 Therefore, mps = 1/multiplier = ¼ = .25 & mpc = .75 53 Full spending multiplier = 1/mps = 1/(1-mpc) (p. 573) For example: mpc =.9, then multiplier = 1/(1-mpc) = 1/(1-.9) = 1/.1 =10 If mpc = 67, then multiplier = 1/mps = 1/.33 = 3 4. *Reduced Multiplier Effect 54 Full Spending Multiplier Assignment 1. Suppose the mpc=.75, initial RGDP is $15.5 trillion, and government spending rises by $0.15 trillion ($150 billion). Calculate the mps, multiplier, the effect upon aggregate demand for RGDP, and the new level of RGDP. mps = .25 = 1 –mpc = 1 -.75 multiplier = 1/mps = 1/.25 = 4 ∆AD for GDP = multiplier x ∆government spending = 4 x 0.15 = $ 0.6 trillion Why? Spending multiplier = ∆AD for GDP/new spending New level of AD = Previous level of AD for GDP + ∆AD = 15.5 + .6 = $16.1 trillion 2. Suppose the mps=.1, initial RGDP is $17 trillion, and investment spending declines by $0.025 trillion ($25 billion). Calculate the mpc, multiplier, the effect upon aggregate demand for RGDP, and the new level of RGDP. mpc = .9 = 1 –mpc = 1 -.1 spending multiplier = 1/mps = 1/.1 = 10 ∆AD for GDP = multiplier x ∆investment spending = 10 x (–0.025) = - $ 0.25 trillion Spending multiplier = ∆AD for GDP/new spending New level of AD = Previous level of AD for GDP + ∆AD = 17 - .25 = $16.75 trillion 3. Suppose the mpc=.5, initial RGDP is $20 trillion, and consumption spending rises by $0.075 trillion ($75 billion). Calculate the mps, multiplier, the effect upon aggregate demand for RGDP, and the new level of RGDP. mps = .5 = 1 –mpc = 1 -.5 spending multiplier = 1/mps = 1/.5 = 2 ∆AD for GDP = multiplier x ∆consumption spending = 2 x (0.075) = + $ 0.15 trillion Spending multiplier = ∆AD for GDP/new spending New level of AD = Previous level of AD for GDP + ∆AD = 20 + .15 = $20.15 trillion 55 Aggregate supply and demand-chapter 29 1. Aggregate supply and demand diagram: real GDP along the horizontal axis and the aggregate price level or index along the vertical axis. 2. a. b. c. *Factors that causes the downward slope of the aggregate demand curve: wealth effect, real balances effect, interest-rate effect. 3. Determinants of aggregate demand: -factors that cause the AD curve to shift. (refer to table on page 592) a. Consumption factors: wealth, consumer expectations, household debt, personal taxes, interest rates. b. Investment factors: interest rates, profits, business expectations, technology, excess capacity, business taxes. c. Government expenditures (not government transfers) d. Factors that affect net exports (pp593-594): (i). exchange rates (pencast on the effect of exchange rate on net exports and aggregate demand) (ii). foreign income among trade partners (pencast on the effect of foreign income on net exports and aggregate demand) 4. Shifts in aggregate demand versus movement along the demand curve 56 57 Aggregate Supply 5. Three ranges of the aggregate supply curve: -horizontal segment -upward-sloping segment -vertical segment (Pencast on three segments of the aggregate supply curve) 6. a. b. c. d. e. Determinants of aggregate supply: factor that cause AS curve to shift. (p.598) input prices or resource costs or production costs (labor costs, energy costs), resource availability, market power, productivity (commercial technology, worker training and education, hard work), government intervention in the form of business taxes, subsidies and regulations 7. Shifts in aggregate supply and movements along the aggregate supply curve 58 8. Macroeconomic equilibrium and changes in macroeconomic equilibrium (pencast on changes in macroeconomic equilibrium) 9. AS-AD effects upon real GDP, unemployment, and inflation 10. Full multiplier and reduced multiplier effects 11. Demand-pull inflation and cost-push inflation 12. Recession and economic recovery in the aggregate supply and demand model 13. Paradox of Thrift 14. Stagflation 59 From Instructor’s manual on aggregate demand and supply Determinants of aggregate demand: Determinants are the “other things” (besides price level) that can cause a shift or change in demand (see Figure 29.2 in text). The following determinants are discussed in more detail in the text. 1. Changes in consumer spending, which can be caused by changes in several factors. a. b. c. d. Consumer wealth, Consumer expectations, Household debt, and Taxes. 2. a. b. c. d. e. Changes in investment spending, which can be caused by changes in several factors. Interest rates, and Expected returns, which are a function of Expected future business conditions Technology Degree of excess capacity Business taxes 3. Changes in government spending. 4. Changes in net export spending unrelated to price level, which may be caused by changes in other factors such as: a. National income abroad: -Increased income among our trade partners causes their consumption to rise, including more imports from the U.S. Consequently, U.S. net exports increase. -A decrease in income among our trade partners causes their consumption to decline, including less imports from the U.S. Consequently, U.S. net exports decrease. b. Exchange rates: -Depreciation of the U.S. dollar encourages U.S. exports since U.S. products become less expensive when foreign buyers can obtain more dollars for their currency. Conversely, dollar depreciation discourages import buying in the U.S. because our dollars can’t be exchanged for as much foreign currency. -An appreciation of the U.S. dollar reduces U.S. exports. (Opposite effect of a depreciation of the dollar) 60 Aggregate supply is a schedule or curve showing the level of real domestic output available at each possible price level. Aggregate supply in the long run (Figure 29.5) In the long run the aggregate supply curve is vertical at the economy’s full-employment output. A. 1. 2. Aggregate supply in the short run (Figure 29.4) The short run aggregate supply curve is upward sloping. To the left of full-employment output, the curve is relatively flat. The relative abundance of idle inputs means that firms can increase output without substantial increases in production costs. B. Aggregate supply in the immediate short-run (Figure 29.3) 1. The aggregate supply curve is horizontal at a given price level due to the rigidity of prices C. Determinants of aggregate supply: Determinants are the “other things” besides price level that cause changes or shifts in aggregate supply (see Figure 29.6 in text). The following determinants are discussed in more detail in the text. 1. A change in input prices (production costs), which can be caused by changes in several factors. (A decrease in production costs will cause AS curve to shift right) a. Domestic resource prices (wages, capital costs) b. Prices of imported resources (e.g. oil), and c. Market or monopoly power in certain industries. (If a few firms dominate an industry, then they might increase the price of their product; and then AS curve shifts left) 2. Changes in productivity (productivity = real output / input) can cause changes in perunit production cost (production cost per unit = total input cost / units of output). If productivity rises, unit production costs will fall. This can shift aggregate supply to the right and lower prices. The reverse is true when productivity falls. Productivity improvement is very important in business efforts to reduce costs. (Increased commercial technology increases productivity) (An increase in productivity causes an increase in AS and the AS curve shifts right) 3. Change in legal-institutional environment, a. Business taxes and/or subsidies, and b. Government regulation versus deregulation 61 Macroeconomic AS-AD Problems 1. Explain and illustrate the effects upon the aggregate price level and RGDP and unemployment in the macroeconomy that occurs in each of the following ten situations (two points each). Draw a separate diagram for each situation. a. b. c. d. e. f. g. h. i. j. Because of peace in the Middle East, the price of oil falls. The American dollar depreciates in value, which affects net exports Labor productivity rises because of better worker tools and equipment Wages and salaries decrease throughout the economy Consumer confidence falls because of the threat of war Aggregate demand rises Consumer debt increases The government increases taxes and reduces spending Business profit expectations diminish Costs of production fall and household wealth rises (two effects). (Answers for letters c through j; you need Adobe Reader 11 or higher for audio) 2. Explain and illustrate the effects upon the aggregate price level (or inflation), RGDP, and unemployment in the macroeconomy that occurs in each of the following ten situations (based on Keynesian Theory). Draw a separate diagram for each situation. a. b. c. d. e. f. g. h. i. j. AS falls The government reduces spending Due to war in the Middle East, the price of oil rises. Net exports decrease b/c foreign income declines or dollar becomes stronger (appreciation, revaluation, exchange rate goes up) *Aggregate demand decreases along the vertical segment of AS curve *Aggregate demand increases along the horizontal segment of AS curve The exchange rate depreciates, which causes net exports to rise Household taxes rise Consumer taxes fall. The government increases spending (Answers for problem 2 above; Adobe Flash Player and Adobe Reader 11 or higher needed for audio) 62 Fiscal Policy—Chapter 30 1. Fiscal Policy: chapter 30 Fiscal Policy tools: Government spending taxes Primary economic effects: RGDP and unemployment Inflation Secondary government budget effects: Budget Deficit Government Debt 2. Expansionary Fiscal Policy - higher G or lower T - expand AD - increases RGDP and decreases U (goal); -possible increase in inflation (negative side effect) 3. Contractionary Fiscal Policy - lower G or higher T - decrease AD - reduces inflation (goal); - possible decrease in RGDP and increase in unemployment (negative side effect) 4. Conservative and Liberal Approaches to Fiscal Policy 5. Impact of fiscal policy on AD? 6. Is government debt sometimes necessary? Business analogy (Pencast on fiscal policy; Adobe Reader 11 or higher required for audio) 63 Monetary Policy, chapter 33: 1. Monetary Policy: chapter 33 -Money Supply--determined by the Federal Reserve (central bank); not to be confused with Treasury (administers government spending and administers collection of taxes by the IRS) -Money Supply = currency + bank deposits -Instruments or targets: Money Supply and Interest Rates (inverse relation) -Policy tools: a. b. c. Open Market Operations (OMO): affects Money Supply and interest rates discount rate = interest rate that Fed charges banks that need to borrow money reserve requirement = the % of deposits that banks must hold as cash to meet the demands of depositors who want to withdraw money from their accounts. 2. Expansionary (loose) monetary policy 3. Contractionary (tight) monetary policy 4. Impact of Monetary Policy on Aggregate Demand: -goals: **higher economic growth and lower unemployment for expansionary monetary policy **lower inflation for contractionary monetary policy -negative side effects: ** higher inflation for an expansionary monetary policy ** higher unemployment and lower RGDP for an tight monetary policy 64 5. Federal Open Market Committee (FOMC) (Fed committee that determines OMO) 6. Open Market Operations (OMO) -buying and selling Treasury Bonds A. Expansionary OMO: Fed buys bonds→↑Ms→↓r→↑C, ↑I→↑AD→↑PI, ↑RGDP, ↓U B. Expansionary OMO: Fed sells bonds→↓Ms→↑r→↓C, ↓I→↓AD→↓PI, ↓RGDP, ↑U 7. Quantitative Easing: Fed buys mortgaged-backed securities to increase the money supply and keep interest rates low, and to increase macroeconomic demand (Pencast on monetary policy; Adobe Flash and Adobe Reader 11 or higher required for audio) (Pencast on loose and tight open market operations; Adobe Flash and Adobe Reader 11 or higher required for audio) Short essay: What is monetary policy? What are the instruments or tools of monetary policy? What is the difference between expansionary and contractionary monetary policy? 65 Federal Reserve and Banking System: chapters 31-32 1. Three functions of money, p637 a. -Medium of Exchange: exchange of money for goods b. -Unit of Account: measure the value (price) or worth of an economic good c. -Store of Value: saving or wealth in bank accounts or cash 2. Definition of money supply = cash held outside of banks + bank deposits (saving and checking accounts) 3. Framework of Federal Reserve System, p. 643 4. Functions of the Fed, p. 645-646 -monetary policy -printing money or issuing currency -FDIC=Federal Deposit Insurance Corporation: $250,000 protected in each bank -reserve requirements: percentage of deposits that must be held as bank reserves or vault cash -Fed is a lender of last resort to member banks (discount window; discount rate) -bank regulations -check clearing process 5. ****Money Creation process, chapter 32 -The Fed prints money and then purchases Tbonds (OMO). Much of the new money gets deposited in banks, which then gets loaned out. When banks make a loan, then money supply increases. 6. Commodity Money versus Gold Standard versus Fiat Money System versus bartering 7. Example: Bitcoins 8. Barter System: direct trading of one good for another 9. Financial Liquidity: ease in which an financial asset can be used for spending 66 Classical and Keynesian Perspectives on the Macroeconomy 1. Classical View: market forces should play the major role in the economy; -small role for government (low taxes, low govt spending); conservative perspective 2. Keynesian View: government activism in macroeconomy (John M. Keynes), p584Expansionary macroeconomic policies to resolve recessions; sometimes market failures such as recessions, high unemployment; stronger role of government in the economy; Keynesian perspective is a more liberal view 3. Role of Market Forces versus Government policy 4. Market Failure versus Government Failure 5. Relation between macroeconomic views and political ideology -Keynesian view is more liberal; Democratic perspective -Classical view is more conservative; Republican perspective 67 International Trade: chapter 37 1. Trade Characteristics across countries, pp755-756 2. Largest trading partners: usually neighbor countries (NAFTA) 3. Comparative Advantage: economic theory for free trade -Countries should specialize in producing and exporting those goods that they can supply most cheaply in terms of prices and production costs, and most productively. -Comparative advantage based on resource abundance - (examples: Saudi Arabia, China, US) 4. Trade Barriers: -Tariffs (tax on imports), -Quotas (quantity limitation on imports), -Export subsidies: government provides loans or grants to promote exporting. -NTBs 5. Free trade versus trade protectionism (protect jobs and businesses in import-competing industries); free trade emphasized from a conservative perspective; protectionism emphasized from a liberal perspective. 6. *Infant industry argument (disregard) 7. Cheap labor abroad 8. Trade Treaties (reduce trade barriers and promote free trade): WTO, EU, NAFTA 68 International Finance: chapter 38 1. Balance of Payments = current account + financial/capital accounts a. Current Account: flow of income (biggest category is trade) b. Financial/Capital Accounts: total amount of international investment/international debt -measures flow of money (hard currencies) across countries to make payments for trade and investment, etc. 2. Exchange rates: - floating (flexible) exchange rate: market forces determine the level of the exchange rate -fixed exchange rate: government determines the level 3. Exchange rate change -depreciation: weaker, devaluation; domestic currency can buy less of the foreign currency; - import prices become higher and export prices become cheaper; - amount of imports go down and amount of exports go up; -finally, trade deficit improves. -appreciation: stronger, revaluation; domestic currency can buy more of the foreign currency; -import prices become cheaper and export prices become higher; -amount of imports go up and exports go down; - finally, trade deficit gets worse. 69 NX = X – M 4. Factors or determinants that affect exchange rates a. Tastes or popularity of traded goods (e.g., US goods become more popular to trade partners, so the value of $ gets stronger) b. Income: Domestic income gets higher, consumer spending goes up, imports go up, demand for foreign currency goes up, value of the foreign currency goes up; value of domestic currency goes down c. Inflation: domestic inflation rises, domestic currency depreciates; Why? domestic goods cost more, so foreigners buy less of our goods; demand for $ goes down, and $ weakens d. Interest rates: domestic interest rates go up, foreign countries buy more of our interest-bearing bond investments; demand for $ increases; value of $ appreciate 5. Effects of exchange rates on prices and amounts of traded goods (see item 3 above) 6. Hard currencies (international money; primarily from DCs) versus soft currencies (primarily from LDCs) 70 Video Segments “Dec 2013 Jobs Report” http://video.pbs.org/video/2365154161/ “How the stock market might not reflect the current economy” http://video.pbs.org/video/2365128010/ “Finding the Connection Between Prosperity and Happiness” http://video.pbs.org/video/2365029651/ “What Do Tax Rates' Ups and Downs Mean for Economic Growth? “ http://www.youtube.com/watch?v=_dzDESNnhXU&index=4&list=PL41B4411773C45F8A “Examining the Fed's role in the economic recovery” http://www.youtube.com/watch?v=U1Joqu4HB58 “America's Historical Struggle with Debt and the Role of Federal Government” http://www.pbs.org/newshour/bb/business/july-dec12/makingsense_11-27.html “Red Ink' in the Federal Budget: Understanding Why the U.S. Has So Much Debt” http://www.pbs.org/newshour/bb/business/july-dec12/makingsense_10-25.html 71 Review Test Questions for First Test Answer the following 50 multiple-choice questions for 100 points (2 points each). 1 a. b. c. d. 2 a. b. c. d. 3 a. b. c. d. 4 a. b. c. d. 5 a. b. c. d. 6 a. b. c. d. 7 a. b. c. d. 8 Macroeconomics is the study of the economy from which point of view? the state government international economy national economy the auto industry Which of the following directly pertains to the definition of economics? Scarcity of resources politics Unlimited natural resources available supermarket Which of the following is a positive statement? inflation should be lower international trade is good for the economy inflation is about 2 percent I think the economy is doing very well Which of the following is a normative statement? The sales tax is seven percent in the state Income taxes should not be any higher than 10 percent Apple is primarily a software company Unemployment is about 8.1 percent Which of the following relates to microeconomics? nominal GDP domestic investment individual markets or industries global economic performance Productive efficiency relates to Recession in the economy high price products Point outside the production possibility curve Point on the production possibilities curve Allocative efficiency pertains to which of the following? Production of goods in the most costly manner possible point outside the production possibilities frontier High wages for workers best mix of products for the nation as a whole In terms of the circular flow diagram, what is the function of businesses in the resource market? a. supplier b. creditor c. demanders of labor; businesses hire workers 72 d. borrower 9 The law of supply relates to which of the following statements? a. the connection between unemployment and GDP b. the connection between quantity and price from a seller perspective; shown as a movement along supply curve; caused by change in price c. the association between taxes and income from a business viewpoint d. the effect of income upon buyer purchases 10 Suppose the price decreases for smart phones. Consequently, the demand for data plans increases. This outcome may be explained by saying the two products are a. complements b. substitutes c. unrelated goods d. investments 11 Which of the following is an example of substitute goods? a. bread and butter b. cereal and milk c. Butter and margarine d. Cars and gasoline 12 Which of the following is an example of complementary products? a. jelly and toast b. Dr. Pepper and Mountain Due c. tablet computers and winter coats d. hamburgers and hot dogs 18. a. b. c. d. 19. a. b. c. d. 20. a. b. c. d. 21. a. b. c. d. Which market participant is the demander in the product market? government business firms consumers workers Which of the following expresses the law of demand? A higher price causes an increase in quantity supplied A higher price causes an increase in quantity demanded Demand curve shifts left A higher price causes a decrease in quantity demanded Which of these statements indicates market equilibrium Shortage—amount demanded is greater than quantity supplied surplus supply curve intersects demand curve point inside the production possibilities curve A market shortage is characterized by which of these statements? Supply greater than demand Supply less than demand Supply equals demand Supply equals zero 73 22. a. b. c. d. 23. a. b. c. d. 24. a. b. c. d. 25. a. b. c. d. 26. a. b. c. d. 27. a. b. c. d. 28. a. b. c. d. 40. a. b. c. d. If supply exceeds demand, then . . . A shortage occurs A surplus is evident The market is in equilibrium The price occurs below equilibrium Economic efficiency in terms of the production possibilities model Is shown as a point outside the curve Is indicated as a point inside the curve Is expressed as a point on the curve Is illustrated as a positive gap between supply and demand Economic inefficiency is expressed in the production possibilities model As a point inside the curve As a point outside the curve As an outward shift of the curve As the equilibrium point An increase in labor productivity or economic growth Causes the production possibilities curve to shift inward Causes a movement along the production possibilities curve Causes the economy to move to point inside the production possibilities curve Causes the production possibilities curve to shift outward A decline in economic resources Causes the production possibilities curve to shift inward Causes a movement along the production possibilities curve Causes the economy to move to point inside the production possibilities curve Causes the production possibilities curve to shift outward Advancement in commercial technology Causes the production possibilities curve to shift inward Causes a movement along the production possibilities curve Causes the economy to move to point inside the production possibilities curve Causes the production possibilities curve to shift outward Suppose a production possibilities curve is used to measure the private sector along one axis and the government sector on the other axis. A change in emphasis in favor of more government-provided goods and less private-sector goods will cause the production possibilities curve to shift inward a movement along the production possibilities curve the economy to move to point inside the production possibilities curve the production possibilities curve to shift outward Suppose the price decreases for computer tablets. What is the predicted impact upon the market for carrying-cases for computer tablets? (the two goods are complements) Increase in demand for cases Decrease in demand for cases Total amount of computer tablet cases should go down Decrease in supply 74 41. a. b. c. d. 42. a. b. c. d. 43. a. b. c. d. 44. a. b. c. d. 45. a. b. c. d. Suppose the price of computer tablets decreases. What is the predicted impact upon the demand for notebook computers (assume the two goods are substitutes) Increase in demand for notebook computers Decrease in demand for notebook computers Total amount of notebook computers should go up Increase in supply of notebook computers In the case of an inferior good, what is the impact of an increase in income? Higher demand Lower demand and price falls and quantity decreases Higher supply Lower supply In the case of a normal good, what is the predicted impact of an increase in income? Higher demand Lower demand Higher supply Lower supply Suppose production costs rise. What is the predicted effect? Higher demand Lower demand Higher supply Lower supply Suppose the number of sellers increase. What is the predicted effect? greater supply decline in supply higher prices less production 75 Practice Supply and Demand Questions 1. Say the demand for a product falls, while the supply stays the same. This causes the (free-market) equilibrium ________. a. b. c. d. price to increase and equilibrium quantity to increase price to decrease and equilibrium quantity to stay the same price to increase and equilibrium quantity to decrease price to decrease and equilibrium quantity to decrease 2. Say the demand for a product increases, while the supply stays the same. This causes the (free-market) equilibrium ________. a. b. c. d. price to increase and equilibrium quantity to increase price to decrease and equilibrium quantity to increase price to increase and equilibrium quantity to decrease price to decrease and equilibrium quantity to decrease 3. Suppose that the supply for a product declines, while the demand stays constant. This causes the (free-market) equilibrium ________. a. b. c. d. price to increase and equilibrium quantity to increase price to decrease and equilibrium quantity to increase price to increase and equilibrium quantity to decrease price to decrease and equilibrium quantity to decrease 4. Imagine that the supply for a product rises, while the demand remains the same. This causes the (free-market) equilibrium ________. a. b. c. d. price to increase and equilibrium quantity to increase price to decrease and equilibrium quantity to increase price to increase and equilibrium quantity to decrease price to decrease and equilibrium quantity to decrease 5. Suppose the demand for a product goes down, while the supply stays the same. This causes the . . . . a. b. c. d. demand curve to shift right demand curve to shift left supply curve to shift right supply curve to shift left 76 6. Say the supply for a product falls, while the demand stays constant. This causes the a. b. c. d. demand curve to shift right demand curve to shift left supply curve to shift right supply curve to shift left 7. Assume that production costs rise. This causes the equilibrium ________. (supply curve shifts left) price to increase and equilibrium quantity to increase price to decrease and equilibrium quantity to increase price to increase and equilibrium quantity to decrease price to decrease and equilibrium quantity to decrease a. b. c. d. 8. a. b. c. d. 9. a. b. c. d. Assume that business taxes decline. This causes the equilibrium ________. (supply curve shifts right) price to increase and equilibrium quantity to increase price to decrease and equilibrium quantity to increase price to increase and equilibrium quantity to decrease price to decrease and equilibrium quantity to decrease Assume that consumer confidence declines. This causes the equilibrium ________. (demand curve shifts left) price to increase and equilibrium quantity to increase price to decrease and equilibrium quantity to increase price to increase and equilibrium quantity to decrease price to decrease and equilibrium quantity to decrease 10. Assume that household income rises for a normal good. This causes the equilibrium ________. (demand curve shifts right) a. b. c. d. price to increase and equilibrium quantity to increase price to decrease and equilibrium quantity to increase price to increase and equilibrium quantity to decrease price to decrease and equilibrium quantity to decrease 77 Review Questions for the Second test 13 Nominal GDP a. measures the economy in terms of current prices b. measures the economy discounted for price changes over time c. is an interest rate measurement for consumption d. is the same thing as disposable income 14 Which of the following is descriptive of a trade deficit? a. Exports are always negative b. Exports are less than imports c. Exports are greater than imports (trade surplus) d. Imports divided by exports equals zero 15 Real GDP a. refers to the amount of cash in Wall Street b. refers to inflation rate adjusted for population growth c. is the total investment level of the economy divided by the stock market index d. is the total level of national output adjusted for the price index level 16 Unemployment refers to which of these statements? a. the percentage change in real investment b. the change in income rate c. the change in the average price level over time d. people who have lost their jobs 17 Which of the following is not directly included in the calculation of GDP? a. Money outside of banks c. net exports b. government spending d. consumption 45. The inflation rate refers to which of the following? a. change in real income b. the change in the number of people who have jobs c. the percentage of the labor force who are without work d. the percentage change in the average price level 46. National Income a. refers to the total amount of money in the state b. equals total income that is earned by resources such as labor c. is the total GDP of the economy divided by the average price index d. refers to the amount of wealth available after taxes are added 20. The stage of the business cycle where RGDP is at maximum is called: a. Recession c. Peak b. Trough d. Recovery 21. Which of the following is not a category of consumption? a. Durable goods b. Housing construction (this falls under category of residential investment) c. nondurable goods d. services 78 22. a. b. c. d. 23. a. b. c. d. 24. a. b. 25. a. b. Which of the following is directly included in the labor force calculation? (chp 26) Retired individuals children unemployed individuals (LF = #U + #E) stay-at-home mothers or fathers The part of the business cycle where RGDP is rising is referred to as: recession depression expansion or recovery trough What is the effect upon real GDP growth, in the case of inflation=5% and nominal GDP growth =4% (rgdp% = ngdp% - p% = 4 – 5 = -1) 1% better off c. no change 4% better off d. 1% worse off The phase of the business cycle where output declines is called: Recession c. peak trough d. Recovery 26. a. b. c. d. 27. a. b. c. d. 28. a. b. c. d. Which of the following is not a component of GDP? Consumption Exports Government expenditure Social security tax A trade surplus situation means that Exports are greater than imports The level of imports exceed exports Imports are negative Exports equal imports Disposable income is a measurement of Income available after all taxes are subtracted and all government transfers are added. GDP adjusted for interest rate changes Excessive income held by the middle class Consumer spending on nondurable products 79 Review calculations for second test For multiple-choice questions 46-50, refer to Table 1. Table 1: Macroeconomic measurements Government Transfers. . . . . . . . . . . . .25 Social Security Contributions . . . . . . 30 Depreciation. . . . . . . . . . . . . . . . . . . . 10 Government Spending . . . . . . . . . . . 75 Investment. . . . . . . . . . . . . . . . . . . . . 35 Imports. . . . . . . . . . . . . . . . . . . . . . . . 25 Consumption. . . . . . . . . . . . . . . . . . . 160 Exports. . . . . . . . . . . . . . . . . . . . . . . . .20 Price index this year. . . . . . . . . . . . . 165 Price index last year. . . . . . . . . . . . . 150 Unemployed Persons. . . . . . . . . . . . . .20 Population. . . . . . . . . . . . . . . . . . . . . 320 Employed Persons . . . . . . . . . . . . . . .215 46. a. b. c. d. 47. a. b. c. d. 48. a. b. c. d. 49. a. b. c. d. 50. a. b. Nominal GDP equals 250 265 = 160 +35 +75 + (20 – 25) 325 225 Real GDP equals 177.5 210.4 160.6 = 265/1.65 where 165 becomes 1.65 after decimal adjustment 325.5 The inflation rate equals 10% = 100*(165 -150)/150 8% 7% 5% The unemployment rate equals 10% 7.5% 8.5% =100*20/(20+215) = %u = 100*[#U/(#U + #E)] 12% Based on the table, net exports equal how much? 20 c. 5 25 d. -5 51. Labor force participation rate = 100*235/320 =73.4% 80 81 Review Test Questions for Second Exam 2 biggest factors that affect investment? Interest rates and profits 1. a. b. c. d. 2. a. b. c. d. 10. a. b. c. d. 11. a. b. c. d. 12. a. b. c. d. 13. a. b. c. d. 14. a. b. c. d. 15. a. b. c. d. A lower real interest rate (chp 27) causes higher business investment generates a decrease in aggregate supply causes an increase in government spending has no effect upon investment According to Okun’s Law Higher unemployment is associated with higher RGDP Higher unemployment is associated with lower RGDP Higher unemployment is associated with higher inflation Higher interest rates are associated with higher RGDP Which demographic group has the lowest unemployment rate? (chp 26) Individuals with a college education Construction workers teenagers factory workers The multiplier effect (chapter 27); I increases 10b; RGDP increases by 20b is greater than one (best answer) indicates the impact of income upon worker productivity refers to the influence of exchange rates upon international trade is a microeconomics topic The rule of 70 relates to which of the following? (rule 70 = 70/rate; if rate =10%, then 7 years to double) Effect of income upon saving The number of years it takes for a financial investment to double in value Impact of price on quantity supplied Relation between exchange rates and taxes An important determinant of business economic investment is Household debt Interest rates and business profits Number of consumers consumer debt Which statement refers to the multiplier effect? Influence of wealth upon consumer income Effect of price on quantity supplied Impact of exchange rates on the trade balance The impact of government spending for the GDP level Which economic outcome is connected with an increase in unemployment? Lower RGDP Higher GDP An increase in net exports Lower production costs 82 16. a. b. c. d. 17. a. b. c. d. 18. a. b. c. d. Which of these statements is correct? mpc – mps = 0 aps + apc = 10 1 – mpc = multiplier aps + apc = 1 If the mpc = .9, what is size of the multiplier? Hint: mpc = 1 - mps 10 9 1 0 According to the rule of 70, how many years does it take for a monetary amount to double in value? 10 years at a rate-of-return of 10 percent 7 years at a rate-of-return of 7 percent 10 years at a rate-of-return of 7 percent (70/7 = 10) 14 years at a rate-of-return of 10 percent Given a rate-of-return of 7 percent, how many years does it take for $25,000 to grow into $100,000? 10 years 20 years (70/7 = 10 yrs to double; 25 to 50 takes 10 years; plus 50 to 100 takes another 10 yrs) 7 years 14 years Suppose that net exports decline by $10 billion and consequently RGDP eventually falls by $20 billion. The full multiplier effect would be equal to 1 20 10 2 = chg RGDP/chg in initial spending = 20/10) 21. a. b. c. d. 22. a. b. c. d. 23. a. b. Which of the following is descriptive of the multiplier effect? Effect of taxes upon the level of consumer debt An increase in investment spending will cause an even larger impact on RGDP Impact of exchange rates on the unemployment rate The influence of greater government spending upon the debt level A major determinant of consumption is Worker productivity Commercial technological advance Household income or disposable income Number of business suppliers The natural unemployment rate corresponds to which situation? An efficient economy A severe recession a. b. c. d. 19. a. b. c. d. 20. 83 c. d. Low worker productivity High level of discouraged workers 84 Review Questions for Third Test 1. a. b. c. d. 2. a. b. c. d. 3. a. b. c. d. 4. a. b. c. d. e. 5. a. b. c. d. 6. a. b. c. d. 7. a. b. Which of the following determinants causes a decline in aggregate demand? (hint: table on p592) Increased worker productivity (AS to increase; rightward shift) lower real interest rates (AD will increase) an increase in government spending (AD will increase; expansionary fiscal policy) higher household (personal) income taxes The effect of an increase in aggregate supply is: (hint: table on p598) Recession (decrease in AS or decrease in AD) Higher interest rates (decrease in AD b/c of underlying decrease in I or C) higher real GDP and lower unemployment, lower inflation (rightward shift of AS curve) more unemployment Which of the following generates greater RGDP? An increase in resource costs of production Technological progress (b/c AS curve shifts right) lower worker productivity higher government taxes Which of the following creates more inflation? Lower aggregate demand Higher aggregate demand (demand-pull inflation) less government regulation upon business A decrease in prices Decrease in Aggregate Supply (cost-push inflation) Which of the following causes a decline in aggregate supply? higher consumer expectations higher production costs increase in employment economic growth Which of the following determinants causes an increase in AD Greater business confidence reduced wealth lower production costs higher income taxes Which of the following relates to a severe recession? High GDP c. flat segment of AS curve Low unemployment d. vertical segment of AS curve 85 8. a. b. c. d. 9. a. b. c. d. 10. a. b. c. d. 11. a. b. c. d. 12. a. b. c. d. 13. a. b. c. d. 14. a. b. c. d. 15. a. b. c. d. Which of the following will tend to cause the price of imports to rise? (p593-594) Depreciation of the currency (weaker currency means weaker ability to buy imports b/c of higher import prices; less imports and NX increase; NX = X - M) Appreciation (stronger) of the currency (the price of imports become cheaper; more imports and NX decrease; trade deficit get worse) Higher interest rates a decline in the demand for imports Which statement pertains to the paradox of thrift? A higher saving rate will increase the GDP level A higher interest rate will cause less saving in the economy An increase in saving throughout the economy (which good for individuals) could cause GDP to decline An increase in savings causes an increase in consumer spending A decline in aggregate supply will create: Demand-pull inflation ***Cost-push inflation (stagflation=higher inflation and lower RGD)**** deflation higher GDP An increase in aggregate demand causes: Demand-pull inflation Cost-push inflation Deflation Higher unemployment Which of these is a determinant of the investment component of GDP? wealth saving net exports business expectations The inverse relation between output (or RGDP) and unemployment is known as: Okun’s Law The law of demand The law of supply the consumption function Which of the following is a determinant of consumption? Business expectations Business profits Household wealth commercial technology Which determinant causes the aggregate demand curve to shift right? Lower net exports Higher government spending (liberal expansionary fiscal policy); also referred to as a Keynesian fiscal policy Lower worker productivity An increase in the price of imported oil 86 16. a. b. c. d. 17. a. b. c. d. 18. b. c. d. e. 19. a. b. c. d. 20. a. b. c. d. 21. a. b. c. d. 22. a. b. c. d. 23. a. b. c. d. 24. a. b. c. d. If wealth rises, consumer spending will go up consumer spending will fall consumer spending will stay the same the government will reduces the tax rate Which of these causes consumption to go down? Higher household income lower interest rates pessimistic expectations Higher production costs Which of these determinants causes a decrease in investment? lower interest rates higher profits technological improvement pessimistic business expectations Based on the AS-AD model, a decrease in investment causes: A higher aggregate price level An increase in aggregate supply A lower real GDP level and lower PI and increase in U b/c lower AD Less unemployment Based on the AS-AD model, an increase in production costs causes: Higher aggregate demand A rightward is of the AS curve A decline in aggregate supply Deflation Which of the following will cause a decline in aggregate demand? Greater consumer wealth Pessimistic consumer expectations Increased worker productivity A decrease in the unemployment rate Which of these occurs as a result of an increase in aggregate supply? Higher GDP Lower GDP Higher unemployment Higher average price level Lower oil prices (from a production costs perspective) will cause: Higher AD Lower aggregate demand Rightward shift of aggregate supply curve Leftward shift of AS curve If the mpc = .75, then the marginal propensity to save must equal 1 0 4 .25 = 1 – mpc 87 25. a. b. c. d. 26. a. b. c. d. 27. a. b. c. d. 28. a. b. c. d. 29. a. b. c. d. 30. a. b. c. d. 31. a. b. c. d. 32. a. b. c. d. 33. a. b. c. d. Suppose the mps = .5. The spending multiplier is therefore equal to: 1 2 = 1/mps = 1/.5 =2 1.5 4 Suppose the mps = .25 and the change in investment is $100 billion. As a result of the full multiplier effect, the change in AD would be: $75 billion $10 billion $400 billion =100*(1/.25) = 400 = change in spending x multiplier - $7.5 billion Which of the following corresponds to the reduced multiplier effect? The reduced multiplier is greater than the full multiplier The effect is caused by a shift in the Okun’s Law curve It takes into account both the AS and AD curves The effect refers to a shift in the consumption curve An increase in government regulations upon the business sector will cause: Greater business investment An increase in aggregate supply An expansion of aggregate demand A leftward shift of aggregate supply curve An increase in household debt will tend to cause: greater aggregate demand Less consumer spending Slower business productivity Hyperinflation in the economy Macroeconomic equilibrium occurs: At the intersection between aggregate supply and demand When the unemployment rate reaches zero percent at the point where interest rates are at the highest level at the point where inflation falls to zero percent A decrease in the unemployment rate is associated with: Higher AD Lower AD Decrease in aggregate supply A recession The average propensity to consume (apc) refers to: Influence of income upon spending;apc = C/DI Impact of government taxes upon business behavior Impact of interest rates on consumer spending The influence of government spending upon the GDP level If the mps = .2, what is the size of the spending multiplier? 5 = 1/mps 4 3 2 88 34. a. b. c. d. 35. a. b. c. d. A higher aggregate price level tends to occur from which of the following? Declining aggregate demand higher aggregate demand Lower aggregate supply Lower production costs Which of the following is a goal of expansionary fiscal policy? reduce inflation increase unemployment reduce the trade deficit increase GDP or reduce unemployment or get the economy out of recession 36. A conservative expansionary fiscal policy consists of a. higher taxes b. higher government spending (liberal expansionary fiscal policy) c. reduced interest rates d. reduced taxes 37. A liberal expansionary fiscal policy or Keynesian fiscal policy consists of a. higher interest rates b. reduced government spending c. higher government spending d. lower interest rates 38. Contractionary macroeconomic fiscal policy tends to a. reduce the budget deficit b/c either G goes down or T goes up b. increase the budget deficit c. cause higher economic growth d. cause higher inflation 7. A conservative contractionary fiscal policy consists of a. lower interest rates b. a decrease in government spending c. higher government spending d. lower money supply 8. *Reduced or actual multiplier effect—movement from one equilibrium to the next 9. *Full multiplier effect—shift of the AD curve (excludes AS) 10. *Three segments of AS curve: impact of shift in AD upon inflation and RGDP 11. *Stagflation—inflation plus economic stagnation (recession) 12. What is the impact of an increase in foreign GDP on U.S. NX (e.g., foreign income increases, what happens to our NX? Answer: Our NX go up b/c an increase in U.S. exports due to more income abroad and so foreigner buy more U.S. goods) 89 Key Review Questions for ECO 2030 final exam 1. a. b. c. d. If the money supply increases dramatically, which of the following outcomes would likely occur? an increase in the unemployment rate exports would rise higher inflation in the economy inflation would go down 2. a. b. c. d. An increase in household income would probably cause: consumer spending to go up a major decline in consumer expenditure real GDP to decrease in value lower inflation throughout the economy 3. a. b. c. d. A fundamental issue in economics is the problem of: finite factors of production and a limited amount of economic wants and needs unlimited economic wants and needs, but a limited amount economic resources limited economic wants and unlimited economic resources unlimited factors of productions and also unlimited economic desires a. b. c. d. Let us suppose that the supply of an economic good declines while the demand stays constant. Which of the following equilibrium results would take place? equilibrium quantity would increase and equilibrium price would rise equilibrium quantity would decline and equilibrium price would go up equilibrium price would decrease and equilibrium quantity would go up equilibrium price would go down and equilibrium quantity would also go down 5. a. b. c. d. Which of the following results is usually associated with an economic recession? Real GDP growth equals 2-3% The unemployment rate decreases Net exports get larger Real GDP decreases in the economy 4. 90 6. Imagine that you are a member of the Council of Economic Advisors and the US economy is in a recession. What Keynesian (fiscal) macroeconomic policy could be advised? a. An increase in the tax rate and a decline in government spending b. An increase government expenditure and a reduction in taxes (expansionary Keynesian fiscal policy) c. An increase in interest rates d. a lower level of consumer spending 7. a. b. c. d. Which of these policies would you recommend for a country that is attempting to reduce hyperinflation in the macroeconomy? a reduction in the growth rate of money supply An increase in the growth rate of the money supply an increase in the amount government expenditure lower taxes a. b. c. d. Suppose that the government increases spending to pay for rising health care costs. If taxes do not increase, which of the following outcomes would probably occur? the inflation rate would go down a government budget surplus would occur an increase in the level of government debt government debt would go down a. b. c. d. Suppose that the Federal Reserve adopt an expansionary policy to reduce unemployment and expand macroeconomic growth. Which of the following actions would the Fed take? Increase the level of taxes increase money supply and increase interest rates reduce interest rates and increase the money supply reduce the level of money supply in the economy 8. 9. 10. What would be the probable outcome of a cut in household income taxes? a. consumer spending would rise b. A decrease in economic investment spending c. A decline in consumption d. aggregate demand would fall 91 Review Test Questions for Final Exam 1. a. b. c. d. 2. a. b. c. d. 3. a. b. 4. a. b. c. d. 5. a. b. c. d. Which of the following causes a decrease in aggregate demand? lower interest rates higher real interest rates increased government spending decreased taxes The result of an increase in aggregate supply is inflation lower aggregate price level reduced real GDP reduced employment The possible side-effect of contractionary monetary policy is higher inflation c. higher taxes lower interest rates d. recession A depreciation (weaker currency) of the exchange rate causes a worse trade deficit, and a reduction in aggregate demand no effect upon aggregate demand a decrease in aggregate supply an increase in AD and RGDP because NX increase Open market operations consist of the Fed buying and selling T-bills consist of the Treasury borrowing from the public consist of Congress passing the fiscal budget consist of market deregulation policies 6. a. b. c. d. 7. e. f. g. h. 8. a. b. c. d. Expansionary monetary policy consists of higher real interest rates consists of an increase in the money supply causes lower inflation causes lower GDP Lower real interest rates are caused by a reduction in money supply cause an increase in AD cause a decrease in AS cause business investment to decrease Money creation occurs when Congress raises taxes as interest rates rise through the process of the Fed buying Tbonds and then bank loans as aggregate demand falls 92 9. Which of the following causes higher RGDP? e. an increase in oil and gas prices f. an increase workers’ wages g. increased worker productivity h. reduced money supply 10. Which of the following causes lower inflation? f. increased money supply growth g. reduced money supply growth h. lower taxes i. a trade surplus 11. Which of the following are duties of the Federal Reserve System? a. clearing of checks b. bank regulation c. control money supply d. The Fed lends money to banks that are short on funds 12. The classical view of macroeconomics a. emphasizes a large role of government b. emphasizes the benefits of free market forces c. indicates economic instability of the private sector d. generally supports increased regulation of business 13. Which of the following relates to a decrease in AS? e. lower aggregate price level f. low oil and gas prices g. inflation h. economic recovery 14. Which of the following relates to the store of value function of money? a. prices of economic goods b. method of economic transaction c. wealth accumulation d. purchasing power 15. The components of money supply consists of a. Cash outside of banks b. gold and real estate c. bank account deposits d. credit cards 16. The Keynesian view a. stresses a large role of government b. stresses a small role of government c. is similar to conservative ideology d. emphasizes the efficiency of supply and demand 17. Which of the following is not a major trading partner with the U.S.? a. Canada b. Malaysia c. Japan 93 d. Western Europe 18. Which of the following is a major U.S. export product? a. gold b. toys c. chemicals d. petroleum 19. Which of the following is a major import product? a. petroleum b. aircraft c. grain d. chemicals 20. If the U.S. dollar depreciates relative to the British pound, then a. British goods become more expensive to Americans b. British goods become cheaper to Americans c. Fewer dollars are needed to buy a British pound d. American goods become more expensive to the British 21. Comparative Advantage refers to which of the following? a. Countries should export the products with the greatest opportunity cost b. Nations should import the products that are most expensive c. Countries should export the goods that have lowest costs of production d. Countries should run a trade deficit to boost employment 22. The paradox of thrift refers to which of the following? a. Saving may benefit the individual, but it could hurt the whole economy b. Higher savings will lead to greater GDP c. Interest rates affect net exports d. A higher savings rate causes a higher spending multiplier effect 23. Which of the following is a function of the Fed? 24. Open Market Operations consists of ... 25. Which of the following is a function of money? 26. The reserve requirement refers to which of the following? 27. North American Free Trade Agreement (NAFTA)—US, Canada, Mexico 28. Free Trade—no trade barriers; free markets in trade, no or little government intervention in trade, idea that free market forces provide a beneficial outcome in trade 29. Trade barriers or trade protectionism—tariffs (tax on imports) and quotas (quantity limit or restriction on amount of imports) 30. WTO (World Trade Organization)—negotiates trade treaties across countries in the world 94 Further Review Questions for Final Exam. 1. a. b. c. d. 2. a. b. c. d. 3. a. b. c. d. 4. a. b. 5. a. b. c. d. 6. a. b. c. d. 7. a. b. c. d. 8. a. b. c. d. Which of the following is a goal of contractionary monetary policy? reduce unemployment reduce inflation increase the trade deficit increase economic growth Which of the following causes an increase in aggregate demand? Increased worker productivity higher real interest rates decreased government spending decreased taxes The outcome of a decrease in aggregate supply is Economic growth inflation increased real GDP increased employment The possible negative side-effect of contractionary monetary policy is lower inflation c. lower real interest rates recession d. lower unemployment An appreciation of the exchange rate causes a reduced trade deficit, and no effect upon aggregate demand lower prices for imports a decrease in aggregate supply an increase in AD A liberal expansionary fiscal policy consists of higher government spending an increase in money supply growth higher interest rates higher taxes Expansionary macroeconomic policy Causes higher aggregate demand Causes lower aggregate demand Causes higher aggregate supply Causes lower aggregate supply Expansionary monetary policy Causes higher real interest rates Causes lower real interest rates Produces disinflation or lower inflation May be adopted to reduce inflation 9. a. b. c. d. Contractionary monetary policy Leads to higher real interest rates consists of an increase in the money supply creates lower unemployment causes higher economic investment 95 10. Higher real interest rates a. are caused by increased money supply b. cause a decrease in AD c. cause an increase in AS d. cause business investment to expand 11. Most of the money supply consists of a. Taxes upon businesses b. cash and currency c. saving and checking account deposits d. savings bonds 12. Which of the following causes lower RGDP? a. An increase in oil and gas prices b. Technological progress c. increased worker productivity d. increased money supply growth 13. Which of the following creates higher inflation? a. increased money supply growth b. reduced money supply growth c. higher taxes d. reduced business confidence 14. Which of the following is a responsibility of the Federal Reserve System? a. Government spending b. Monetary policy and lender of last resort c. Determining the budget deficit d. Correcting market externalities 15. The Keynesian view of macroeconomics a. emphasizes a small role of government b. recommends a larger role of government when the economy is in recession c. focuses on economic efficiency of the private sector d. generally supports reduced regulation of business 16. Which of the following causes an increase in aggregate supply? a. higher aggregate price level b. lower resource costs c. reduced employment d. recession 17. Which of the following relates to the unit of account function of money? a. price of economic goods b. method of economic transaction c. store of wealth d. unemployment stability 18. Which of the following does not cause an increase in AD a. Greater consumer confidence b. Increased wealth c. Increased production costs d. Reduced taxes 96 19. a. b. c. d. 21. a. b. c. d. 22. a. b. c. d. The conservative (classical) view of the macroeconomy stresses a minimal role of government recommends an expanded role of government is similar to the political liberal ideology emphasizes the mismatch between supply and demand Which of the following pertains to microeconomics? Total size of the economy The study of specific products or markets The tradeoff between economic growth and unemployment The influence of interest rates upon the budget deficit Productive efficiency refers to which of the following? Resource substitution Differentiation of goods and services Least costs Ups and downs of the business cycle 23. Which of the following refers to free trade? a. Import tariffs b. Fixed exchange rates c. No trade barriers d. Export quotas 24. An import tariff refers to: a. A quantity restriction on imports b. Comparative advantage c. A tax on imports d. The quantity of imports 25. The balance of payments is a measure of: a. The flow of money into and out of a country b. The economic size of a country c. The percentage of the workforce who are jobless d. The average inflation rate 26. If the U.S. dollar depreciates relative to the Japanese Yen, then a. Japanese goods become more expensive to Americans b. Japanese goods become less expensive to Americans c. More Yen are needed to buy one US dollar d. American goods become less expensive to Mexicans 27. Which country is not included in the NAFTA treaty? a. US c. Canada b. Brazil d. Mexico 28. The phase of the business cycle where output is declining is called: a. Recession c. Peak b. Recovery d. trough 29. Frictional unemployment a. is equivalent to the natural rate b. is caused by recession c. pertains to people temporarily between jobs d. pertains to people who are unemployed because they lack job skills 97 30. a. b. c. d. 31. a. b. c. d. The multiplier effect is usually less than one in value indicates the influence of new economic spending upon GDP refers to the money creation process in the banking system equals the marginal propensity to consume The paradox of thrift: Refers to the concept that wealth accumulates over time Relates to the impact of interest rates upon net exports Is the idea that too much saving actually can reduce GDP emphasizes the mismatch between supply and demand 32. Which of the following relates to the current account in the balance of payments? a. International trade b. International investment c. Government debt d. The interest rate on corporate bonds 33. Microeconomics is the study of the economy from which point of view? a. the federal government b. markets or industries c. the global economy d. political perspective 34. Which of the following directly relates to the definition of macroeconomics? a. unlimited resources available b. national economic performance c. normative economics d. business economic efficiency 35. The banking reserve requirement relates to which of these ideas? a. Banks should be bailed out by the government if they become bankrupt b. Private banks should provide higher interest rates on deposits c. Banks need to keep some fraction of deposits in the form of cash d. The commerce department is in charge of the check-clearing process 36. Which of the following is a positive statement? a. I think the government should raise taxes on the rich b. The inflation rate is about 2.5 percent c. In my opinion, taxes should be reduced 37. The inverse relation between unemployment and RGDP is called: a. Okun’s Law b. Law of supply c. Law of one price d. Comparative advantage 38. Which of the following causes consumer spending to go up? a. Lower wealth b. More income c. Higher taxes d. Consumer pessimism 39. Cyclical unemployment a. is equivalent to the natural rate of five percent 98 b. c. d. a. b. c. d. is caused by a recession relates to workers who are temporarily between jobs refers to individuals who are unemployed because they lack job skills 40. Open Market Operations (OMO): are the natural result of free market forces in an industry refers to influence of exchange rates on the trade deficit cause the market supply curve to shift to the left consist of the Fed buying and selling T-bills to affect the money supply Know the difference between expansionary (fed buy T-bonds and injects cash into banking system) and contractionary OMO (fed sell T-bills and withdraws cash into banking system) a. b. c. d. a. b. c. d. a. b. c. d. a. b. c. d. a. b. c. d. a. b. c. d. 41. Suppose notebook computers and tablet computers are substitute goods. What is the effect of a decrease in the price of tablet computers upon the market for notebook computers? Increase in demand for notebook computers Increase in supply for notebook computers Decrease in demand for notebook computers Decrease in supply for notebook computers 42. Which of the following statements relates to the law of supply? A higher price causes people to buy a smaller amount A higher price motivates businesses to sell more A higher interest rate generates a decrease in the amount of loans An increase in worker productivity causes a decrease in output 43. Suppose that computers and internet service are complementary goods. What is the effect of a decrease in the price of internet service upon the market for computers? Increase in demand for computers Increase in supply for computers Decrease in demand for computers Decrease in supply for computers 44. What is the impact of an increase in worker productivity upon the market for computers? Increase in demand for computers Increase in supply for computers Decrease in demand for computers Decrease in supply for computers 45. What would happen if the demand for computers were to decline? Increase in the price Decrease in the price Increase in the quantity Decline in unemployment 46. Which of the following determinants will cause an increase in aggregate demand? Lower government spending A reduction in consumer confidence higher taxes higher government spending 99 47. If resource costs were to rise, then . . . a. aggregate supply would increase b. real GDP would go down c. unemployment would decrease d. aggregate demand would expand 48. Which of these determinants would cause an increase in consumer spending? a. Low consumer confidence b. Higher interest rates c. More wealth d. An increase in household taxes 49. Suppose the mpc=.80, initial RGDP equals $14 trillion, and investment increases by $100 billion ($0.10 trillion). What is the value of the mps? a. 5 b. .20 c. 1 d. 14.1 50. Suppose mpc=.80, initial RGDP equals $14 trillion, and investment increases by $100 billion ($0.10 trillion). What is the value of the spending multiplier? a. .20 b. 80 c. 14 d. 5 = 1/mps 51. Suppose mpc=.80, initial RGDP equals $14 trillion, and investment increases by $100 billion ($0.10 trillion). What will be the impact on RGDP? a. RGDP will rise by $500 billion = $100Billion x 5 b. RGDP will rise by $1 trillion c. RGDP will decrease to $13 trillion d. RGDP will rise by $80 billion 100 Table 1. Macroeconomic Measurements Social Security Contributions. . . . . . . . . . . . . . . 35 Imports. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17 Government Purchases. . . . . . . . . . . . . . . . . . . . .105 Nominal Interest Rate. . . . . . . . . . . . . . . . . . . . . 8% Price index this year. . . . . . . . . . . . . . . . . . . . 206 Consumption. . . . . . . . . . . . . . . . . . . . . . . . . . . 225 Nominal Income Growth. . . . . . . . . . . . . . . . . . 5% Personal Income Taxes. . . . . . . . . . . . . . . . . . .25 Investment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .50 Price index last year. . . . . . . . . . . . . . . . . . . . 200 Exports. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Unemployed Persons. . . . . . . . . . . . . . . . . . . . .10 million Population. . . . . . . . . . . . . . . . . . . . . . . . . . . . 310 million Institutionalized Persons. . . . . . . . . . . . . . . . . . 75 million Employed Persons. . . . . . . . . . . . . . . . . . . . . . 190 million Nominal economic growth. . . . . . . . . . . . . . . . 2 percent a. b. c. d. a. b. c. d. a. b. c. d. a. b. c. d. 52. Refer to Table 1 above. What is the level of net exports? 17 27 -7 = x - m -10 53. Refer to Table 1 above. What is the level of nominal GDP? 380 397 373 = C + I + G + NX 275 54. Refer to Table 1. What is the level of real GDP? 181.07 = NGDP/PI = 373/2.06 150.34 200 214.55 55. Refer to Table 1. What is the inflation rate? 3 percent = 100*(206-200)/200 4 percent 5 percent 6 percent 101 56. Refer to Table 1. What is the unemployment rate? a. 3 percent b. 4 percent c. 5 percent = 100* #U/#LF = 100*10/(10+190) d. 6 percent 57. Suppose a savings account earns 3.5 percent rate of return. How many years would it take for the amount of the savings to double in value? (hint: refer to rule of 70) a. 2 years b. 35 years c. 10 years d. 20 years = 70/3.5 58. Which macroeconomics perspective emphasizes the efficiency of market forces? a. Keynesian approach b. classical view c. democracy d. socialism 59. Expansionary open market operations consist of . . . a. the Fed selling treasury bills b. the Fed buying treasury bills c. a decrease in income taxes d. an increase in the interest rate 60. Which country is a member of the NAFTA treaty? a. China b. France c. Canada d. Australia 102 Additional Problems and essays to review for Final Exam 3. Explain and illustrate the effects upon price and quantity that occur in each of the following ten situations involving the market for gasoline. Draw a separate graph for each situation. a. b. c. d. e. f. g. h. i. j. New cars become more fuel efficient. The price of oil declines. OPEC restricts the supply of oil Household income rises People decide to buy more cars The government increases the gas tax A surplus occurs in the market. The government reduces taxes upon car manufacturers. Supply rises and demand fall. (two effects) A natural disaster disrupts the flow of oil and gas. 4. Suppose the mpc=.75, initial RGDP is $15 trillion, and government spending rises by $0.10 trillion ($100 billion). Calculate the mps, multiplier, the effect upon aggregate demand for RGDP, and the new level of RGDP. Explain the multiplier effect. Indicate the difference between the full and reduced multipliers. How does an reduction in the mpc affect the multiplier? Explain. 5. Calculate NGDP, RGDP and NX. (monetary values in trillions of dollars) Social Security Contributions. . . . . . . . . . . . . . . $2 Imports. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4 Government Purchases. . . . . . . . . . . . . . . . . . . . . $5 Nominal Interest Rate. . . . . . . . . . . . . . . . . . . . . 9% Price index this year. . . . . . . . . . . . . . . . . . . . 112 Consumption. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7 NGDP last year. . . . . . . . . . . . . . . . . . . . . . . . . . . $14 Personal Income Taxes. . . . . . . . . . . . . . . . . . . $1.5 Gross Investment. . . . . . . . . . . . . . . . . . . . . . . . $3 Price index last year. . . . . . . . . . . . . . . . . . . . 105 Exports. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3.5 Unemployed Persons. . . . . . . . . . . . . . . . 20 million Population. . . . . . . . . . . . . . . . . . . . . . . . .310 million Institutionalized Persons. . . . . . . . . . . . . 70 million Employed Persons. . . . . . . . . . . . . . . . . .150 million 103 6. Determine the inflation rate. Calculate NDP growth and RGDP growth. Is the real economy growing? Calculate the unemployment rate. 7. Illustrate and discuss the effects of contractionary and expansionary fiscal policy upon the macroeconomy using AD-AS analysis. Indicate the effects of fiscal policy upon real GDP, unemployment and inflation. How is fiscal policy used to counter the problems of inflation and recession? What are the effects of fiscal policy upon the budget deficit? Explain the difference between a liberal and a conservative fiscal policy. 8. Illustrate and discuss the impact of tight and loose monetary policy upon the macroeconomy using AD-AS analysis. Indicate the effects of monetary policy upon real GDP, unemployment and inflation. How is monetary policy used to counter the problems of inflation and recession? Describe is the relationship between open market operations, money supply, interest rates, investment and AD. 9. Discuss the role and functions of money in the economy. What are the purposes and functions of the Federal Reserve System in the banking industry and in the economy? 10. Explain and illustrate the circular flow for a mixed economy. Who are the three main participants? What functions do the participants perform in the two main markets? How does the circular flow relate to supply and demand? 11. Explain the similarities and differences between Keynesian and classical economics. What is Say’s Law? Which view do consider more realistic? Explain. (5 points) 104 Creating a trendline in a scatter graph using Numbers 1) select the chart 2) open the charts inspector 3) select "Series" in the segmented controls 4) Open the advanced section by clicking the expose triangle 5) Select the "Trendline" segment at the bottom, then the type of trendline from the "Type" menu 105 Midterm Student Evaluation Course: ______________________________ Instructor: ____________________________ Answer each question according to the following scale. Please circle a number, then add comments. Your comments are essential to helping your instructor understand your response to the course. (1 = very poor 2 = poor 3 = sufficient 4 = good 5 = excellent) 1. Please rate the content of the lectures. Comments: 1 2 3 4 5 2. Please rate the structure and pacing of the lectures. 1 Comments: 2 3 4 5 3. Please rate the course as a whole. Comments: 2 3 4 5 1 4. Please add any additional comments, concerns, or suggestions. 5. (On the back of this sheet) Do you find the blackboard material helpful? Comments: Yes or No 106 Additional Macroeconomic Essays Taking into consideration what you have learned in this course over the length of the semester, write a 1 ½ to 2 page essay in which you explain how this class has deepened your understanding of how knowledge discovered through the social sciences influences society. In formulating your essay, please carefully, and in straightforward, logical prose, answer each of the following questions: 1. What are the two or three of the most consequential individual or social behaviors studied by economics? 2. What are the most influential theories or principles that economists use to explain these behaviors, and what kinds of evidence or methods do social scientists use to ensure the soundness of their ideas? 3. Thinking about the most important problems that have been explored by economics, what are the most consequential findings of this discipline, and how have these findings impacted contemporary society as a whole? 107