Download Key Review Questions for ECO 2030 final exam

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
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Creating a trendline in a scatter graph using Numbers ......................................................... 103
Midterm Student Evaluation ................................................................................................. 106
Additional Macroeconomic Essays....................................................................................... 107
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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.
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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.
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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.
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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%
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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.
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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.
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HPU Final Exam Schedule
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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.
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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.
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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