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Study Guide
Chapters 19-22
•What 2 factors can cause GDP per capita to increase?
Output per worker increases or share of population
employed increases
•What 6 factors determine average labor productivity?
1.Human capital
2.Physical capital
3.Land and other natural resources
4.Technology
5.Entrepreneurship and management
6.Political and legal environment
•Give an example of a capital gain and a capital loss.
Capital Gain – increase in the value of assets; stocks increase
Capital Loss – decrease in the value of assets; value of home decreases
•What is the private savings level if income = $50,000, taxes = $5,000,
and consumption = $35,000?
50,000-5,000-35,000 = $10,000 in private savings
•What are three reasons for household savings?
Life-cycle saving - to meet long-term objectives
Precautionary saving - for protection against setbacks
Bequest saving - to leave an inheritance
If the actual interest rate is above the equilibrium interest rate, will there
be a surplus or a shortage of savings?
Surplus of savings
If the government budget deficit increases, what will happen to the
real interest rates, savings, and investment?
There will be a leftward shift in the savings curve, causing
the real interest rate to increase. There will be lower levels of
both savings and investments.
Explain the difference between stocks and bonds.
A share of stock is a claim to partial ownership of a firm;
a bond is a legal promise to repay debt
What are the three principal uses of money?
1.Medium of exchange
2.Unit of account
3.Store of value
A bank has $100,000 in deposits, and the reserve-deposit ratio is 10%.
If their current reserve level is $15,000, how much are they going to
loan out in order to meet the reserve-deposit ratio?
$5,000 (The bank only needs $10,000 in reserves since this is
10% of their deposits)
A bank has reserves of $25,000 and the reserve-deposit ratio is 10%.
The residents of the country hold $100,000 in currency.
What is the total money supply?
Money Supply = Currency held by public +
(bank reserves/reserve-deposit ratio)
100,000 + 250,000 = $350,000
The citizens of a country hold $1000 in currency.
The bank has $500 in reserves, and the reserve-deposit ratio is 5%.
The Federal Reserve conducts open-market operations to stimulate
the economy, and purchases bonds for $100. Assume the $100 from the
Federal Reserve is deposited completely into the bank.
What was the money supply before the Fed’s action, and what is the
money supply after the Fed’s action?
Before: $1000 + (500/.05) = $11,000
After: $1000 + (600/.05) = $13,000
~The Federal Reserve’s $100 in open-market operations
increased the money supply by $2,000.
Define recession, peak, and trough.
Recession - a period in which the economy is growing at a rate below normal
Peak - the beginning of a recession; high point of the business cycle
Trough - the end of a recession; low point of the business cycle
If potential output is $50 billion and actual output is $46 billion,
what is the value of the output gap? Is this a recessionary or expansionary gap?
Output Gap = $46-$50 = $-4 billion; this is a recessionary gap since
actual output is less than potential output.
If frictional unemployment is 2%, structural unemployment is 4%, and cyclical
unemployment is 3%, what is the natural rate of unemployment? Is this situation
representative of a recessionary gap or expansionary gap?
Natural Rate of Unemployment = 2% (frictional) + 4% (structural) = 6%
This is a recessionary gap, since total unemployment (9%) exceeds the
natural rate of unemployment.