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244 Cards in this Set

  • Front
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  • 3rd side (hint)
7. Opportunity cost of holding money
Interest Rate
7.When the interest rate rises, the quantity of money demanded decreases because
People shift money from holdings to interest bearing assets
7. When real GDP increases, the demand for money...
increases
7.In the money market, if the interest rate exceeds the equilibrium  interest, there is a 
surplus of money
How is the surplus eliminated?
People buy bonds to rid themselves of the surplus money, bidding up their 
price and pushing interest rates down
7.In the short run, which of the following actions lower the interest rate?
a decrease in the demand for money 
7. Fed Policy Goal?
price stability
7.The core inflation rate, measured by the core CPI, measures changes in the
prices of all consumer goods except food and fuel
7.The Federal Open Market Committee meets ________ times per year
8
7.The federal funds rate is the interest rate
banks charge each other on overnight loans
7. Taylor rule uses what three variables to determine Federal Funds Rate?
Output Gap, Inflation Rate, Equilibrium interest rate.
7. If the Fed follows the Taylor rule and the economy goes into a recession, the Fed would
lower the federal funds rate
7.When the Fed sells government securities to a bank, how are the Fedʹs assets 
affected?
the amount of government securities is decreased
7. If the Fed buys U.S. government securites
the federal funds rate will fall
7.If the Fed sells U.S. government securities
the federal funds rate rises
7.In an open market purchase, the Fed ________ government securities, which 
________ bank reserves. 
buys, increases
7.n the market for bank reserves, if the federal funds rate target is higher than the 
federal funds rate, the Fed will take action to ________ reserves.
decrease the supply of
7. If the Fed increases the monetary base, the
federal funds rate falls
7. The taylor rule shows
how the fed could set the federal funds rate
7. Monetary policy affects real GDP by
changing aggregate demand
7. When the fed lowers the federal funds rate aggregate demand
increases
7. When the fed lowers the federal funds rate it leads to
an increase in lending by banks
7. If the U.S. interest rate rises, the exchange rate value of the dollar ________ and net 
exports ________.
rises, decreases
7.When the Fed raises the federal funds rate, other
interest rates rise, consumption, investment and net exports decrease, and the 
aggregate demand curve shifts leftward. 
7.In an AS/AD figure, lowering the federal funds rate initially shifts the
AD curve rightward
7. The short run effect of lowering the federal funds rate
Raises the price level and increases real GDP
7. Inflation targets are usually specified as
a range for the inflation rate
7.   The discount rate is
the price the fed charges on loans to banks
7.  At its inception, the Federal Reserve was intended to be
lender of last resort
7.The Federal Reserve System was created to
promote market financial stability
7. When the fed lowers the federal funds rate it leads to
an increase in lending by banks
7. If the U.S. interest rate rises, the exchange rate value of the dollar ________ and net 
exports ________.
rises, decreases
7.When the Fed raises the federal funds rate, other
interest rates rise, consumption, investment and net exports decrease, and the 
aggregate demand curve shifts leftward. 
7.In an AS/AD figure, lowering the federal funds rate initially shifts the
AD curve rightward
7. The short run effect of lowering the federal funds rate
Raises the price level and increases real GDP
7. Inflation targets are usually specified as
a range for the inflation rate
7.   The discount rate is
the price the fed charges banks on overnight loans
7.  At its inception, the Federal Reserve was intended to be
lender of last resort
7.The Federal Reserve System was created to
promote market financial stability
7.According to the Taylor rule, the Fed should raise the federal funds interest rate 
when inflation ________ the Fedʹs inflation target or when real GDP ________ the 
Fedʹs output target. 
 rises above; rises above
7.The time it takes the FED or Congress to change economic policy is
implementation lag
7.The time it takes for a new economic policy to affect behavior in the economy is
response lag
7.The implementation lag for fiscal policy is longer than for monetary policy because
 it takes longer for Congress to act than the FED.
7.In general, monetary policy has a longer __________ lag than fiscal policy but 
shorter __________ lag
response / implementation
7.During periods of stagflation, an increase in the money supply will
increase inflation and the level of output. 
8. The consumer price index (CPI)
 compares the cost in the current period to the cost in a reference 
base period of a basket of goods typically consumed in the base 
period
8. If the CPI basket of goods cost $200 in the reference base period and $450 in a later year, the CPI in the later year equals
225
8.If the price level last year was 220 and this is 250 what is the inflation rate
13.6
8. The biases in the CPI include the  
new goods, quality change, and substitution biases
8.The technique currently used to calculate the CPI implicitly assumes 
that over time consumers buy 
the same relative quantities of goods as in a base year
8.The Consumer Expenditure Survey is
undertaken infrequently
8.A rightward shift in the aggregate demand curve generates a 
__________ inflation and __________ output
demand-pull; higher 
8.A sudden increase in the price of oil causes a __________ inflation and 
__________ output.
cost-push; lower  
8.For an economy to experience both a recession and inflation at the same time
the aggregate supply curve must shift to the left
8.  A demand-pull inflation initially is characterized by
increasing real output and a labor shortage. 
8.An increase in the money wage rate shifts the SAS curve ________ aand increase in the money prices of raw materials shifts the SAS curve  ________
leftward, leftward
8.Which of the following price indices comes closest to measuring the cost  of a typical household
consumer price index
If we want to use a measure of inflation that foreshadows price changes 
before they affect prices at the retail level, we would base our measure 
of inflation on
producer price index
8. The real wage equals the nominal wage ________ the CPI, all times 100
divided by
8. someone whose hurt by inflation
person paid a fixed income during inflationary period
8. If inflation is perfectly anticipated, who loses/
those who hold paper money
8.The cost to firms of changing prices 
menu cost
8.When actual inflation is less than expected inflation
borrowers lose, lenders gain
8. business cycle events that result from changes in aggregate demand WHAT 2 THEORIES
keynesian, monetarist
8.In the Keynesian business cycle theory, business cycles begin with 
changes in 
business confidence
Keynes used the term ʺanimal spiritsʺ to refer to the
 volatility of business confidence
8.In monetarist business cycle theory, the factor leading to a business 
cycle is changes in 
quantity of money
8.A key element of the new classical model of the business cycle is
rational expectations
8. Which of the following is the factor the creates business cycles in the 
real business cycle theory?
a change in the growth rate of productivity
8.In the real business cycle model, the quantity of money 
has no effect on real gdp
8.When aggregate demand persistently grows at a rate that exceeds th
growth rate of potential GDP, the economy will experience
persistent inflation
9. example of a nominal variable
price level
9.The classical dichotomy is a discovery that states
when the economy is at full employment, the forces that determine the real 
variables are independent of those that determine the nominal variables
9.The classical dichotomy does not apply
when the economy is in a recession
9.0The money wage rate measures the
number of dollars earned by an hour of labor
9.0 The real wage rate measures the
quantity of goods and services an hour of labor can purchase
9.The real wage rate falls if the money wage rate
rises more slowly than the price level
9.The capital stock in the economy is the total 
quantity of plant, equipment, and inventories
Approximately, the real interest rate ________ the  inflation rate ________ the 
nominal interest rate. 
plus, equals
The real interest rate is 4 percent a year. When the inflation rate is zero, the nominal 
interest rate is approximately ________ percent a year; and when the inflation rate is 
2 percent a year, the nominal interest rate is approximately ________ percent a year. 
4,6
9 If the money wage rate is $15.00 per hour and the price level is 120, the real wage 
rate is 
?
NOT a source of a loanable fund
business investment
 In the market for loanable funds, the supply comes from 
government surplus, foreign borrowing, private saving
9. The equilibrium real interest rate is determined by the
demand for loanable funds curve and the supply of loanable funds curve
9.If real GDP is $10 trillion, the price level is 120, and the quantity of money is $4 
trillion, what is the velocity of circulation?
3
mv=py
9.Which of the following equations represents the equation of exchange
MV = PY
9.According to the quantity theory of money
 V and Y are not affected by the quantity of money
9. The quantity theory of money argues that, in the long run, the percentage change in 
money will create an equal percentage change in
the price level
9.If the economy is at the natural unemployment rate,
real GDP = potential
9. cyclical unemployment is due mainly to
fluctuations of the business cycle
9. Structural unemployment is the result of 
technological change or foreign competition
9. When a worker quits a job to look for a better one
frictional unemployment increases
9.The leading spokesman for monetarism over the last few decades has been
milton friedman
9.ʺCrowding outʺ refers to a decrease in 
investment spending caused by an increase in the interest rates
______ question the effectiveness of ______ policy in changing aggregate _____, since 
they believe that crowding out of investment will be nearly complete. 
monetarists, monetary, demand
9. The long run aggregate supply curve is
D)  a vertical line through the natural rate level of output. 
9.The two cornerstones of Classical economics are the Quantity Theory and 
Says Law
9.According to Sayʹs law
the economy will never suffer from unemployment or underconsumption
9.n the Classical interest theory, saving and investment determine
interest rate
9.According to Classical interest rattheory, which of the following will increase the 
equilibrium interest rate? 
A decrease in saving  
9.In the Classical view, the money supply determines 
price level
 Which of the following ensures full employment in the Classical model
Wage and price flexibility  
In the Classical system, the total output of goods and services and total employment 
are determined by all of the following except 
the interest rate
Money neutrality implies that changes in the money supply have an impact on
price level
10.Which of the following is NOT true of the equation of exchange? 
its a short run theory
It uses the concept of the velocity of circulation,part of the quantity theory of money.inflation is strongly correlated with the growth rate of the
money
supply.

 10.If velocity is 6 and the quantity of money is $2 trillion, what is nominal GDP?
C)  $12 trillion  
10.According to the quantity theory of money, in the long run 
 an increase in the quantity of money creates an increase in prices but no 
additional increase in real GDP. 
Suppose the money growth rate is 310. percent, velocity is constant, and real GDP is 
growing at 2 percent.  What is the inflation rate?
1%
10.Moving along a short-run Phillips curve, what is constant
expected inflation rate
10.Along a short-run Phillips curve, suppose the expected inflation rate is 6 percent. If 
the inflation rate turns out to be 8 percent instead,
movement upward along the curve
10.an increase in the expected inflation rate shifts the
short-run Phillips curve upward
10. The position of the long-run Phillips curve is determined by
natural unemployment rate
10.People know that the inflation rate will increase from 3 percent to 5 percent. As a 
result 
The nominal interest rate rises by 2 percentage points. 
10.The opportunity cost of investment is the
real interest rate
10.The rate of inflation tends to remain constant when
the unemployment rate equals the NAIRU
10.A decrease in aggregate demand in the Classical model leads to 
lower prices and unchanged output 
10.  If inflation becomes a serious problem, a Monetarist-oriented President is likely to 
favor a policy emphasizing 
slower monetary growth
10.Complete crowding out implies that a government deficit financed by selling bonds 
to the non-bank public will have what affect on aggregate demand?
none
10.The Monetarists argue that in the long run, the Phillips Curve is vertical because 
wages change more slowly than the price level
11.The labor force is the sum of the
number of employed people and the number of unemployed people. 
11.Based on the following data for the country of Tiny Town, the unemployment rate 
equals: 
Population = 100 
Labor force = 80 
Number of employed persons = 70 
Number of discouraged workers = 5 
A)  15/80 × 100.   B)  5/70 × 100.   C)  10/100 × 100.   D)  10/80 × 100
D
11. Which of the following decreases the unemployment rate? 
B)  Discouraged workers leave the labor force. 
11.  The labor force participation rate is the ratio of 
D)  (the labor force divided by the working-age population) multiplied by 100. 
11.Over the last 40 years, the labor force participation rate of men
has DECREASED: women INCREASED
11.Which of the following most likely would decrease frictional unemployment
effective employment services
11.Full employment occurs when  what is zero?
cyclical
11. Full employment occurs when the 
unemployment rate = the natural unemployment rate
11.When cyclical unemployment increases and other things remain the same
the natural unemployment rate does not change
11.In the labor market, increases in labor productivity ________ the real wage rate and 
________ employment. 
raises/increases
5. A consumption function shows a
positive (direct) relationship between consumption expenditure and 
disposable income
5.Which of the following variables does NOT have a direct effect of changing
consumption expenditure?
expected future profits
5.What is the marginal propensity to consume?
the ratio of the change in consumption expenditure to the change in disposable  income. 
5. MPC + MPS =?
1
5. As a nationʹs GDP increases, that nationʹs imports...
increase
5. If aggregate planned expenditures are less than real GDP then
 firmsʹ inventories will increase and real GDP will decrease as production 
falls
5.  When investment is less than planned investment, aggregate planned expenditure 
is ________ than actual aggregate expenditure and inventories are ________ than 
planned. 
greater, less
5..Equilibrium expenditure is defined as the level of aggregate expenditure where it
equals real gdp
5.The difference between planned and unplanned spending is
unplanned changes in inventories
5. If there are no income taxes or imports, the multiplier equals 
1/(1 - marginal propensity to consume)
5.All of the following are government outlays EXCEPT
purchases of corporate bonds
5.Which of the following statements regarding the U.S governmentʹs budget surpluses and deficits is correct? 
During the 1980s large deficits arose from a combination of tax cuts and 
expenditure increases
5.Suppose a country has been running a persistent government budget deficit. If the deficit is reduced, but remains positive
government debt will increase
5.The Council of Economic Advisers have the following roles except
proposing the federal governmentʹs budget to Congress
5.An example of a discretionary fiscal policy is when 
Congress passes a law that raises personal marginal tax rates. 
5. The autonomous tax multiplier is
 smaller than the government expenditure multiplier
12. The field of finance primarily studies
the implications of time and risk for allocating resources over time
12. Which of the following is the correct way to figure the future value of $1 put in an account that earns 5
percent for 20 years?
1(1 + .05)20
12.The PRESENT value of money to be received in the future is larger as
the lower the interest rate and the sooner
12.What is the formula for the present value of a payment of $100 to be made one year from today
$100/(1 + r)
12. The present value of a payment to be made in the future falls as
the interest rate rises and the time until the payment is made increases
12. When the Fed lowers interest rates, other things equal
the present value of potential investment projects increases and investment increases
12. A measure of the volatility of a stock is the ____ of its price
standard deviation
12. Which of the following defines an annuity?
For a fee, an insurance company provides you with regular income until you die
12. Which of the following is adverse selection?
a high-risk person being more likely to apply for insurance
12. When you rent a car, you might treat it with less care than you would if it were your own. This is an example of
moral hazard
12.Other things the same, as the number of stocks in a portfolio rises, what happens to risk and standard deviation.
less risk, standard deviation on returns falls
12. diversification? how many stocks?
It only reduces firm-specific risk; much of the reduction comes from increasing the
number of stocks in a portfolio from 1 to 30.
12. Fundamental analysis is
the study of a company’s accounting statements and future prospects to determine its
value.
12.An index fund
holds all stocks in a given stock index
12. Insurance reduces risk by
pooling
12. Which of the following is correct concerning stock market irrationality
Bubbles could arise, in part, because the price that people pay for stock depends on what
they think someone else will pay for it in the future.
12.Investment, as defined in the text, refers to the purchase of
new capital
12.The total amount spent on adding to the stock of capital and on 
replacing depreciated capital is
gross investment. 
12.The capital stock increases whenever   
net investment is positive
12. Net investment equals
gross investment minus depreciation. 
12. If the government budget is balanced and investment is equal to saving, 
then
exports equal imports 
12.GDP using the expenditure approach equals the sum of personal 
consumption expenditures plus
gross private investment plus government expenditure on goods 
and services plus net exports of goods and services. 
12.In the expenditure approach to GDP, the largest component is
personal consumption expenditure
12. GDP = (letters)
C + I + G + NX
4.Gross private domestic investment is all purchases of newly produced
business capital goods and buildings 
plus the change in business inventories plus residential 
construction. 
4. The difference between gross investment and net investment is
depreciation
4. Purchase of a new house counts as
an investment
4.In the national income accounts, government expenditure on goods and  services exclude
transfer payments
4.If the GDP deflator is biased upward by quality changes, the result is 
that
real GDP is understated.
13. uppose a country is producing $20 million of real GDP.  If the economy grows at 10 
percent per year, approximately how many years will to take for real GDP to grow 
to $80 million? 
7 years
13. The best measure of long-term economic growth potential is changes in
real GDP per person. 
13 Average real per person GDP growth in US per year?
2%
13.Which of the following statements about world growth during the last half of the  20th century is correct?
Real GDP per person in Hong Kong and Singapore are approaching that in the United States. 
13.Which of the following would be least likely to promote growth
lowering the amount of capital per hour
13Markets provide all of the following benefits to society EXCEPT
eliminating incentives to change the quantities supplied and demanded.
13)  If the level of technology rises, real GDP per hour of labor 
increases for any level of capital per hour of labor
13.All of the following would increase the growth rate of the economy EXCEPT
by discouraging international trade, you are not increasing the growth rate of the economy
13.One policy that would increase the saving rate would be
taxing consumption
13.Classical growth theory asserts that population growth is
determined by the level of income per person
13. Classical economists believed that
real wage rates will never rise above their subsistence level in the long run
13.The notion that technological change is not random but instead is driven by the pursuit of profits is an essential element o
new growth theory
13 According to the new growth theory of Paul Romer
knowledge is not subject to diminishing returns
13  I equals
S + T - G - NX
 The term ʺcrowding outʺ relates to 
decreases in private investment because of a government budget deficit
increases in the real interest rate due to government budget deficit. 
The ________ the interest rate, the ________ the present value of a given future 
amount. 
lower; lower
Comparing the fiscal imbalance for the current generation versus future generations, 
it is the case that 
 future generations pay a larger share of the fiscal imbalance
3. The short-run aggregate supply curve is upward sloping becaus
money wage rates do not immediately change when the price level 
changes. 
3.Other things equal, along the aggregate demand curve, a higher price 
level is associated with  
decrease in quantity of real GDP demanded
3.  One reason that the aggregate demand curve has a negative slope is
because  
people buy more foreign goods when the domestic price level 
rises. 
3. An increase in the quantity of money
increases aggregate demand
3.A rise in the exchange rate of the dollar
decreases aggregate demand
3.)  In short-run macroeconomic equilibrium
real GDP and the price level are determined by short-run 
aggregate supply and aggregate demand
3. If the actual real GDP is less than potential real GDP, the economy is 
below the full employment equilibrium
3.It is very important to distinguish between the short run and the long 
run when we are discussing
aggregate supply
3.The rationale underlying policies to deregulate the economy is that 
these policies would shift the 
aggregate supply curve rightward
3.Suppose the equilibrium output equals $600 billion, 
a decrease in wages and an increase in government spending will, for 
sure, increase
equilibrium output
2.The opportunity cost of a good is the same as its  
relative price
2. higher price =?
less demanded
2. law of supply
price of a good rises, more supplied
2.  An increase in the price of jet fuel will ________ air flights and the 
equilibrium quantity of air flights will 
decrease/decrease
14.Because of the existence of comparative advantage, the total output of goods is  higher when each producer 
specializes in the production of a particular good
14.A person has a comparative advantage in producing a particular good if that person
an produce it at lower opportunity cost than anyone else can
14.When a nation has a comparative advantage in the production of a particular good
the nation can gain from trade.
14.A person who has an absolute advantage will
not have a comparative advantage is anything
14 Dynamic comparative advantage arises from 
learn by doing
14. The effects of tariffs include all of the following EXCEPT
4tariffs increase the balance of trade in favor of the importing country
14.The establishment of GATT has resulted in
 a reduction in tariffs since World War II
14. Economists usually favor which policy which promotes protectionism?
None of the above. Economists generally agree that arguments in favor of 
protection are flawed.
14.The exchange rate is the price at which the ________ of one country exchanges for 
the ________ of another country. 
goods/goods
14.In the foreign exchange market, the ________ of one country is traded for the 
________ of another country. 
currency/currency
14.When the U.S. exchange rate falls, U.S. goods become ________  to foreign residents 
and U.S. exports ________. 
less expensive; increase 
14. If the U.S. interest rate rises, the 
demand curve for dollars shifts rightward
14.The idea that the value of money tends to be  equal across countries in the LONG 
RUN is known as 
purchasing power parity
14.f the prices in the United States rise faster than those in other countries, in the 
LONG RUN 
he exchange rate falls. 
14.A country records its international finance accounts in its 
balance of payments accounts. 
14.The balance of payments account used to record payments for imported goods and 
services is the
current account.  
14.The U.S. capital account measures 
foreign investment in the United States minus U.S. investment abroad
14.A negative balance in the capital account means the economy is 
lending to the rest of the world
14.A negative balance in the current account means the economy is
importing more than it is exporting
14. A strong U.S. $ will 
reduce aggregate demand, increase the current account deficit and increase the capital account surplus 
Accoording to the TRI-LEMMA a country can have
fixed exchange rates, capital mobility but no control over monetary policy
1.At least 7 out of every 10 economists agree with the following 
propositions. Which of these propositions is normative?
The redistribution of income is a legitimate role for the U.S. 
government
1.One student in a football stadium with 30,000 students can see the  
better if he or she stands up. Assuming that all 30,000 students can 
see the game better if they all stand is an example of the 
fallacy of composition
Inflation occurs when...
aggregate demand increases more than long-run aggregate supply increases
4 interesting facts about keynes
1. father an economist, mother a mayor, pacifist but helped with WWII,
Value Added?
the value of something added onto the value of the cost of its factors of production
FDIC?
The FDIC is The Federal Deposit Insurance Corporation. It
provides deposit insurance, which guarantees the safety of deposits in member banks
FOMC?
The FOMC is responsible for creating policy. It consists of the
chairman, six other members of the Board of Governors, president of the New York Fed,
and the presidents of other regional Fed banks.
How does an open market purchase of bonds by the feds increase money supply?
he Fed's open market purchase of bonds increases the money supply by first increasing
a bank's DEPOSITS AND reserves. banks then loan reserves
MS UP? (SR)
i down, I up, C up, D up, P, Y, Up
Nominal GDP reflects what 2 variables --
change in output AND change in prices
what causes inflation?
economy growing too fast, money faster than economy. real GDP above potential GDP
How classical model explains output?
quantity of capital, labor, resources
HOW DO U.S. UNEMPLOYMENT RATE TRENDS COMPARE WITH EUROPE
AND JAPAN
The European business cycle is out of phases with the U.S. cycle
and in Japan unemployment was low and stable until the 1990's, but has since drifted
upward. The European business cycle was on a rising trend through the 1980s.
Formula for calculating future value?
FV = PV (1 + i)^n
Best way to diversify?
buy a no-load index stock mutual fund
Cost of Economic Growth?
must decrease production and consumption. opportunity cost of having more later is less today
current account deficit means
more imports than exports
financial/capital account surplus means
we're borrowing more than we're lending