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244 Cards in this Set
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7. Opportunity cost of holding money
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Interest Rate
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7.When the interest rate rises, the quantity of money demanded decreases because
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People shift money from holdings to interest bearing assets
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7. When real GDP increases, the demand for money...
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increases
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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 |
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7.In the short run, which of the following actions lower the interest rate?
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a decrease in the demand for money
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7. Fed Policy Goal?
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price stability
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7.The core inflation rate, measured by the core CPI, measures changes in the
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prices of all consumer goods except food and fuel
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7.The Federal Open Market Committee meets ________ times per year
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8
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7.The federal funds rate is the interest rate
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banks charge each other on overnight loans
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7. Taylor rule uses what three variables to determine Federal Funds Rate?
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Output Gap, Inflation Rate, Equilibrium interest rate.
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7. If the Fed follows the Taylor rule and the economy goes into a recession, the Fed would
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lower the federal funds rate
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7.When the Fed sells government securities to a bank, how are the Fedʹs assets
affected? |
the amount of government securities is decreased
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7. If the Fed buys U.S. government securites
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the federal funds rate will fall
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7.If the Fed sells U.S. government securities
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the federal funds rate rises
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7.In an open market purchase, the Fed ________ government securities, which
________ bank reserves. |
buys, increases
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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
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7. If the Fed increases the monetary base, the
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federal funds rate falls
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7. The taylor rule shows
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how the fed could set the federal funds rate
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7. Monetary policy affects real GDP by
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changing aggregate demand
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7. When the fed lowers the federal funds rate aggregate demand
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increases
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7. When the fed lowers the federal funds rate it leads to
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an increase in lending by banks
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7. If the U.S. interest rate rises, the exchange rate value of the dollar ________ and net
exports ________. |
rises, decreases
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7.When the Fed raises the federal funds rate, other
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interest rates rise, consumption, investment and net exports decrease, and the
aggregate demand curve shifts leftward. |
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7.In an AS/AD figure, lowering the federal funds rate initially shifts the
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AD curve rightward
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7. The short run effect of lowering the federal funds rate
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Raises the price level and increases real GDP
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7. Inflation targets are usually specified as
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a range for the inflation rate
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7. The discount rate is
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the price the fed charges on loans to banks
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7. At its inception, the Federal Reserve was intended to be
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lender of last resort
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7.The Federal Reserve System was created to
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promote market financial stability
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7. When the fed lowers the federal funds rate it leads to
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an increase in lending by banks
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7. If the U.S. interest rate rises, the exchange rate value of the dollar ________ and net
exports ________. |
rises, decreases
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7.When the Fed raises the federal funds rate, other
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interest rates rise, consumption, investment and net exports decrease, and the
aggregate demand curve shifts leftward. |
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7.In an AS/AD figure, lowering the federal funds rate initially shifts the
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AD curve rightward
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7. The short run effect of lowering the federal funds rate
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Raises the price level and increases real GDP
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7. Inflation targets are usually specified as
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a range for the inflation rate
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7. The discount rate is
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the price the fed charges banks on overnight loans
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7. At its inception, the Federal Reserve was intended to be
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lender of last resort
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7.The Federal Reserve System was created to
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promote market financial stability
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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
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7.The time it takes the FED or Congress to change economic policy is
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implementation lag
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7.The time it takes for a new economic policy to affect behavior in the economy is
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response lag
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7.The implementation lag for fiscal policy is longer than for monetary policy because
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it takes longer for Congress to act than the FED.
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7.In general, monetary policy has a longer __________ lag than fiscal policy but
shorter __________ lag |
response / implementation
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7.During periods of stagflation, an increase in the money supply will
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increase inflation and the level of output.
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8. The consumer price index (CPI)
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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 |
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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
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225
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8.If the price level last year was 220 and this is 250 what is the inflation rate
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13.6
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8. The biases in the CPI include the
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new goods, quality change, and substitution biases
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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
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8.The Consumer Expenditure Survey is
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undertaken infrequently
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8.A rightward shift in the aggregate demand curve generates a
__________ inflation and __________ output |
demand-pull; higher
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8.A sudden increase in the price of oil causes a __________ inflation and
__________ output. |
cost-push; lower
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8.For an economy to experience both a recession and inflation at the same time
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the aggregate supply curve must shift to the left
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8. A demand-pull inflation initially is characterized by
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increasing real output and a labor shortage.
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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 ________
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leftward, leftward
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8.Which of the following price indices comes closest to measuring the cost of a typical household
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consumer price index
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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
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8. The real wage equals the nominal wage ________ the CPI, all times 100
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divided by
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8. someone whose hurt by inflation
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person paid a fixed income during inflationary period
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8. If inflation is perfectly anticipated, who loses/
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those who hold paper money
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8.The cost to firms of changing prices
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menu cost
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8.When actual inflation is less than expected inflation
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borrowers lose, lenders gain
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8. business cycle events that result from changes in aggregate demand WHAT 2 THEORIES
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keynesian, monetarist
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8.In the Keynesian business cycle theory, business cycles begin with
changes in |
business confidence
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Keynes used the term ʺanimal spiritsʺ to refer to the
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volatility of business confidence
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8.In monetarist business cycle theory, the factor leading to a business
cycle is changes in |
quantity of money
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8.A key element of the new classical model of the business cycle is
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rational expectations
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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
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8.In the real business cycle model, the quantity of money
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has no effect on real gdp
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8.When aggregate demand persistently grows at a rate that exceeds th
growth rate of potential GDP, the economy will experience |
persistent inflation
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9. example of a nominal variable
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price level
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9.The classical dichotomy is a discovery that states
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when the economy is at full employment, the forces that determine the real
variables are independent of those that determine the nominal variables |
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9.The classical dichotomy does not apply
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when the economy is in a recession
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9.0The money wage rate measures the
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number of dollars earned by an hour of labor
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9.0 The real wage rate measures the
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quantity of goods and services an hour of labor can purchase
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9.The real wage rate falls if the money wage rate
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rises more slowly than the price level
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9.The capital stock in the economy is the total
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quantity of plant, equipment, and inventories
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Approximately, the real interest rate ________ the inflation rate ________ the
nominal interest rate. |
plus, equals
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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
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9 If the money wage rate is $15.00 per hour and the price level is 120, the real wage
rate is |
?
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NOT a source of a loanable fund
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business investment
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In the market for loanable funds, the supply comes from
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government surplus, foreign borrowing, private saving
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9. The equilibrium real interest rate is determined by the
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demand for loanable funds curve and the supply of loanable funds curve
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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
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mv=py
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9.Which of the following equations represents the equation of exchange
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MV = PY
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9.According to the quantity theory of money
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V and Y are not affected by the quantity of money
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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
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9.If the economy is at the natural unemployment rate,
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real GDP = potential
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9. cyclical unemployment is due mainly to
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fluctuations of the business cycle
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9. Structural unemployment is the result of
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technological change or foreign competition
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9. When a worker quits a job to look for a better one
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frictional unemployment increases
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9.The leading spokesman for monetarism over the last few decades has been
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milton friedman
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9.ʺCrowding outʺ refers to a decrease in
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investment spending caused by an increase in the interest rates
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______ question the effectiveness of ______ policy in changing aggregate _____, since
they believe that crowding out of investment will be nearly complete. |
monetarists, monetary, demand
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9. The long run aggregate supply curve is
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D) a vertical line through the natural rate level of output.
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9.The two cornerstones of Classical economics are the Quantity Theory and
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Says Law
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9.According to Sayʹs law
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the economy will never suffer from unemployment or underconsumption
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9.n the Classical interest theory, saving and investment determine
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interest rate
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9.According to Classical interest rattheory, which of the following will increase the
equilibrium interest rate? |
A decrease in saving
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9.In the Classical view, the money supply determines
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price level
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Which of the following ensures full employment in the Classical model
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Wage and price flexibility
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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
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Money neutrality implies that changes in the money supply have an impact on
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price level
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10.Which of the following is NOT true of the equation of exchange?
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its a short run theory
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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. |
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10.If velocity is 6 and the quantity of money is $2 trillion, what is nominal GDP?
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C) $12 trillion
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10.According to the quantity theory of money, in the long run
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an increase in the quantity of money creates an increase in prices but no
additional increase in real GDP. |
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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%
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10.Moving along a short-run Phillips curve, what is constant
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expected inflation rate
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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
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10.an increase in the expected inflation rate shifts the
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short-run Phillips curve upward
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10. The position of the long-run Phillips curve is determined by
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natural unemployment rate
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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.
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10.The opportunity cost of investment is the
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real interest rate
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10.The rate of inflation tends to remain constant when
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the unemployment rate equals the NAIRU
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10.A decrease in aggregate demand in the Classical model leads to
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lower prices and unchanged output
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10. If inflation becomes a serious problem, a Monetarist-oriented President is likely to
favor a policy emphasizing |
slower monetary growth
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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
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10.The Monetarists argue that in the long run, the Phillips Curve is vertical because
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wages change more slowly than the price level
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11.The labor force is the sum of the
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number of employed people and the number of unemployed people.
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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 |
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11. Which of the following decreases the unemployment rate?
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B) Discouraged workers leave the labor force.
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11. The labor force participation rate is the ratio of
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D) (the labor force divided by the working-age population) multiplied by 100.
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11.Over the last 40 years, the labor force participation rate of men
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has DECREASED: women INCREASED
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11.Which of the following most likely would decrease frictional unemployment
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effective employment services
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11.Full employment occurs when what is zero?
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cyclical
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11. Full employment occurs when the
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unemployment rate = the natural unemployment rate
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11.When cyclical unemployment increases and other things remain the same
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the natural unemployment rate does not change
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11.In the labor market, increases in labor productivity ________ the real wage rate and
________ employment. |
raises/increases
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5. A consumption function shows a
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positive (direct) relationship between consumption expenditure and
disposable income |
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5.Which of the following variables does NOT have a direct effect of changing
consumption expenditure? |
expected future profits
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5.What is the marginal propensity to consume?
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the ratio of the change in consumption expenditure to the change in disposable income.
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5. MPC + MPS =?
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1
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5. As a nationʹs GDP increases, that nationʹs imports...
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increase
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5. If aggregate planned expenditures are less than real GDP then
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firmsʹ inventories will increase and real GDP will decrease as production
falls |
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5. When investment is less than planned investment, aggregate planned expenditure
is ________ than actual aggregate expenditure and inventories are ________ than planned. |
greater, less
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5..Equilibrium expenditure is defined as the level of aggregate expenditure where it
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equals real gdp
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5.The difference between planned and unplanned spending is
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unplanned changes in inventories
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5. If there are no income taxes or imports, the multiplier equals
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1/(1 - marginal propensity to consume)
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5.All of the following are government outlays EXCEPT
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purchases of corporate bonds
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5.Which of the following statements regarding the U.S governmentʹs budget surpluses and deficits is correct?
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During the 1980s large deficits arose from a combination of tax cuts and
expenditure increases |
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5.Suppose a country has been running a persistent government budget deficit. If the deficit is reduced, but remains positive
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government debt will increase
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5.The Council of Economic Advisers have the following roles except
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proposing the federal governmentʹs budget to Congress
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5.An example of a discretionary fiscal policy is when
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Congress passes a law that raises personal marginal tax rates.
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5. The autonomous tax multiplier is
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smaller than the government expenditure multiplier
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12. The field of finance primarily studies
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the implications of time and risk for allocating resources over time
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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
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12.The PRESENT value of money to be received in the future is larger as
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the lower the interest rate and the sooner
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12.What is the formula for the present value of a payment of $100 to be made one year from today
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$100/(1 + r)
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12. The present value of a payment to be made in the future falls as
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the interest rate rises and the time until the payment is made increases
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12. When the Fed lowers interest rates, other things equal
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the present value of potential investment projects increases and investment increases
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12. A measure of the volatility of a stock is the ____ of its price
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standard deviation
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12. Which of the following defines an annuity?
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For a fee, an insurance company provides you with regular income until you die
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12. Which of the following is adverse selection?
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a high-risk person being more likely to apply for insurance
|
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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
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moral hazard
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12.Other things the same, as the number of stocks in a portfolio rises, what happens to risk and standard deviation.
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less risk, standard deviation on returns falls
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12. diversification? how many stocks?
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It only reduces firm-specific risk; much of the reduction comes from increasing the
number of stocks in a portfolio from 1 to 30. |
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12. Fundamental analysis is
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the study of a company’s accounting statements and future prospects to determine its
value. |
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12.An index fund
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holds all stocks in a given stock index
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12. Insurance reduces risk by
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pooling
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12. Which of the following is correct concerning stock market irrationality
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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. |
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12.Investment, as defined in the text, refers to the purchase of
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new capital
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12.The total amount spent on adding to the stock of capital and on
replacing depreciated capital is |
gross investment.
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12.The capital stock increases whenever
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net investment is positive
|
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12. Net investment equals
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gross investment minus depreciation.
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12. If the government budget is balanced and investment is equal to saving,
then |
exports equal imports
|
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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. |
|
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12.In the expenditure approach to GDP, the largest component is
|
personal consumption expenditure
|
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12. GDP = (letters)
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C + I + G + NX
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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. |
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4. The difference between gross investment and net investment is
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depreciation
|
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4. Purchase of a new house counts as
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an investment
|
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4.In the national income accounts, government expenditure on goods and services exclude
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transfer payments
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4.If the GDP deflator is biased upward by quality changes, the result is
that |
real GDP is understated.
|
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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
|
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13. The best measure of long-term economic growth potential is changes in
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real GDP per person.
|
|
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13 Average real per person GDP growth in US per year?
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2%
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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.
|
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13.Which of the following would be least likely to promote growth
|
lowering the amount of capital per hour
|
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13Markets provide all of the following benefits to society EXCEPT
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eliminating incentives to change the quantities supplied and demanded.
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13) If the level of technology rises, real GDP per hour of labor
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increases for any level of capital per hour of labor
|
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13.All of the following would increase the growth rate of the economy EXCEPT
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by discouraging international trade, you are not increasing the growth rate of the economy
|
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13.One policy that would increase the saving rate would be
|
taxing consumption
|
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13.Classical growth theory asserts that population growth is
|
determined by the level of income per person
|
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13. Classical economists believed that
|
real wage rates will never rise above their subsistence level in the long run
|
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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
|
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13 According to the new growth theory of Paul Romer
|
knowledge is not subject to diminishing returns
|
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13 I equals
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S + T - G - NX
|
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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. |
|
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The ________ the interest rate, the ________ the present value of a given future
amount. |
lower; lower
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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
|
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3. The short-run aggregate supply curve is upward sloping becaus
|
money wage rates do not immediately change when the price level
changes. |
|
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3.Other things equal, along the aggregate demand curve, a higher price
level is associated with |
decrease in quantity of real GDP demanded
|
|
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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. |
|
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3. An increase in the quantity of money
|
increases aggregate demand
|
|
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3.A rise in the exchange rate of the dollar
|
decreases aggregate demand
|
|
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3.) In short-run macroeconomic equilibrium
|
real GDP and the price level are determined by short-run
aggregate supply and aggregate demand |
|
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3. If the actual real GDP is less than potential real GDP, the economy is
|
below the full employment equilibrium
|
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3.It is very important to distinguish between the short run and the long
run when we are discussing |
aggregate supply
|
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3.The rationale underlying policies to deregulate the economy is that
these policies would shift the |
aggregate supply curve rightward
|
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3.Suppose the equilibrium output equals $600 billion,
a decrease in wages and an increase in government spending will, for sure, increase |
equilibrium output
|
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2.The opportunity cost of a good is the same as its
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relative price
|
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2. higher price =?
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less demanded
|
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2. law of supply
|
price of a good rises, more supplied
|
|
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2. An increase in the price of jet fuel will ________ air flights and the
equilibrium quantity of air flights will |
decrease/decrease
|
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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
|
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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
|
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14.When a nation has a comparative advantage in the production of a particular good
|
the nation can gain from trade.
|
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14.A person who has an absolute advantage will
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not have a comparative advantage is anything
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14 Dynamic comparative advantage arises from
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learn by doing
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14. The effects of tariffs include all of the following EXCEPT
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4tariffs increase the balance of trade in favor of the importing country
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14.The establishment of GATT has resulted in
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a reduction in tariffs since World War II
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14. Economists usually favor which policy which promotes protectionism?
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None of the above. Economists generally agree that arguments in favor of
protection are flawed. |
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14.The exchange rate is the price at which the ________ of one country exchanges for
the ________ of another country. |
goods/goods
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14.In the foreign exchange market, the ________ of one country is traded for the
________ of another country. |
currency/currency
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14.When the U.S. exchange rate falls, U.S. goods become ________ to foreign residents
and U.S. exports ________. |
less expensive; increase
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14. If the U.S. interest rate rises, the
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demand curve for dollars shifts rightward
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14.The idea that the value of money tends to be equal across countries in the LONG
RUN is known as |
purchasing power parity
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14.f the prices in the United States rise faster than those in other countries, in the
LONG RUN |
he exchange rate falls.
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14.A country records its international finance accounts in its
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balance of payments accounts.
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14.The balance of payments account used to record payments for imported goods and
services is the |
current account.
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14.The U.S. capital account measures
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foreign investment in the United States minus U.S. investment abroad
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14.A negative balance in the capital account means the economy is
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lending to the rest of the world
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14.A negative balance in the current account means the economy is
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importing more than it is exporting
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14. A strong U.S. $ will
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reduce aggregate demand, increase the current account deficit and increase the capital account surplus
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Accoording to the TRI-LEMMA a country can have
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fixed exchange rates, capital mobility but no control over monetary policy
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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 |
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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
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Inflation occurs when...
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aggregate demand increases more than long-run aggregate supply increases
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4 interesting facts about keynes
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1. father an economist, mother a mayor, pacifist but helped with WWII,
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Value Added?
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the value of something added onto the value of the cost of its factors of production
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FDIC?
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The FDIC is The Federal Deposit Insurance Corporation. It
provides deposit insurance, which guarantees the safety of deposits in member banks |
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FOMC?
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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. |
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How does an open market purchase of bonds by the feds increase money supply?
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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 |
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MS UP? (SR)
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i down, I up, C up, D up, P, Y, Up
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Nominal GDP reflects what 2 variables --
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change in output AND change in prices
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what causes inflation?
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economy growing too fast, money faster than economy. real GDP above potential GDP
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How classical model explains output?
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quantity of capital, labor, resources
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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. |
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Formula for calculating future value?
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FV = PV (1 + i)^n
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Best way to diversify?
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buy a no-load index stock mutual fund
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Cost of Economic Growth?
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must decrease production and consumption. opportunity cost of having more later is less today
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current account deficit means
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more imports than exports
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financial/capital account surplus means
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we're borrowing more than we're lending
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