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Isabelle values her time at $60 an hour. She spends 2 hours giving Jayla a massage. Jayla was willing to pay as much as
$300 for the massage, but they negotiated a price of $200. in this transaction,
a. consumer surplus is $20 larger than producer surplus.
b.  consumer surplus is $40 larger than producer surplus.
c. producer surplus is $20 larger than consumer surplus.
d.  producer surplus is $40 larger than consumer surplus.
a. consumer surplus is $20 larger than producer surplus.
 
an efficient allocation of resources maximizes
a. consumer surplus.
b.  producer surplus.
c. consumer surplus plus producer surplus.
d.  consumer surplus minus producer surplus.
c. consumer surplus plus producer surplus.
 
When a market is in equilibrium, the buyers are those with the _________ willingness to pay and the sellers are those with the _________ costs.
a. highest; highest
b.  highest; lowest
c. lowest; highest
d.  lowest; lowest
b.  highest; lowest
 
Producing a quantity larger than the equilibrium of supply and demand is inefficient because the marginal buyer's willingness to pay is
a. negative.
b.  zero.
c. positive but less than the marginal seller's cost.
d.  positive and greater than the marginal seller's cost
c. positive but less than the marginal seller's cost.
 
If a market is efficient, then
a. the market allocates buyers to the sellers who can produce the good at least cost.
b. all of these answers.
c. none of these answers.
d. the quantity produced in the market maximizes the sum of consumer and producer surplus.
e. the market allocates output to the buyers that value it the most.
 
If a market generates a side effect or externality, then free market solutions
a. maximize producer surplus.
b. are efficient.
c. are inefficient.
d. are equitable.
 
Consumer surplus is the buyer's willingness to pay minus the seller's cost.
False
 
consumer surplus decreases when the price in that market increases.
True.
 
If your willingness to pay for a hamburger is $3.00 and the price is $2.00, your consumer surplus is $5.00.
False
 
Producers surplus is a measure of the unsold inventories of supplies in a market
False
 
consumer surplus is a good measure of buyer's benefits if buyers are rational.
True.
 
The height of the supply curve is the marginal seller's cost.
True.
 
Total Surplus
consumer surplus + producer surplus
 
Equilibrium in a competitive market maximizes total surplus.
True.
 
The two main types of market failure
the market power and externalities
 
Along the IS curve, which of the following markets are in equilibrium?
the goods and forex markets
 
Suppose the MPC is 0.8 in Canada and the MPC of Home goods is 0.55. If income increases by $100 million in Canada, then the increase in consumption of domestic goods will be:
$55 million.
 
If the marginal propensity to consume for a nation is 0.8, it means:
consumers decrease their spending by $0.80 for each $1 of a decrease in their income.
 
If taxes fall and foreign income falls, what will happen to output, ceteris paribus?
It is uncertain what will happen.
 
With a fixed supply of money, as GDP rises, the demand for money ____ and therefore ____ must rise to encourage savers to hold financial assets instead of cash.
rises; rates of interest
 
The relationship between the quantity of real balances demanded and the rate of interest (called the demand for money curve)
will ____ when GDP increases because _____.
increase (shift right); more transactions balances are needed to make purchases and to hold between pay periods
 
After identifying one combination of interest rates and GDP for which the demand for money is equal to the supply of money (equilibrium), to maintain the equilibrium if GDP rises:
interest rates would have to rise.
 
Under a fixed exchange rate regime, an expansionary fiscal policy would ____ interest rates and GDP, which would cause ____ pressure on the exchange rate, forcing the monetary authority to undertake a(n) ______ monetary policy.
raise; downward (appreciation); expansionary
 
All else being equal, an increase in government spending would shift the ______ line to the ______, causing interest rates
to _______ and the trade balance to _______.
is; right; rise; rise
 
Factors that shift the IS curve involve:
exogenous variables affecting demand, such as a change in government spending or a change in the exchange rate.
 
When the real exchange rate decreases in the United States, then there is a(n) ______ in U.S. demand for U.S. goods and a(n) _________ in U.S. demand for Mexican goods.
decrease; increase
 
What assumption results in investment depending only on the nominal interest rate?
zero inflation
 
If taxes go up and all else remains equal, then consumption should:
fall.
 
Calculate the relative price of a basket of goods sold in the United States and Japan in terms of dollars if the yen/
$ exchange rate = 90. The basket costs $100 in the United States and ¥9,000 in Japan.
The relative price is: 1.0, which means they both cost the same.
 
Consider an economy with flexible exchange rates. If there are high levels of inflation in the economy, then the appropriate monetary policy would be to ________ in the money supply, which will cause the ______ curve to shift ________.
decrease; the LM; left
 
A set of combinations of nominal interest rates and GDP, for which the demand for money is equal to the supply of money, is:
the LM curve.
 
If we start from long-run general equilibrium of goods, forex, and the money markets, and there is a temporary expansion of the
money supply, what will be the outcome?
GDP rises, the interest rate falls, and the exchange rate rises (depreciation).
 
the supply of money increases, what happens in the IS-LM framework?
The LM curve shifts right.
 
The total demand line will shift whenever:
there is an exogenous change in one of its components (C, I, G, or TB).
 
An increase in income in an open economy nation will cause a change in consumer spending on home production, and a(n):
increase in imports if MPCF (marginal propensity to consume foreign goods) is greater than zero.
 
If domestic and foreign prices rise by the same relative amount, what will happen to the trade balance?
Nothing will happen.
 
Investment occurs when:
the expected real interest rate is less than the expected real return on the investment project.
 
The time gap between a nation's decision to implement a corrective economic policy and the actual results of the policy is known as the:
outside lag.
 
The LM curve will shift to the right, if there is a(n):
increase in money supply.
 
The inside lag is the time between:
observing a shock and countering it.
 
A fall in the real exchange rate (appreciation) will decrease the trade balance in the short run and cause a(n) ________ of the total demand curve.
downward shift
 
Consider the following information on Mexico's trade. Thirty percent of the trade is conducted with country A, 55% of trade with
country B, and 15% of trade with country C. If the peso appreciates 10% against country A, depreciates 30% against country B,
and depreciates 10% against country C, then the effective trade-weighted real exchange rate experiences a:
15% depreciation.
 
The principle involved in short-run uncovered interest parity is that home interest rates will be equal to:
the foreign rate of interest plus the expected rate of depreciation of the home currency.
 
The open-economy IS curve slopes down because any change in the foreign or home interest rate will inversely affect demand, along with a secondary effect from a change in:
the exchange rate and the trade balance.
 
The LM curve shows that, with a fixed supply of money, as GDP rises, the demand for money ____ and the rate of interest will ____.
rise; rise
 
The LM curve describes the relationship between interest rates and GDP for which the supply of money is equal to the
demand for real balances, holding _____ constant.
the quantity of money
 
If the central bank expands the money supply under floating exchange rates, it potentially stimulates the economy in two ways, namely:
by lowering the rate of interest and by causing a depreciation of the currency.
 
The trade balance component of aggregate demand is a function of all the following EXCEPT:
consumer spending.
 
If the dollar appreciates against the Mexican peso, consumers in Mexico are likely to buy more local products, and consumers in the United States are likely to buy more Mexican products. This phenomenon is known as:
expenditure switching.
 
Every point on an open-economy IS curve represents: combinations of interest rates and levels of production, which result in
equilibrium in the goods market and the forex market.
 
When income levels in the home nation increase, what is the effect on the home TB?
It decreases because of an increase in imports.
 
The functional relationship between the trade balance and the real exchange rate is:
a positive, or increasing, function.
 
The LM curve shows equilibrium in the _______ market at various levels of interest rates and GDP.
money
 
The TB (i.e., X - M) is part of the short-run spending equation. With sticky prices, what would be the effect on the TB with an increase (depreciation) of the home nation's exchange rate?
Consumers in the home nation would increase spending on domestic goods and decrease spending on foreign goods, causing the trade balance to increase.
 
The marginal propensity to consume goods and services can be broken out into the:
marginal propensity to consume home-produced goods and services plus the marginal propensity to consume imports.
 
Consider the following information for a family. The income for the family is $58,000; if the MPC is 0.6, and income increases by $13,000, then the increase in savings for the family is:
$5,200.
 
The goods market adjusts to an equilibrium right at the point of the Keynesian cross. Why?
At only that point, total spending is equal to total production.
 
What is the real exchange rate?
It is the ratio of the domestic cost of a foreign basket of products compared to the cost of the same domestic basket of products.
 
If the central bank in a foreign country increases its interest rate, then the IS curve of the domestic economy will:
shift to the right.
 
Suppose that the dollar real exchange rate falls by 10% against the euro, 20% against the pound, and 25% against the yen. If the United States trades equally with each country, what is the percentage decline in the real effective exchange rate?
18.3%
 
Full pass-through means that a 10% rise in the overseas price of an imported good leads to:
a 10% rise in the domestic price.
 
All else being equal, an increase in government spending would shift the ______ line to the ______, causing interest rates to _______ and the trade balance to _______
Is; right; rise; rise
 
Normally, a firm's borrowing cost is the expected real interest rate, which takes expected inflation into account. With price stickiness, however, the firm will consider only:
the nominal rate of interest.
 
If the demand for money decreases, ceteris paribus, the LM curve would:
shift left.
 
All else being equal, an increase in government spending would shift the ______ line to the ______, causing interest
rates to _______ and the trade balance to _______.
Is; right; rise; rise
 
The slope of the consumption function relates changes in consumer spending to changes in disposable income received by
consumers. This is called:
the marginal propensity to consume.
 
If a basket of goods costs $100 in the United States and 300 pesos in Mexico, and if the exchange rate is $1 = 5 pesos,
then the dollar price of the basket of goods in Mexico is:
$60.
 
The short-run model makes use of the ______, which assumes that private consumption expenditure is sensitive to
changes in current income.
Keynesian consumption function
 
Consider the IS-LM curves for an economy with flexible exchange rates.
An increase in the foreign income will result in the: IS curve shifting to the right.
 
Considering only the goods and forex markets, as the economy adjusts to lower rates of interest and equilibrium is restored,
the level of GDP will:
NOT FALL
 
When income levels in the rest of the world increase, what is the effect on the home TB?
NOT IT DECREASES BECAUSE OF EXPENDITURE SWITCHING
 
If a government must run a balanced budget, then tax revenues and government spending:
move exactly in the same direction
 
If we assume sticky prices in both foreign and domestic trading nations, the rate of pass-through from the nominal to the
real exchange rate falls as:
the percentage of traded goods priced in foreign currencies rises.
 
Which of the following is a general rule for how demand shocks affect the IS curve?
When any exogenous variable works to increase demand, IS shifts to the right and, conversely, when any exogenous variable works to decrease demand, IS shifts to the left.
 
In the Keynesian model, when is the economy in short-run equilibrium?
when total spending (demand) is equal to production (supply)
 
Consider the following information for a family. If the income for the family is $58,000, then an increase in income by
$20,000 will result in an increase in consumption by:
$10,000 if the MPC is 0.5
 
Traders operate on the principle that the ______ the value of the nominal exchange rate (E), the ______ it is to purchase foreign currency, and the _____ its return measured in the domestic currency.
higher; more expensive; lower
 
An increase in the home country's income will result in a(n) _____ in the home country trade balance, and an increase in
foreign income will result in a(n) _____ in the home country trade balance.
fall; increase
 
Suppose the MPC is 0.8 in Canada and the MPCh is 0.55. If income increases by $100 million in Canada, then the increase in consumption of foreign goods will be:
$25 million.
 
When the marginal propensity to consume foreign imports (MPCF) rises, ceteris paribus, what happens to the trade balance?
It decreases.
 
Which of the following equations is correct?
AE = C + I + G + (X - M)
 
The 45-degree line in the Keynesian model represents a set of points where _____ equals _____
disposable income; consumption
 
A depression economy has considerable slack, so:
unemployment is high
 
Aggregate expenditures are equal to:
the total of consumption plus investment plus government expenditures plus exports minus imports
 
Consumption spending is:
spending by individuals and households on both durable and nondurable goods
 
_____ is the change in consumption associated with a change in income
The marginal propensity to save
 
Saving is equal to:
disposable income minus consumption
 
As income increases, consumption ______
increases at a slower rate
 
If the stock market collapses, consumption will:
decrease because people feel less wealthy
 
Investment spending:
tends to be volatile
 
John Maynard Keynes focused on _____ to explain how the economy reaches short-term equilibrium employment, output, and income
aggregate spending
 
In the simple Keynesian model, equilibrium exists when:
investment spending equals saving
 
When the economy is in equilibrium in the simple Keynesian model:
saving is equal to investment
 
The formula for the simple spending multiplier is:
1/(1 – MP)
 
According to Keynes, as income grows:
both consumption spending and saving grow
 
When taxes are decreased, disposable income _______ and consumption spending ______________ multiplied
by the change in disposable income
rises; rises by the marginal propensity to consume
 
The spending reduction necessary to bring an overheated economy back to full employment is called the:
inflationary gap
 
The GDP gap divided by the multiplier yields the:
inflationary or recessionary gap
 
Between 1929 and 1933, government spending _____ and net exports _____
stayed the same; declined
 
Economic growth is best defined as an increase in
Either real GDP or real GDP per capita
 
Real GDP per capita is found by
Dividing real GDP by population
 
Real GDP per capita
Can grow either more slowly or more rapidly than GDP
 
Which of the following best measures improvements in the standard of living of a nation
Growth of real GDP per capita
 
If a nation's real GDP increases from 100 billion to 106 billion and its population jumps from 200 million to 212 million,
it's real GDP per capital will
Remain constant
 
For a nations real GDP per capita to rise during a year
Real GDP must increase more rapidly than population
 
Growth is advantageous to a nation because it
Lessens the burden of scarcity
 
For comparing changes in potential military strength and political preeminence, the most meaningful measure of economic
growth would be changes in
Total real output
 
Between years one and two, real GDP grew by______ percent and Alta
5
 
Between years one and two, real GDP per capita grew by approximately______ percent in Alta
4
 
Given the annual rate of economic growth, the rule of 70 allows one to
Calculate the number of years required for real GDP to double
 
Explanation
The rule of 70 is a mathematical formula used to estimate the number of years it takes for a variable to double, based on its annual growth rate. In this case, the question is asking how the rule of 70 can be used in relation to real GDP. By applying the rule of 70 to the annual rate of economic growth, one can calculate the number of years it would take for real GDP to double.
This can be useful in understanding the pace of economic growth and predicting future economic trends.
 
The number of years required for real GDP to double can be found by
Dividing 70 by the annual growth rate
 
At an annual growth rate of 7%, real GDP will double in about
10 years
 
If a nation's real GDP is growing by 5 percent per year, its real GDP will double in approximately
14 years
 
If the economy's real GDP doubles in 18 years, we can
Conclude that its average annual rate of growth is about 3.9%
 
Between 1950 and 2015, US real GDP grew at an average annual rate of about
3.1%
 
Between 1950 and 2015, US real GDP per capita grew at an average annual rate of about
2%
 
Real per capita GDP in the United States in 2015 was approximately
$50,820
 
Under what circumstances do rates of economic growth understate the growth of economic well-being
Product quality has improved
 
Which of the following statements is most accurate about modern economic growth
Modern economic growth is characterized by sustained and ongoing increases in living standards
 
Countries that have experienced modern economic growth have also tended to
Move toward more democratic forms of government
 
The Industrial Revolution and modern economic growth resulted in
The average human life span more than doubling
 
Economic historians date the start of the Industrial Revolution around the year 1776, when James Watt
Invented and built a more powerful and efficient steam engine
 
Real per capita GDP
Was much more equal across nations in 1820 than it is today
 
Which of the following economic regions has experienced the least growth in real GDP per capita since 1820
Africa
 
Which of the following economic regions has experienced the most growth in real GDP per capita since 1820
United States
 
Which of the following statements is most accurate about the prospects for poorer countries catching up with richer countries
Catching up as possible, as follower countries tend to grow faster than leader countries
 
In 1998, living standards in the United States were nearly_____ times higher than those in Africa
20
 
Economic growth rates and follower countries
Tend to exceed those in leader countries because followers can cheaply adopt the new technologies that leaders developed at relatively high costs
 
Real GDP per capita in the United States (as of 2010) exceeds that of France primarily because
The United States has a higher percentage of the working age population in the labor force and because US employees average about 14% more hours worked per year
 
Based on the annual number of hours worked per capita, labor supply in the United States exceeds that of France by about_____ percent
34
 
Strong property rights are important for modern economic growth because
People are more likely to invest if they don't fear that others can take their returns on investment without compensation
 
Which of the following institutional structures is most likely to promote growth
A well enforced system of patents and copyrights
 
Which of the following institutional arrangements is most likely to promote growth
Unrestricted trade between nations
 
A competitive market system
Encourages growth by allowing producers to make profitable investment decisions based on market signals
 
Free trade
Encourages growth by promoting the rapid spread of new inventions and innovations
 
Sustainable banking involves which of the following?
a. Expanding globally
b. Making more profits
c. Providing services to customers
d. Taking stakeholder interests into account
 
Which of the following groups benefited most from quantitative easing?
a. Low-paid workers
b. Investors in equities
c. Indebted companies in emerging markets
d. Savers
 
Increasing sovereign debt is a worry in all but which one of the following circumstances?
a. When public spending is falling
b. When tax revenues fall
c. When public spending is spiralling out of control
d. When economic growth slows
 
All but which one of the following is a drawback of 'self-regulation' in financial services?
a. It assumes companies will behave in responsible ways.
b. The company is not inclined to engage in ethical behavior unless compelled to do so.
c. The company is likely to put owners ahead of other stakeholders.
d. It reduces regulatory bureaucracy.
 
When did the gold standard prevail in the international finance?
a. the 1900s to 1930
b. 1917 to 1939
c. 1948 to the 1970s
d. the 1870s to 1914
 
Which sector has seen the highest surges in stock prices in the decade following the 2008 financial crash?
a. Retailers
b. Car manufacturers
c. Oil companies
d. High-tech companies
 
The Argentina financial crisis was caused mainly by which of the following?
a. The activities of hedge funds
b. Too much accumulated sovereign debt
c. Poor governance
d. Too many indebted companies
 
Rising debt burdens of private-sector companies in emerging economies are a concern for which of the following reasons?
a. Governments will become politically unstable.
b. Companies might have difficulty repaying, due to volatility in global markets.
c. Governments will probably need to step in to prop up indebted companies.
d. Banks are reluctant to lend to companies.
 
Hedge funds are criticized for which one of the following reasons?
a. They make lots of money.
b. Their speculative activities can distort markets.
c. They attract people who like to gamble.
d. Their activities can annoy corporate decision makers.
 
Why has globalization increased financial risks?
a. Global production now involves many countries.
b. Global supply chains need increased sources of capital.
c. Global capital flows can be highly volatile.
d. Global companies seek differing locations as part of their financial strategy.
 
Banking scandals have included all but which one of the following?
a. Rigging the interbank lending rate
b. Fines for mis-selling financial products
c. The separation of retail banking from investment banking
d. The Global Restructuring Group of RBS
 
Which of the following best describes the Washington consensus as originally conceived?
a. Comprehensive deregulation
b. Market reforms moderated by social needs
c. A priority on reducing public debt, despite economic hardships
d. An emphasis on market reforms as the only way out of financial crises
 
Why was the World Bank set up?
a. To maintain order in the international monetary system
b. To promote economic development
c. To preserve peace through international cooperation
d. To formulate a coordinated policy response to financial crises
 
A company's decision to acquire another company in a different country is a strategy that is often used for which of the following purposes?
a. To streamline corporate decision making
b. To gain rapid entry into a new market
c. To gain an immediate boost in profits
d. To streamline operations
 
Which of the following was an outcome of Russia's currency crisis of 1998?
a. A resurgence of market reforms
b. The fall of the government and election of Vladimir Putin
c. A reduction in state ownership in the economy
d. Austerity measures to reduce government debt
 
Which of the following was beneficial during the gold standard period?
a. Countries could not control their own interest rates.
b. Gold became scarce.
c. Governments lost some control over monetary policy.
d. There was exchange-rate stability among countries.
 
The Washington consensus includes all but which one of the following policies?
a. Market reforms
b. Liberalizing FDI
c. Deregulation
d. Nationalizing key industries
 
Which of the following is true of a banking crisis?
a. It results in a sharp appreciation in the value of the currency.
b. It happens due to a decline in domestic borrowing.
c. It leads to individuals and companies withdrawing their deposits from banks.
d. It occurs due to asset price deflation.
 
A merger of pharmaceutical companies is likely to lead to all but which one of the following?
a. More investment in R&D
b. Lower prices for drugs in poor countries
c. More marketing expenditure in global markets
d. Ability to put greater pricing pressure on health providers
 
Which of the following is a Bretton Woods institution?
a. The World Trade Organization (WTO)
b. The Securities and Exchange Commission (SEC)
c. The International Monetary Fund (IMF)
d. The International Labour Organization (ILO)
C
 
A country's exporters favor all but which one of the following?
a. A well regulated currency market
b. A strong domestic currency
c. A weak domestic currency
d. A stable currency market
 
Which of the following refers to the gold standard?
a. Pegging currencies to gold and guaranteeing convertibility
b. The most valuable currency in the world at any given point in time
c. Conducting international trade by physically exchanging gold
d. The common global standard of gold quality to be maintained
 
All but which one of the following was a cause of the global financial crisis 2008?
a. Risky activities of global banks
b. The collapse in the US housing market
c. Regulatory failures
d. Too much government regulation of financial services
 
Which of the following is an advantage of the pegged exchange rate?
a. It leads to financial stability.
b. It attracts foreign investors.
c. It protects the country against economic downturn.
d. It deters speculators on the country's currency.
 
Which of the following refers to a system under which the exchange rate for converting one currency into another is continuously adjusted depending on the laws of supply and demand?
a. Pegged exchange rate
b. Fixed exchange rate
c. Floating exchange rate
d. Forward exchange rate
 
Risks arising in derivatives trading include all but which one of the following?
a. Speculative investors are active in trading.
b. There are potentially huge profits to be made in such trading.
c. The value of securities is hard to assess.
d. Much of the trading is unregulated.
 
Lessons from the Asian financial crisis of 1997-8 included all but which one of the following?
a. Financial crisis can spread to the entire economy.
b. IMF conditions requiring market reforms can cause more economic hardship.
c. Global capital flows are invariably beneficial in developing economies.
d. Financial contagion can spread from one country to another.
 
In terms of the gold standard, the amount of currency needed to purchase one ounce of gold was referred to as the:
a. gold par value
b. gold to dollar ratio
c. gold reserve ratio
d. gold mix ratio
 
What is the aggregate expenditure model?
The aggregate expenditure model is a simple model that helps us understand the relationships among some of the economic variables involved in the business cycle.
 
What is nominal GDP?
Nominal GDP is the current market value of all final goods and services produced in a country in a year.
 
What is real GDP?
Real GDP corrects nominal GDP for the effects of inflation.
 
What does the aggregate expenditure model focus on?
The aggregate expenditure model focuses on the short-run relationship between total spending and real GDP.
 
What is the central assumption of the aggregate expenditure model?
The central assumption of the aggregate expenditure model is that the price level doesn't change.
 
What does the assumption that the price level doesn't change mean for the model?
The assumption that the price level doesn't change means that we don't have to worry about a difference between real GDP and nominal GDP.
 
What is the key idea of the aggregate expenditure model?
The key idea of the aggregate expenditure model is that in any particular year, the level of real GDP is determined mainly by the level of aggregate expenditure.
 
What do we need to understand the relationship between aggregate expenditure and real GDP?
To understand the relationship between aggregate expenditure and real GDP, we need to look more closely at the components of aggregate expenditure.
 
What are the four components of aggregate expenditure identified by Keynes?
consumption, investment, government purchases, and net exports.
 
A decrease in the price level
causes a downward movement along the existing AD curve
 
If the nominal wage is $12 per hour and the price level (as measured by a price index) is 2, it follows that the real wage is _________ per hour.
$6.00
 
Suppose consumption decreases at each price level. As a result, aggregate demand __________, and the AD curve shifts __________.
decreases; leftward
 
An aggregate demand (AD) curve shows the
real output (Real GDP) people are willing and able to buy at different price levels, ceteris paribus.
 
Can a change in the price level change aggregate demand?
No, only a change in a factor other than the price level can change aggregate demand.
 
A decrease in consumption caused by a factor other than a change in the price level
shifts the AD curve to the left.
 
If consumption increases,
the AD curve will shift rightward, which will push the price level up.
 
A decrease in the price of a nonlabor input such as machinery
shifts the SRAS curve to the right.
 
The AD curve shows the various amounts of real output that people are willing and able to
buy at different price levels.
 
The product of ____________________ and _________________ is equal to the total amount of spending in an economy.
the money supply; velocity
 
A falling interest rate affects the demand for consumer __________ and shifts the AD curve to the __________.
durables; right
 
If wage rates rise at the same time that labor productivity increases, what is the effect on short-run aggregate supply (SRAS)?
SRAS may rise, fall, or remain constant.
 
What is consumption in the context of aggregate expenditure?
Consumption is the spending by households on goods and services, including everything from food to haircuts to snowmobiles.
 
What is planned investment in the context of aggregate expenditure?
Planned investment is the planned spending by firms on capital goods, such as factories, office buildings, and machines, and by households on new homes.
 
What are net exports in the context of aggregate expenditure?
Net exports are the spending by foreign firms and households on goods and services produced in Canada minus the spending by Canadian firms and households on goods and services produced in other countries.
 
What is planned investment?
Planned investment is the amount that businesses plan to spend on investment.
 
What are inventories?
Inventories are products that have been produced but not yet sold to the consumer.
 
What is included in investment spending?
Changes in inventories are included as part of investment spending, along with spending on machinery, equipment, office buildings, and factories.
 
How would a manager respond to a decrease in inventories?
The manager would likely order more copies of the product to replenish inventory.
 
What happens when stores and producers in the economy experience similar unplanned drops in inventories?
They will increase their orders, and the output of the economy (GDP) will increase.
 
During the deep recessions of the early 1980s and of 2007-2009,
unemployment reached roughly __________
10%
 
The unemployment rate may underestimate the true extent of unemployment if:
many people become discouraged and cease looking for work.
 
A university student who is enrolled in school fulltime and not seeking employment is considered:
out of the labor force.
 
During the Great Depression of the 1930s, the unemployment rate reached more than _________ of the labor force
25%
 
Reginald looked for work for six months but could not find a job to his liking. He now spends his time at the beach. For purposes of employment he is considered:
out of the labor force.
 
If the unemployment rate is 6 percent and the number of persons unemployed is 6 million, then the number of people employed is equal to:
94 million.
 
The unemployment rate in a town in which 65,400 persons are employed and 11,000 are unemployed equals:
14.4%
 
A welder who quits his job and moves from Pittsburgh to Madison to try to get a better welding job is said to be:
frictionally unemployed
 
Frictional unemployment occurs when:
a worker decides to quit one job to seek a different job.
 
Which of the following statements is incorrect?
Employment insurance compensation increases the opportunity cost of being unemployed.
 
If the number of employed persons in a country equals 24 million, the number of unemployed persons equals 8 million, and the number of persons over age 16 in the population equals 40 million, the unemployment rate equals:
25%
 
Insofar as government public policy is concerned, the best way to battle unemployment would be __________________.
to minimize recessions
 
The U.S. unemployment rate moves up and down as the economy moves in and out of recessions. But over time, the unemployment rate seems to return to a range of ____________.
4%-6%
 
If a nation's labor force receives a significant influx of young workers:
the natural rate of unemployment is likely to increase.
 
Freelife, New Hampshire has a labor force of 78,567 persons and employment of 74,382. The unemployment rate for the city is:
5.3%
 
The development of a nationwide computerized job bank listing of all job openings would be most likely to reduce
frictional unemployment
 
If the number of employed persons in a country equals 24 million, the number of unemployed persons equals 8 million, and the
number of persons over age 16 in the population equals 40 million, the unemployment rate equals:
25%.
 
Cyclical unemployment arises when
business activity in the macroeconomy declines.
 
Through good economic years and bad, many European economies had unemployment rates hovering
near _________ since the 1970s.
10%
 
Women composed __________ of the paid workforce in 1900 and 50% of the paid workforce in 2010.
18%
 
How would a manager respond to an unplanned increase in inventories?
The manager would likely order fewer copies of The Fifth Risk, say 85 copies, in hopes of selling all of the copies
ordered this time
 
What happens if many other stores and producers experience similar unplanned increases in inventories?
If many other stores and producers throughout the economy have experienced similar unplanned increases in inventories, they too will decrease their orders.
 
What happens when firms cut back production in response to a decrease in orders?
In response to the decrease in orders, firms will cut back production and GDP will decrease.
 
What can happen as a result of firms laying off workers due to a decrease in production?
As a result of firms laying off workers due to a decrease in production, total employment will decrease.
 
What actions might managers of small-town Tim Hortons have to take if major employers in the area close?
Managers of small-town Tim Hortons may have to lay off workers if major employers in the area close.
 
During the past century, ______ in the United States has grown at an average annual rate of approximately 3%.
Cyclical movements in real GDP have accompanied this growth of output.
Real GDP
 
The four phases of the business cycle are:
1) expansion
2) peak (or boom)
3) contraction
4) recession
 
Two back to back quarters of declining real GDP. Characterized by declining real GDP and rising unemployment
Recession
 
A severe recession
Depression
 
The level of employment that results form the efficient use of the labor force taking into account the normal (natural) rate of
unemployment due to information costs, dynamic changes, and the structural conditions of the economy.
Full Employment
 
Both _____ and ______ are associated with the economy's maximum sustainable rate of output.
Full employment; the natural rate of unemployment
 
is the maximum sustainable output level consistent with the economy's resource base and current institutional arrangements.
Potential Output
 
Fluctuations in the general level of economic activity as measured by variables such as the rate of unemployment and changes
in real GDP
Business Cycle
 
During economic expansions, construction and investment are ________.
increasing
 
The number of people 16 years of age and older who are either employed of unemployed
Civilian Labor Force
 
A person not currently employed who is either 1) actively seeking employment or 2) waiting to begin or return to a job.
Unemployed
 
________ in real GDP influence the demand for labor and employment.
Fluctuations
 
The percentage of unemployed people in the labor force.
Unemployment Rate
 
The number of people 16 years of age and over employed as civilians divided by the total civilian population
16 years of age and older. The ratio is expressed as a percentage.
Employment/Population Ratio
 
3 Types of Unemployment
frictional unemployment
structural unemployment
cyclical unemployment
 
Unemployment due to constant changes in the economy that prevent
qualified unemployed workers from being immediately matched up with
existing job openings.
Frictional Unemployment
 
Unemployment due to the structural characteristics of the economy that make it difficult for job seekers to find
employment and for employers to hire workers.
Structural Unemployment
 
Unemployment due to recessionary business conditions and inadequate labor demand
Cyclical Unemployment
 
The "normal" unemployment rate due to frictional and structural conditions in labor markets.
Natural Rate of Unemployment
 
can also be defined as a decline in the value of money
Inflation
 
An increase in the general level of prices that was not expected by most decision-makers.
Unanticipated Inflation
 
An increase in the general level of prices that was expected by most decision-makers
Anticipated Inflation
 
Why does Inflation adversely affect the economy?
High and variable inflation reduces investment
Inflation distorts the information delivered by prices
High and variable inflation results in less productive use of resources
 
What causes Inflation?
If aggregate demand rises more rapidly than supply, prices will rise. Second, nearly all economists believe that a rapid expansion in a nation's stock of money causes inflation.