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According to Keynes, what determines the level of employment and income?
aggregate expenditures
 
The collapse of home values that began in 2008 led to ____ in Americans' consumption and _____ in their saving rates
a decrease; an increase
 
Which of the following is NOT a reason the aggregate demand curve is negatively sloped?
income effect
 
The curve that shows how much GDP is demanded at various price levels is called:
aggregate demand
 
Which of the following may be an explanation for the shift in aggregate demand from A to B?
Interest rates fall and boost investment
 
When the price of a given product declines, the consumer's spendable income rises because it takes less income to purchase the same quantity This is called the:
income effect
 
The shift in aggregate demand depicted may be due to a(n):
increase in income taxes
 
High family debt:
reduces the tendency to consume
 
Suppose the government raises income taxes, so consumers have less take-home pay This policy action will cause a(n):
decrease in aggregate demand
 
Government spending on Social Security:
increases aggregate demand
 
If the amount of regulation in an economy increases, the aggregate supply curve shifts _____ and output supplied will be _____
left; reduced
 
_____ will most likely increase the economy's long-run aggregate supply
Advances in technology
 
In macroeconomics, the long run is:
a period long enough that participants in the economy will have enough time to gain all relevant information and enough time to act correctly on that information
 
A shift of the aggregate _______ curve to the ________ would cause inflation to rise and employment to increase
demand; right
 
________ inflation occurs when a supply shock reduces aggregate supply
Cost-push
 
A solution to the simultaneous emergence of deflation and unemployment is to use policies that shift the:
aggregate demand curve to the right
 
The idea that new spending creates more new spending is known as:
the multiplier effect
 
Cost-push inflation is a situation in which:
the short-run aggregate supply curve shifts leftward
 
Cost-push inflation occurs when:
rising resource costs reduce short-run aggregate supply
 
a supply shock shifts the short-run aggregate supply curve to the right subsidies to businesses are increased total spending expands so much that equilibrium output exceeds full-employment output If a country has $100 million of debt, the interest rate on the debt is 10%, and the country does not make any payments on the debt, then at the end of year 3, the debt amount would be:
$133.1 million.
 
A country has $50 million of debt at the rate of 10%. It does not make any payments in year 1 and manages to renegotiate the interest rate to 5% at the end of year 1. The interest payment in year 2 for this country would be:
$2.75 million.
 
International borrowing and lending involve changes in:
the levels of external wealth.
 
Suppose that the present discounted value of a stream of payments is $1,000. If the yearly payment is $50, what is the interest rate?
5%
 
The intertemporal model is NOT used in determining which of the following? how a nation must save each year the amount equal to the difference between payments to the rest of the world and income from the rest of
the world
 
The LRBC dictates that if initial wealth equals zero:
present value of TB = 0 = present value of GDP (Q) - present value of C (GNE).
 
If a nation experiences an output shock and wishes to borrow to smooth consumption, how much of the loss is the nation able to borrow and still maintain the long-run budget constraint? a percentage of the shock to GDP equal to 1/(1 + r*), where r* is the
world long-run real interest rate
 
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.
 
Relatively high tax designed to raise revenue and discourage consumption of a socially undesirable product.
sin tax
 
final burden of a tax
incidence of a tax
 
exception or oversight in the tax law allowing a taxpayer to avoid paying certain taxes.
tax loophole
 
federal tax levied on the wages, salaries, and other income of individuals.
individual income tax
 
general state or city tax levied on a product at the time of sale.
sales tax
 
annual report by a tax payer filed with the local, state, or federal gov detailing income earned and taxes owed.
tax return
 
belief that taxes should be paid according to benefits received regardless of income.
benefit principle of taxation
 
belief that taxes should be paid according to level of income, regardless of benefits received.
ability-to-pay principle of taxation
 
tax in which the percentage of income paid in tax is the same regardless of the level of income.
proportional tax
 
total taxes paid divided by the total taxable income.
average tax rate
 
federal health care program for senior citizens.
medicare
 
tax in which the percentage of income paid in tax rises as the level of income rises.
progressive tax
 
tax rate that applies to the next dollar of taxable income.
marginal tax rate
 
tax in which the percentage of income paid in tax goes down as income rises.
regressive tax
 
branch of US treasury department that collects taxes.
IRS
 
system that automatically deducts income taxes from paychecks on a regular basis.
payroll withholding system
 
adjustment of the tax brackets to offset the impact of inflation.
indexing
 
Federal Insurance Contributions Act; tax levied on employers and employees to support social security and medicare.
FICA
 
tax on wages and salaries deducted from paychecks to finance social security and medicare
payroll tax
 
tax on corporate profits.
corporate income tax
 
general revenue tax levied on the manufacture or sale of selected items.
excise tax
 
tax on the transfer of property when a person dies.
estate tax
 
tax paid by the donor on transfer of money or wealth.
gift tax
 
tax on imported products
customs duty
 
fee paid for the use of a good or service.
user fee
 
funds that one level of gov receives from another level of gov.
intergovernmental revenue
 
tax on tangible and intangible possessions.
property tax
 
person who examines and assess property values for tax purposes.
tax assessor
 
market structure in which average costs of production are lowest when a single firm exists.
natural monopoly
 
document attached to a paycheck summarizing pay and deductions.
payroll withholding statement
 
schedule that spreads depreciation over fewer years to generate larger tax reductions.
accelerated depreciation
 
tax credit given for purchase of equipment
investment tax credit
 
personal income tax rate that applies to cases in which taxes would otherwise fall below a certain level.
alternative minimum tax
 
profits from the sale of an asset held for 12 months or longer.
capital gains
 
proportional tax on individual income after a specified threshold has been reached.
flat tax
 
tax on the value added at every stage of the production process.
value-added tax (VAT)
 
medicare is __________ tax.
proportional
 
individual income tax is ____________ tax.
progressive
 
sales tax is _____________ tax.
regressive
 
Whenever U.S. government spending increases, thereby increasing the demand for real balances and the rate of interest, the currency will appreciate and there is a potential for:
crowding out.
 
When comparing monetary and fiscal policy under fixed and floating exchange rate regimes, which of the following statements is FALSE?
In a fixed exchange rate regime, an expansionary monetary policy is effective by stimulating spending; it has no impact on the currency value or the trade balance.
 
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.
 
In 2002, $1 = 1 euro, and in 2006, $1 = 0.6 euro. If a Ferrari cost $100,000 in 2002, then it should have cost ______ in 2006.
$166,666
 
Suppose that the United Kingdom pegs the pound to the euro and the European Central Bank decides to use monetary policy to offset the possible inflationary effects of European expansionary fiscal policy. How would the European Central Bank's monetary policy affect European interest rates?
They would rise.
 
Suppose that Canada decides to peg its dollar ($C, or the loonie) to the U.S. dollar at an exchange rate of $C1 = $US1. What is likely to happen to U.S. GDP following the leftward shift of its IS curve?
It will fall.
 
Suppose that Canada decides to peg its dollar ($C, or the loonie) to the U.S. dollar at an exchange rate of $C1 = $US1. Will there be pressure for the Canadian dollar to change in value against the U.S. dollar as a result of the leftward shift of the U.S. IS curve?
Yes, the value will appreciate.
 
In 1990, Britain joined the ERM. If the German Bundesbank increased interest rates, assuming Britain maintains its exchange rate peg, the likely impact on the British economy would be a(n):
recession.
 
In 1990, Britain joined the ERM. If the German Bundesbank increased interest rates, what will Britain have to do in order to maintain its exchange rate peg?
The British would be forced to increase their interest rates.
 
In 1990, Britain joined the ERM. If the German Bundesbank increased= interest rates, assuming Britain does not maintain its exchange rate peg:
the British pound would depreciate.
 
International firms have begun to offer a new product based on the need for nations to put their savings into productive and high-return assets. It is called:
sovereign wealth funds.
 
Some emerging market national governments accumulate _____ for them to serve as a buffer for output shocks.
foreign (currency) reserves
 
If the long-run budget constraint is upheld, an investment expenditure will increase the present value of consumption only if: the present value of output is greater than the present value of the
investment expenditure.
 
In a country where output equals consumption and I and G are zero, a new investment holds the prospect of permanently increasing output and, thus, consumption. Based on this information, which of the following statements is correct?
If it is an open economy, then it is better for the economy to borrow externally to pay for the investment.
 
If capital flows freely throughout the world, one would expect it would flow:
from the rich nations, where it is abundant and cheap, to the poor nations, where it is scarce and dear.
 
If Mexico has 8% of capital per labor of the U.S. level, it is likely that under the simple model, capital will flow into Mexico because the MPK of capital is higher in
Mexico.
 
What might explain why in some lower-income nations, such as Mexico, there are low levels of capital inflows? the existence of different production functions, which would indicate a
lower marginal product of capital
 
A major factor affecting investment opportunities in rich versus poor nations, aside from the productivity of capital is:
risk factors that threaten investment.
 
It is better to invest in a country whose shocks:
are negatively correlated with yours.
 
Explanations for behavior seeming to favor domestic investments over international investments might include:
the fact that many domestic corporations already incorporate international assets and foreign operations.
 
A Keynesian model is one in which prices are sticky:
in the short run only.
 
Consider the following information for a family. The income for the family is $58,000; if the MPS is 0.25, and the income for the family decreases by $15,000, then the decrease in consumption will be:
$11,250.
 
Demand for money is different from people's demand for goods because:
Demand for money considers people's actual holding of money in cash
 
A liquidity trap arises when the demand for money is:
Perfectly interest elastic making demand for money curve horizontal straight line
 
When analyzing the impact of government consumption and taxes in an open economy, we assume that:
the reasons for changing fiscal policy are not important.
 
When income levels in the home nation increase, what is the effect on the home TB?
It decreases because of an increase in imports.
 
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.
 
According to the Precautionary Demand for money, the ________ the risk of being illiquid, and the _________ the cost of achieving additional cash, the _________ is the precautionary demand for money.
Higher, higher, higher.
 
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.
 
In 2009, there was an unlikely boom in British cross-Channel grocery deliveries to France because of:
a dramatic weakening of the British pound against the euro over the previous 18 months.
 
A belief that high-tech companies would be highly profitable led to the boom in Internet companies in the 1990s, which is known as a(n):
investment shock.
 
Unlike in the long-run model, in the short-run Keynesian model, we make two critical assumptions: that firms adjust production depending on _______, and that _______.
total demand; prices are fixed
 
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.
 
If the United States cuts its government budget deficit, what impact would there be on the IS curve?
It would shift left because of lower levels of total spending, and it would shift right if U.S. interest rates decline due to lower borrowing.
 
A shift to the left by the IS curve can be achieved by all of the following, EXCEPT a(n):
increase in the foreign interest rate.
 
In the figure below, at point D, and at the interest rate level of r2, people will expect interest rate to ______ in the future.
Increase.
 
If the Marginal Efficiency of Capital (MEC) rises above the interest rate (r), then, investment (I) will------ and the aggregate demand will----
Decrease, increase.
 
According to Keynes, which is NOT a motive to hoard money?
Transitionary motive
 
According to Keynes, the_________ the income or GDP or (Y), the ________ the demand for money in an economy.
Higher, Higher.
 
The liquidity preference curve shows the:
Inverse relationship between interest rate and speculative demand for money.
 
Demand for money, holds a ______ relationship with income and an ________ relationship with the interest rate.
Inverse, Inverse.
 
Which is the only determinant of the speculative demand for money?
Interest Rate.
 
According to the Keynesian school of thought, the effectiveness of monetary policy is measured by:
The change in real GDP that the policy can cause.
 
As money supply in the economy goes up, total bank deposits will __________ which will lead to a ________ in interest rates.
Increase, fall.
 
Which of the following statements best describes the Keynesian Chain?
Money Supply (MS) up, interest rate down, investment up and GDP (Y) up
 
The LM curve will shift to the right, if there is a(n):
increase in money supply.
 
A bond is:
a debt instrument, that is, the issuer has taken out a loan.
 
The face value of a bond is:
the amount that the issuer will have to pay upon maturity.
 
The interest rate on a bond is:
the difference between the face value and the bond price, expressed as a percentage of the bond price.
 
The price of a bond is determined by
the demand for and supply of bonds.
 
Which of the following statements is true about bonds?
Sellers of newly issued bonds are borrowers.
 
Which of the following events is likely to generate a demand for U.S. dollars?
A Saudi Arabian citizen buys a condominium in New York.
 
What are the three motives for holding money?
the transaction motive, the speculative motive, and the precautionary motive.
 
Keeping an extra $200 in your checking account to pay for possible car repairs illustrates the:
precautionary demand for money.
 
Holding $10 in your pocket to purchase a piping hot pizza, ice hold Coke, or some juicy smelly pickled herring illustrates the
transactions demand for money.
 
The demand for money curve shows:
the quantity of money demanded at each interest rate, holding all other determinants unchanged.
 
The opportunity cost of holding money is
the higher interest rates that can be earned by holding a bond fund.
 
All of the following are determinants causes a shift of money demand except
the money supply.
 
The vertical money supply curve implies that
the money supply is determined by the Federal Reserve.
 
When the Fed conducts an open market sale, it
reduces the money supply and raises interest rates
 
An increase in interest rates (due to a decrease in the money supply) will
reduce aggregate demand.
 
The major tools of monetary policy available to the Federal Reserve System are
reserve requirements, open-market operations, and the discount rate.
 
What are the three types of monetary policy lags?
the recognition lag, the implementation lag, and the impact lag.
 
All else constant, an increase in the demand for bonds
increases the equilibrium quantity and the equilibrium price of bonds.
 
A $1,000 bond, which matures in one year, has a price of $925. The interest rate on this bond is
8.11%.
 
If bond prices rise,
interest rates fall, which in turn, stimulate investment.
 
Who of the following would not generate demand for dollars?
U.S. residents who demand foreign goods, services, and assets.
 
If the supply of bonds in the United States decreases, bond prices will rise.
When bond prices rise interest rates will fall, which will make U.S. financial assets less attractive to foreigner saveres.
 
Suppose the government issues bonds to finance an increase in government spending. In the bond market, the supply curve shifts right, leading to a decrease in bond prices, and
an increase in interest rates.
 
The interest rate on newly issued bonds is usually higher for bonds with ______ terms and ______ risk that the borrower will go bankrupt.
longer; greater
 
The demand for bonds curve slopes downwards because at lower prices, bonds pay higher interest which makes them more
attractive to buyers.
 
To an economist, buying assets like stocks and bonds is a way to:
save.
 
The process by which risks are shared among many different assets or people is called:
diversification.
 
Shares of stock are:
claims to partial ownership of a firm.
 
The rate of return that financial investors require to hold a risky asset minus the rate of return on a safe asset is called the:
risk premium.
 
The risk-free rate is:
the interest rate at which one would lend if there were no risk of default.
Usually approximated by interest rates on U.S Government debt
Lower than any other interest rate
All of the above are true
 
The supply of bonds curve slopes upwards because
lower prices raises the cost of borrowing which makes them less attractive to suppliers.
 
A $100 bond, which matures in one year, has a price of $75. The interest rate on this bond is
33 1/3%.
 
In deciding how much money to hold, individuals evaluate the relative costs and benefits of holding money versus other
assets such as bonds.
 
Stockholders receive returns on their financial investment in the form of _____ and _____.
capital gains; dividends capital gains; dividends
 
The crowding-out effect refers to which of the following?
reductions in private investment spending that is a result of increased government borrowing
 
Which of the following decreases the demand for money?
a decrease in real GDP (income)
 
Which of the following increases the demand for money?
an increase in the price level
 
Which of the following does not cause the money demand curve to shift?
a change in the interest rate
 
An increase in interest rates is likely to cause
firms and households to decrease the quantity of money demanded.
 
An increase in interest rates due to a decrease in the money supply will
reduce aggregate demand.