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Net capital outflow is equal to the amount that: A) foreign investors lend here. B) domestic investors lend abroad. C) foreign investors lend here minus the amount domestic investors lend abroad. D) domestic investors lend abroad minus the amount that […]

The neoclassical theory of distribution explains the allocation of: A) output between goods and services. B) output among consumption, investment, and government spending. C) income among factors of production. D) income between saving and investment. To the extent that low […]

The index of leading indicators compiled by the Conference Board includes 10 data series that are used to forecast economic activity about ______ in advance. A) one month B) six to nine months C) one to two years D) five […]

Holding other factors constant, a decline in the real interest rate will ______ the price of housing and ______ the flow of residential housing investment. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease Which of the […]

In the classical model with fixed income, a reduction in the government budget deficit will lead to a: A) higher real interest rate. B) lower real interest rate. C) higher level of output. D) lower level of output. Economic booms […]

Risk aversion is a dislike of: A) paying interest. B) lending. C) borrowing. D) randomness in economic circumstances. The balanced growth property of the Solow growth model with population growth and technological progress predicts which of the following sets of […]

According to the Phillips curve, other things being equal, inflation depends positively on: A) expected inflation. B) the unemployment rate. C) the rate of technological change. D) the quantities of capital and labor. An increase in income raises money ______ […]

Other things being equal, the ratio of Tobin’s q will rise if: A) stock prices fall. B) the replacement cost of capital rises. C) more capital is installed. D) stock prices rise. When the central bank lowers its target inflation […]

Each of the following conditions will tend to reduce the sacrifice ratio except when: A) workers and firms set wages and prices based on rational expectations. B) policymakers make credible commitments to policy changes. C) announcements of policy changes are […]

Assume that apples cost $0.50 in 2002 and $1 in 2009, whereas oranges cost $1 in 2002 and $0.50 in 2009. If 10 apples and 5 oranges were purchased in 2002, and 5 apples and 10 oranges were purchased in […]

An estimate of what government spending and tax revenue would be if the economy were operating at its natural rate of output and employment is called the ______ budget. A) cyclically adjusted B) inflation-adjusted C) capital-asset D) generational accounting Assume […]

People use money as a medium of exchange when they: A) hold money to transfer purchasing power into the future. B) use money as a measure of economic transactions. C) use money to buy goods and services. D) hold money […]

Inventory investment will decrease when interest rates _____ and credit conditions are _____. A) decrease; tight B) decrease; easy C) increase; easy D) increase; tight If the short-run aggregate supply curve is assumed to be horizontal and international capital flows […]

Falling house prices generate widespread insolvency of financial institutions by: A) reducing the value of collateral assets. B) reducing the value of liabilities. C) increasing the value of assets. D) increasing capital. If real money balances enter the IS“LM model […]

The underground economy: A) is included in the latest GDP accounts. B) includes only illegal activities. C) includes domestic workers for whom Social Security tax is not collected. D) excludes the illegal drug trade. In the IS”LM model when M/P […]

The number of households interviewed in the monthly employment survey of the U.S. Bureau of Labor Statistics is approximately: A) 6,000. B) 60,000. C) 600,000. D) 6 million. A capital rental firm makes a profit if the ______ is ______ […]

Policy is conducted by rule if policymakers: A) announce in advance how policy will respond to various situations and commit themselves to following through on this announcement. B) are free to size up the situation case by case and choose […]

The natural rate of unemployment in the United States since 1950 has averaged between ______ and ______ percent. A) 0; 1 B) 1; 3 C) 5; 6 D) 10; 15 The simple investment function shows that investment ______ as ______ […]

A fixed-weight price index like the CPI ______ the change in the cost of living because it ______ take into account that people can substitute less expensive goods for ones that have become more expensive. A) underestimates; does not B) […]

Economists call the changes in the composition of demand among industries and regions: A) insider-outsider conflicts. B) sectoral shifts. C) moral hazard. D) adverse selection. The public policy implication of Goldin and Katz’s analysis of growing income inequality is that […]

The IS curve plots the relationship between the interest rate and ______ that arises in the market for ______. A) national income; goods and services B) the price level; goods and services C) national income; money D) the price level; […]

In a small open economy with a floating exchange rate, the supply of real money balances is fixed and a rise in government spending: A) raises the interest rate, so that income must rise to maintain equilibrium in the money […]

According to the traditional view of government debt (as in the Mundell”Fleming model), if taxes are cut without cutting government spending, then the short-run effects are a(n) ______ of the dollar and a(n) ______ in net exports. A) appreciation; increase […]

Some economists have advocated replacing government deposit insurance with 100-percent- reserve banking. Under this plan, banks would hold all deposits as reserves. Deposit insurance would no longer be necessary, because banks would always have the reserves to meet customer withdrawals. […]

According to the permanent-income hypothesis, consumption depends primarily on ______ income. A) current B) nominal C) permanent D) transitory To make a trade in a barter economy requires: A) currency. B) a check. C) scrip. D) a double coincidence of […]

Assume that a firm wants to build a factory that will cost $5 million. It believes that it can get a return of $600,000 in one year and then can sell the used factory for its original cost. The rate […]

Alan Blinder’s survey of firms found that the typical firm adjusts its prices: A) more than once a week. B) about once a month. C) once or twice a year. D) less than once a year. The tax multiplier indicates […]

According to the Keynesian-cross analysis, when there is a shift upward in the government-purchases schedule by an amount DG and the planned expenditure schedule by an equal amount, then equilibrium income rises by: A) one unit. B) DG. C) DG […]

If MPC = 0.75 (and there are no income taxes but only lump-sum taxes) when T decreases by 100, then the IS curve for any given interest rate shifts to the right by: A) 100. B) 200. C) 300. D) […]

The consumption decisions of individuals are not important for the: A) determination of the steady-state capital stock. B) determination of fiscal-policy multipliers. C) determination of aggregate demand. D) determination of sticky prices. Beginning at long-run equilibrium in the dynamic model […]

Nominal GDP measures the value of goods and services in ______ prices, while real GDP measures the value of goods and services in ______ prices. A) foreign; domestic B) domestic; foreign C) current; constant D) constant; current All of the […]

Measuring the rate of inflation using a market basket that excludes food and energy prices is preferred by some analysts because this measure, called core inflation, A) provides a real, rather than a nominal, rate of inflation. B) gives a […]

In a small open economy with a floating exchange rate, if the government imposes a tariff on foreign goods, then in the new short-run equilibrium: A) imports will decrease while exports remain constant, leading to a rise in net exports. […]

The real interest rate is the: A) rate of interest actually paid by consumers. B) rate of interest actually paid by banks. C) rate of inflation minus the nominal interest rate. D) nominal interest rate minus the rate of inflation. […]

Which of the following is not a proposed explanation for that fact that Americans on average work 20 percent more hours than the typical resident of western Europe? A) Europeans have more taste for leisure than Americans. B) Americans have […]

Holding other factors constant, legislation to cut taxes in an open economy will: A) increase national saving and lead to a trade surplus. B) increase national saving and lead to a trade deficit. C) reduce national saving and lead to […]

Measuring the size of government debt is complicated by all of the following factors except: A) inflation. B) uncounted liabilities. C) capital assets of the government. D) failure of the Office of Management and Budget to disclose figures on capital […]

According to the Solow model, persistently rising living standards can only be explained by: A) population growth. B) capital accumulation. C) saving rates. D) technological progress. Exhibit: Risk Premium (Exhibit: Risk Premium) A small open economy with a floating exchange […]

In the short run, a favorable supply shock causes: A) both prices and output to rise. B) prices to rise and output to fall. C) prices to fall and output to rise. D) both prices and output to fall. According […]

The inventories of a company that manufactures snow blowers increase in the summer and decline in the winter. This example is most consistent with which of the following explanations for holding inventories? A) production smoothing B) inventories as factors of […]

An illiquid bank can become insolvent when it: A) refuses to make promised payments. B) sells additional stock to obtain funds. C) sells assets at fire-sale prices to meet liquidity demands. D) can extend the due dates of its liabilities. […]

Two interpretations of the IS“LM model are that the model explains: A) the determination of income in the short run when prices are fixed, or what shifts the aggregate demand curve. B) the short-run quantity theory of income, or the […]

Other things being equal, all of the following government policies are likely to increase national saving except: A) decreasing taxes on savings accounts. B) running a budget deficit. C) running a budget surplus. D) retiring part of the national debt. […]

Explain what type of wage rigidity is most likely to affect the unemployment rates of the following types of workers: a. workers with low marginal labor productivity, b. workers in the construction trades, such as plumbers and electricians, c. workers […]

Banks help mitigate the problem of adverse selection in lending by: A) developing expertise in evaluating the business prospects of loan applicants. B) making loans to many different types of borrowers. C) adjusting the amount of the loan to fit […]

In 2007 in the United States among labor-force members ages 16 to 19, the highest unemployment rate was for: A) black females. B) black males. C) white females. D) white males. Tax cuts stimulate ______ by improving workers’ incentive and […]

Along an aggregate demand curve, which of the following are held constant? A) real output and prices B) nominal output and velocity C) the money supply and real output D) the money supply and velocity In a small open economy, […]

A period of falling prices is called: A) deflation. B) inflation. C) a depression. D) a recession. With planned expenditure and the equilibrium condition Y = PE drawn on a graph with income along the horizontal axis, if income exceeds […]

Conventional monetary and fiscal policies used in a recession are aimed at: A) increasing aggregate supply. B) increasing aggregate demand. C) decreasing aggregate supply. D) decreasing aggregate demand The outside lag is the time: A) before automatic stabilizers respond to […]

If the nominal exchange rate falls 10 percent, the domestic price level rises 4 percent, and the foreign price level rises 6 percent, the real exchange rate will fall: A) 0 percent. B) 8 percent. C) 10 percent. D) 12 […]

Monetary neutrality, the irrelevance of the money supply in determining values of _____ variables, is generally thought to be a property of the economy in the long run. A) real B) nominal C) real and nominal D) neither real nor […]

In the dynamic model of aggregate demand and aggregate supply, one period in time is connected to the next period through: A) the monetary policy rule. B) demand shocks. C) inflation expectation. D) the natural level of output. Fiscal policy […]

If the long-run aggregate supply curve is vertical, then changes in aggregate demand affect: A) neither prices nor level of output. B) both prices and level of output. C) level of output but not prices. D) prices but not level […]

the economy rather than a set of facts. I highlight how models help us focus on essentials and avoid unnecessary distractions that can lead us astray. One way to do this is to show how common sense can sometimes give […]

3. To distinguish between the long– and short–run aggregate supply curves. models at the back of their minds, and I often refer back to the long–run models when teaching the material on the short run. Chapter 10 is also a […]

months that the price paid in these transactions is unchanged. Table 1 presents some of Carlton’s findings for the average duration of spells of price rigidity. 244 CASE STUDY EXTENSION 10–3 Are Prices Sticky? I: Evidence from Individual Transactions 1966.1 […]

and also see how changes in exogenous variables shift this curve. Although the textbook does not spend a lot of time on the monetary/fiscal policy debate, the Web site material can be used to go through the standard exercises on […]

267 Go the Dismal Scientist Web site and click on “Tools” in the menu bar at the top of the page. Select “Risk of Recession.” Pick five states and propose explanations as to why their recession risks differ. How do […]

We can analyze the Mundell–Fleming model in terms of the familiar IS–LM diagram (Figure 1). Note now that the position of the IS curve depends upon the exchange rate—a higher exchange rate discourages net exports and causes the IS curve […]

2. To show how the short–run effects of monetary and fiscal policy depend crucially upon the exchange–rate regime. crowding out of net exports and crowding out of investment. The presentation of fixed rates hinges on the endogeneity of the money […]

CASE STUDY EXTENSION 14–4 Anticipated and Unanticipated Money Robert Barro pioneered another test of the imperfect–information model.1 An implication of that model is that anticipated changes in the money supply affect the price level, not output, because anticipated changes in […]

January, etc.) to smooth out month–to–month volatility in inflation. Compare the measure of inflation for the overall index with the measure for the core index. Explain how one might interpret periods where these measures are significantly different from each other […]

359 LECTURE SUPPLEMENT 15–1 How a Real Business Cycle Model Is Constructed The dynamic AD–AS model developed in this chapter can be used to analyze economic growth by considering how an increase in the natural level of output affects the […]

aggregate supply in which the time dimension is explicitly considered. A feature of the model is that it incorporates the response of monetary policy to economic conditions, thereby providing a more realistic setting for understanding the interaction of policy and […]

375 CHAPTER 16 Understanding Consumer Behavior Notes to the Instructor Chapter Summary This chapter discusses the theory of the consumer. It is structured so as to follow, more or less, the history of thought on the topic. It first presents […]

According to this equation, the long rate will exceed the short rate if interest rates are expected to rise, and the short rate will exceed the long rate if interest rates are expected to fall. The expectations theory of the […]

17-4 Asset Pricing III: Bond Prices and the Term Structure of Interest Rates 17-6 Asset Pricing V: The Capital–Asset Pricing Model 17-8 Taxes, Babies, and Housing 395 justify a key assumption of the textbook: investment depends negatively on the real […]

Suppose you’re an economics professor who’s busy writing a paper to be presented in three days. Someone phones you for your forecast of next quarter’s interest rate on three–month Treasury bills. Because you’re paid for writing papers, not making forecasts […]

The material on the political business cycle is particularly striking to students and obviously could be given emphasis in election years. It might also be worth referring back to Ray Fair’s work discussed in Supplement 1–2. At the risk of […]

countries had structural deficits in 2009 reflecting shifts toward expansionary fiscal policy in response to the Great Recession. Between 2009 and 2013, as fiscal policy became tighter, structural balances declined for all of these countries except for Japan, where the […]

19-4 Generational Accounting 453 three sections concentrate on the effects of the government debt on the economy, looking at the effects through the traditional view and the Ricardian view, along with other perspectives. This chapter provides a particularly good time […]

32 CASE STUDY EXTENSION 2-4 The Components of GDP Table 1 and Figure 1 show the principal components of GDP between 1929 and 2013. Table 1 U.S. Nominal GDP and the Components of Expenditure: 1929–2013 (billions of dollars) Year GDP […]

2-3 Chain–Weighted Real GDP 2-5 Defining National Income (Case Study) 15 consumer price index, and the unemployment rate. This chapter contains a standard discussion of GDP and its components, explains the different measures of inflation, and discusses how the population […]

1 See Raghuram Rajan and Luigi Zingales, “Financial Dependence and Growth,” American Economic Review 88 (1998): 559–586. The discussion in this Supplement draws on their research. 491 LECTURE SUPPLEMENT 20–4 Financial Development and Industrial Structure Further evidence on the importance […]

instructor. The analysis of how financial markets can enhance an economy’s long–run growth provides the opportunity for drawing connections with the models of economic growth presented in Chapters 8 and 9. Some instructors may find it useful to review quickly […]

61 LECTURE SUPPLEMENT 3-3 Labor’s Share of Output in the United Kingdom Figure 3–5 in the textbook reveals that the division of U.S. output between capital and labor has been roughly constant for the last 60 years, suggesting that the […]

(c) What determines how GDP is allocated to consumption, investment, and government purchases? (d) What ensures equilibrium of the flows in the circular flow diagram? comparison as the book goes on to consider topics such as the determination of prices […]

4-3 More on Credit Cards 4-5 Checks Without Banks: The Irish Banking Strike with how money is controlled and measured. Next, the chapter discusses the role of banks in the monetary system. Finally, the chapter closes with an analysis of […]

1 E. Fama, “Short–Term Interest Rates as Predictors of Inflation,” American Economic Review 65 (June 1975): 269–82. 2 See Supplement 17–3, “Asset Pricing II: Stock Prices and Efficient Markets,” for a discussion of efficient markets. 3 See the Chapter 11 […]

5-1 The Velocity of Money in Poetry and Song 5-3 Seigniorage as an Inflation Tax 5-5 Using Interest Rates to Forecast Inflation (Case Study) 87 among the most important topics in the chapter. I emphasize this as an occasion where […]

3. To present a simple model of the real exchange rate, emphasizing its role in ensuring that the current account and the capital account sum to zero. also contains a discussion of protectionism, thus allowing the presentation of another surprising […]

Should we conclude that capital is actually immobile? Not necessarily. Other evidence shows that interest rates on comparable assets are quite similar even though the assets are located in different industrial countries.3 And casual observation finds that financial markets seem […]

3. To discuss the various causes of wage rigidity (minimum wages, unions, and efficiency wages) and also how wage rigidity leads to structural unemployment. 7-2 Job Finding and Job Separation 7-4 Dutch Male Unemployment and Unemployment Benefits (Case Study) 7-6 […]

1 See David Card and Alan Krueger, Myth and Measurement: The New Economics of the Minimum Wage (Princeton, NJ: Princeton University Press, 1995); and Lawrence Katz and Alan Krueger, “The Effects of the Minimum Wage on the Fast–Food Industry,” Industrial […]

193 Note: Data are personal saving as a percentage of disposable personal income. Source: U.S. Department of Commerce, Bureau of Economic Analysis. The relationship between personal and government saving is also noteworthy because of an idea called Ricardian equivalence, which […]

2. Because the U.S. economy has less capital than at the Golden Rule, raising consumption of future generations entails a sacrifice of consumption by current generations. equilibrating mechanism in the loans market). The lecture notes distinguish carefully between the steady–state […]

Source: U.S. Department of Commerce, Bureau of Economic Analysis. 220 ADDITIONAL CASE STUDY 9-2 Convergence of Income Across the United States The Solow growth model predicts that economies with similar rates of saving, population growth, and technological progress should converge […]

models that, unlike the Solow model, allow for endogenous technological progress. Supplement 9-7 continues the informal presentation of the model started in Supplement 8–9. As noted in the comments on Chapter 8, the material on economic growth is one of […]

In the classical model with fixed income a decrease in the real interest rate could be the result of a(n): A) increase in government spending. B) increase in desired investment. C) increase in taxes. D) decrease in taxes. The factor […]

In the Solow growth model of an economy with population growth but no technological change, the break-even level of investment must do all of the following except: A) offset the depreciation of existing capital. B) provide capital for new workers. […]

Starting from long-run equilibrium in the dynamic model of aggregate demand and aggregate supply, a temporary five-period tax increase causes output to _____ until returning to the natural level in the long run. A) remain continuously above the natural level […]

The most prominent feature of the U.S. economy in the 1970s was: A) cost-push deflation. B) cost-push inflation. C) demand deflation. D) demand inflation. Financial intermediation is the process of: A) settling disputes between borrowers and lenders. B) advising corporations […]

People use money as a unit of account when they: A) hold money to transfer purchasing power into the future. B) use money as a measure of economic transactions. C) use money to buy goods and services. D) hold money […]

Economic research shows that ______ in explaining international differences in living standards. A) physical capital is more important than human capital B) human capital is at least as important as physical capital C) human capital is much more important than […]

According to the classical dichotomy, when the money supply decreases, _____ will decrease. A) real GDP B) consumption spending C) the price level D) investment spending If there is a fixed-exchange-rate system, then in the long run: A) the nominal […]

Between 1880 and 1896, the price level in the United States fell 23 percent. This movement was ______ for bankers of the Northeast and ______ for farmers of the South and West. A) bad; bad B) good; good C) good; […]

In instances of hyperinflation, the delays involved in collecting taxes often result in: A) decreased real government tax revenue. B) large capital gains for creditors. C) higher shoeleather costs of inflation. D) higher ex ante real interest rates. Assume that […]

An oil cartel effectively increases the price of oil by 100 percent, leading to an adverse supply shock in both Country A and Country B. Both countries were in long-run equilibrium at the same level of output and prices at […]