If the Federal Reserve raises the discount rate, banks will be inclined to borrow
additional reserves and the money supply will increase.
When people who are not working start looking for jobs, the labor-force participation
rate increases.
Rule-of-thumb methods of forecasting inflation uses rational expectations.
If the economy is experiencing inflation, then nominal GDP is greater than real GDP
after the base year.
Opportunity cost is the difference between the benefit and cost of some action.
If the economy is producing at a level above full employment, wages will have to fall
until equilibrium is restored.
In the long run, real GDP is determined by the total level of demand for goods and
services.
If the opportunity cost of a table is 5 chairs in nation A and 1 chair in nation B, it makes
sense for nation A to produce chairs.
Movements of workers from one country to another can shift labor supply curves.
The Q-theory of investment is based on high investments being funded by high stock
prices of a company.
Wages and prices will decrease when unemployment is below the natural rate.
In macroeconomics, the period of time in which prices have fully adjusted to any
economic changes is called the short run.
Holding other factors constant, an increase in the price level causes the aggregate
demand curve to shift to the left.
Recall Application 1, “Absolute Advantage and Comparative Disadvantage in Latvia,”
to answer the following questions:
According to the Application, if Latvia has no absolute advantage relative to its
neighboring European y countries, should it still trade with its neighbors?
A) Yes, it should specialize in timber because it has comparative advantage in it.
B) Yes, it should specialize in livestock because it has comparative advantage in it.
C) Yes, it should specialize in grain because it has comparative advantage in it.
D) No, it should not specialize in anything, and it should just trade with countries
outside its neighboring European countries.
“By how much should the Fed increase the money supply to get the economy out of a
recession?” is:
A) a microeconomic question.
B) both a microeconomic and macroeconomic question.
C) a macroeconomic question.
D) neither a microeconomic nor a macroeconomic question.
The cost of the basket of goods in Year 1 is $200 and the cost of the basket of goods in
Year 2 is $225. If Year 1 is used as the base year, the Year 2 price index is:
A) 80.
B) 112.5.
C) 66.67.
D) 150.
Additional Application INFLATION-INDEXED BONDS IN THE UNITED
STATES
Are there bonds that can protect your investments from inflation? In 1997, the U.S.
Department of the Treasury created a new financial instrument called the Treasury
Inflation-Protected Security, or TIPS. The key feature of TIPS is that the payments to
investors adjust automatically to compensate for the actual changes in the Consumer
Price Index. Therefore, TIPS provide protection to investors from inflation. Like other
government bonds, TIPS make interest payments every six months and a payment of
the original principal when the bond matures. However, unlike other Treasury bonds,
these payments are automatically adjusted for changes in inflation. Despite their
obvious attractions, the market for TIPS is still rather small. As of 2005, there were
about $200 billion in TIPS outstanding, compared to a total volume of about $4 trillion
($4,000 billion) total Treasury obligations. Because TIPS compensate for actual
inflation, the interest rate on these bonds differs from conventional bonds by the
expected inflation rate. By comparing the interest rates on TIPS to other government
bonds of similar maturity, economists can estimate the public’s expectations of inflation.
SOURCE: Simon Kwan, “Inflation Expectations: How the Market Speaks,” Federal
Reserve Bank of San Francisco Economic Letter, October 7, 2005. According to the
application, if the interest rates on TIPS are higher than the interest rates on
non-inflation indexed securities, then:
A) the public expects a deflation in the future.
B) the public expects hyperinflation in the future.
C) the public expects inflation in the future.
D) the public expects stagflation in the future.
The ability of one person or nation to produce a good at a lower opportunity cost than
another is called a(n)
A) market advantage.
B) comparative advantage.
C) absolute advantage.
D) specialization advantage.
Adam Smith used the metaphor of the “invisible hand” to explain how
A) markets mismatch buyers and sellers.
B) business owners are benevolent.
C) people acting on their own self-interest promote the interest of society as a whole.
D) the production possibilities frontier illustrates efficient outcomes.
Hyperinflation is defined as an inflation rate
A) that doubles each year.
B) that exceeds 50 percent per month.
C) that increases rapidly in one year and decreases rapidly the next year.
D) that is moderately high but anticipated.
Supply-side economists look at the effects of taxes on:
A) aggregate demand.
B) aggregate supply.
C) aggregate supply and aggregate demand.
D) a firm’s supply curve.
Figure 4.2 illustrates the supply and demand for t-shirts. If the actual price of t-shirts is
$7, we would expect that
A) demand will decrease until quantity demanded equals quantity supplied.
B) supply will increase until quantity demanded equals quantity supplied.
C) price will increase until quantity demanded equals quantity supplied.
D) there will be no change in the price since the market is in equilibrium.
Customs duties are:
A) taxes levied on goods imported into the United States.
B) tax commitments approved by past sessions of Congress.
C) taxes levied on goods exported from the United States.
D) taxes levied on nonresidents that enter the United States.
Inflation cannot continue indefinitely without:
A) increases in the interest rate.
B) increases in aggregate output.
C) increases in investment.
D) increases in the money supply.
If current unemployment is close to the natural rate of unemployment, the level of the
________ GDP is likely to be close to the level of potential output.
A) nominal
B) structural
C) real
D) estimated
Figure 15.2
Refer to Figure 15.2. Suppose the economy is currently at Point A producing potential
output . If the government increases spending, the economy moves to Point
________ in the short run and to Point ________ in the long run.
A) D; E
B) B; C
C) C; B
D) B; D
The fact that it takes time for government to identify and recognize a problem is one
reason for the occurrence of
A) inside lags.
B) outside lags.
C) implementation lags.
D) structural lags.
When the price level is low and the demand for domestic goods increases, how does it
affect international trade?
A) Net exports will decrease.
B) Net exports will increase.
C) Prices of all international goods will decrease.
D) Prices of all international goods will increase.
Dumping occurs when a firm:
A) charges a higher price to a foreign market than either its home market or the
production costs.
B) generates toxic waste when producing export goods and then dumps the waste in the
ocean.
C) stops selling to a foreign market due to excessive tariffs.
D) charges a lower price to a foreign market than either its home market or the
production costs.
Peaches and cream are complements. When the price of peaches falls, the equilibrium
quantity of cream will ________ and the equilibrium price of cream will ________.
A) rise; rise
B) rise; fall
C) fall; rise
D) fall; fall
Positive economic analysis answers what question?
Briefly explain the “wealth effect” explanation for why aggregate demand curve is
downward sloping.
What are the two types of prices in an economy?
Using a graph, illustrate what the market effects of a quota, a tariff, or a complete ban
on imports would be.
Suppose that Linda wants to calculate a price index for the goods that she commonly
purchases each week. The cost of her bundle of goods and services was $350 in 2008,
$445 in 1999, and $470 in 2010. If Linda uses 2008 as the base year, what will be the
value of her price index for 2008, 2009, and 2010?
Why are fast growing economies predicted to grow even faster in the future?
Immediately after Hurricane Katrina and Rita hit the U.S. in 2005, the price level in the
economy sharply increased. Economists attributed this increase to the very sharp
increase in energy inputs, specifically gasoline. Using the Aggregate Supply and
Aggregate Demand model, illustrate how the hurricanes affected the output and the
price level in the economy.
If a government imposes a tax on a product produced by a company, the tax will
________.
Explain the reasons why the US had a budget surplus in the late 1990s.