If inflation is eight percent, a nominal interest rate of six percent translates into a real
interest rate of two percent.
The full-employment level of output represents that maximum output that a country can
produce.
According to the Solow Model, if the depreciation rate is greater than the saving rate,
the economy will experience a decrease in output as the economy approaches its long
run equilibrium.
What matters to people is the real value of money or income.
A higher saving rate will promote capital deepening.
The principle of voluntary exchange is the concept that a voluntary exchange between
two people makes both people better off.
The long run in macroeconomics is the period of time in which prices do not change or
do not change very much.
If the economy is operating below full employment, falling wages and prices will
increase money demand and raise interest rates.
An estimate of a household’s long-run average income is called permanent income.
Suppose you have $400 to invest at a nominal interest rate of 5 percent. If the inflation
rate is 2 percent, then the real return on your investment is approximately
A) $12.
B) $20.
C) $28.
D) $36.
Expected Real Rates of Interest for Five Countries
Source: Trading Economics, September, 2010Refer to Table 12.1. Assuming the
inflation rate forecast to be accurate, which nation has the lowest real rate of return?
A) Japan
B) Australia
C) South Africa
D) the United States
When people who were previously looking for jobs stop looking for jobs, the:
A) unemployment rate increases.
B) size of the labor force decreases.
C) labor-force participation rate does not change.
D) unemployment rate does not change.
Recall the Application about the government of Mexico City repainting highway
lane lines to transform a 4-lane highway into a 6-lane highway to answer the
following question. When computing percentage changes, using the simple approach
results in increases and decreases which are
A) identical.
B) symmetric.
C) not symmetric.
D) more accurate than using the midpoint method.
The boom period of the late 1990s was a good example of irrational exuberance
because:
A) investment spending and the stock market became positively related.
B) stock prices for companies that had never turned a profit soared.
C) the present value of expected future dividend payments exceeded the stock share
price.
D) even though the stock market took a plunge investment spending continued to rise.
In the long run, a decrease in the money supply
A) has no effect on real interest rates, investment, or output.
B) increases real interest rates, decreases investment, and decreases output.
C) increases real interest rates, increases investment, and decreases output.
D) decreases real interest rates, decreases investment, and decreases output.
A decrease in the money supply causes
A) a long-run decrease in the level of output.
B) both a long-run and short-run decrease in the level of output.
C) a short-run decrease in the level of output.
D) no changes in the level of output.
Suppose the government has a $180 billion budget deficit. If the government creates
$95 billion of new money to finance this deficit and finances the rest by borrowing, the
amount borrowed from the public will be
A) $85 billion.
B) $95 billion.
C) $180 billion.
D) $275 billion.
Studies by economists have tended to show that countries with more independent
central banks have
A) more inflation.
B) less inflation.
C) higher unemployment.
D) lower unemployment.
By engaging in trade and acting in their own self interest, World War II POWs were
following the economic principle of
A) comparative advantage.
B) division of labor.
C) international trade.
D) voluntary exchange.
Figure 14.2
Refer to Figure 14.2. At an interest rate of 4%, there is an:
A) excess demand for money and the interest rate will decline.
B) excess demand for money and the interest rate will rise.
C) excess supply of money and the interest rate will decline.
D) excess supply of money and the interest rate will rise.
The rate at which the money supply turns over in economic transactions in a given year
to purchase nominal GDP is known as
A) money demand.
B) the money multiplier.
C) the velocity of money.
D) the discount rate.
When does voluntary exchange take place?
Explain what is meant by the “wage-price spiral.” Does it always work in one direction?
Draw a graph showing the effect of an increase in the saving rate on the production
function.
Explain what else the government must provide along with free public education in
order to promote economic growth?
Define the multiplier and identify the variable(s) determines its size.
What are GATT and the WTO?
Do inventions have to be major technological breakthroughs to affect the efficiency of
producing goods? Explain.
Why might trade cause income inequality?
Describe how new growth theory explains the impact of comprehensive education in a
developing country.