If GDP is higher than potential output, wages and prices will rise.
Refer to Application 2, “Recovering From a Recession,” to answer the following
questions:
After reading the application, you can infer that the recession in 1973 was also caused
by a financial crisis.
Politicians sometimes have the incentive to take advantage of the differences between
the short-run and long-run effects of economic policies to improve their chances of
being reelected.
Cyclical unemployment increases during recessions.
The expenditures incurred by the government during the war in Iraq decreased the
budget deficit.
The distribution of the 12 districts banks of the Federal Reserve across the U.S.
reflected the distribution of economic and financial power in 1913.
If average income in the United States is more than 25 times average income in
Pakistan, an increase in investment will likely increase economic growth more in
Pakistan than in the United States.
If the economy is in long run equilibrium at full employment, an increase in the money
supply will lead to a higher aggregate demand and a higher output level in the long run.
A sales tax is a form of consumption tax.
If a country runs a trade deficit to finance increased current consumption, it will have to
increase consumption in the future to pay back its borrowings.
Investment spending is countercyclical.
If nominal GDP increased during a year, then output must have increased.
Macroeconomics involves the study of the decision-making of individuals or individual
firms.
Which of the following is a function of the district Federal Reserve Banks?
A) provide advice on monetary policy
B) participate in monetary policy decision-making
C) act as a liaison between the Fed and the banks in their district
D) All of the following are correct.
In 1929-1933, the U.S. experienced unemployment rates exceeding 25 percent and the
U.S. real GDP contracted over 33 percent. During this period, the U.S. economy
experienced:
A) a depression.
B) a trough.
C) an expansion.
D) a peak.
Table 11.2 Refer to Table 11.2. At an aggregate output level of $1000, what will change
in order to bring the economy to equilibrium?
A) Output must decrease.
B) Investment must increase.
C) Inventories must decrease.
D) Consumption must increase.
As the result of unanticipated inflation, firms are better off while workers are worse off
if the actual inflation rate
A) is equal to the expected inflation rate.
B) exceeds the expected inflation rate.
C) is less than the expected inflation rate.
D) Neither firms nor workers are better off as the result of unanticipated inflation.
If nominal wages increase by 4 percent while real wages remain constant, the inflation
rate must be
A) -2 percent.
B) 0 percent.
C) 2 percent.
D) 4 percent.
Which of the following would likely lead to an increase in the natural rate of
unemployment?
A) an increase in the number of teenagers in the workforce
B) an increase in the length of time during which people can receive unemployment
benefits
C) a prolonged recession
D) all of the above
Liquidity refers to:
A) the ability of an asset to hold its value over time.
B) the ease at which an asset can be converted into money on short notice.
C) the purchasing power of a dollar over time.
D) none of the above
Currency held by the public is included in:
A) both M1 and M2.
B) M2 only.
C) M1 only.
D) neither M1 nor M2.
Actual unemployment can exceed the natural rate of unemployment due to
A) structural unemployment.
B) cyclical unemployment.
C) frictional unemployment.
D) all of the above
Daily Output of Russia and Panama
Table 18.1
Refer to Table 18.1. Mutually beneficial terms of trade between Russia and Panama are
A) 1 hat for 2 gloves.
B) 1 glove for 6 hats.
C) 5 gloves for 3 hats.
D) 1 hat for 1 glove.
Figure 2.1
Refer to Figure 2.1. What is the opportunity cost of increasing production of
manufactured products from 500 tons to 600 tons per year?
A) 200 tons of agricultural products per year
B) 400 tons of agricultural products per year
C) 500 tons of agricultural products per year
D) 600 tons of agricultural products per year
The increase in spending that occurs because the real value of money increases when
the price level falls is known as the
A) interest rate effect.
B) international trade effect.
C) price effect.
D) wealth effect.
The opportunity cost of holding money is
A) heavy and awkward.
B) the probability of theft or loss.
C) the ease of conducting everyday business.
D) the return that could have been earned from holding wealth in other assets.
Recall the Application about why international trade may reduce measured inequality in
the United States to answer the following question(s). While it is conventional wisdom
now that inequality in the United States has increased in the last several decades, until
recently no one has taken a careful look at the actual living standards of different
income groups, taking into account the goods they purchase. Two economists from the
University of Chicago, Christian Broda and John Romalis, investigated the living
standards of low-income groups and high-income groups based on the goods these
groups purchase.
According to this Application, while inequality has increased in the United States in the
last several decades, the study done by Broda and Romalis indicates that
A) living standards have not become more unequal.
B) living standards have become even more unequal.
C) there is now no noticeable difference in living standards between income groups.
D) living standards have not noticeably changed over the past several decades.
Suppose that we observe that wages are falling while output is increasing. Holding the
demand for output constant, what might cause this to happen?
Why would the money multiplier decrease if banks choose to hold excess reserves?
Indicate the effect of an unfavorable aggregate supply shock upon the short run
aggregate supply curve.
Additional ApplicationCOPING WITH A STOCK MARKET CRASH: BLACK
MONDAY, 1987How did the Fed successfully respond to the major stock market crash
in 1987?On October 19, 1987, known as “Black Monday,” the Dow Jones index of the
stock market fell a dramatic 22.6 percent in one day. Similar declines were felt in other
indexes and stock markets around the world. These
declines shocked both businesses and investors. In just 24 hours, many people and firms
found themselves much less wealthy. The public began to worry that banks and other
financial institutions—to protect their own
loans and investments—would call in borrowers’ existing loans and stop making new
ones. A sharp drop in available credit could, conceivably, plunge the economy into a
deep recession.Alan Greenspan had just become chairman of the Federal Reserve that
year. As a sophisticated economist with historical knowledge of prior financial crises,
he recognized the seriousness of the situation. He quickly issued
a public statement in which he said that the Federal Reserve stood ready to provide
liquidity to the economy and the financial system. Banks were told that the Fed would
let them borrow liberally. In fact, the Fed provided liquidity to such an extent that
interest rates even fell. As a result of Greenspan’s action, “Black Monday” did not cause
a recession in the United States.Explain what the Fed did after the stock market crash in
October 1987 in order to avert a financial crisis.
Explain how the lack of clear ownership of urban dwellings prevent firms from
investing in businesses that are highly profitable.
Discuss the monetary multiplier. Assume that the banking system’s total excess reserves
total $20 million and that the required reserve ratio is 25%. Calculate the money
multiplier and the total potential expansion of the nation’s money supply.