Fiscal policy affects aggregate demand.
Governments sometime create an excess supply of a product by setting a minimum
price that is greater than the equilibrium price, resulting in a permanent excess supply
of the product. This is known as a price ceiling.
Discretionary funds are typically used by the Executive Branch and Congress for
activist fiscal policies.
When the economy operates below full employment, an increase in government
spending must crowd out another component of GDP.
Recall Application 3, “The Broken Window Fallacy and Keynesian Economics,” to
answer the following question:
Hazlitt’s analysis regarding the effect of increased government spending on the
equilibrium GDP is most applicable during the Great Depression, when many resources
were unused.
Prices of inputs tend to be sticky in the short run because of informal and formal price
arrangements between the buyer and seller of inputs.
If discouraged workers were counted as unemployed, the measured unemployment rate
would increase.
In the 1980s and 1990s, average per capita income increased by a greater percentage in
sub-Saharan Africa than it did in the rest of the world.
Microeconomics helps explain economic fluctuations, why the economy shrinks and
expands and why some of the economy’s resources are idle.
Consumers will spend a higher proportion of a one-time bonus than they would of a
permanent salary increase.
The price of pineapples has risen dramatically. Which of the following is likely to
happen?
A) The quantity of pineapples supplied will increase.
B) The quantity of pineapples supplied will decrease.
C) The supply of pineapples will decrease.
D) The supply of pineapples will increase.
Recall Application 2, “Law of Supply and Woolympics,” to answer the following
questions:
According to the Application, which of the following is the most likely reason for the
falling prices of wool worldwide?
A) lower demand for wool.
B) the Law of Supply.
C) higher demand for wool.
D) lower quantity supplied of wool.
Sticky prices cause an economic coordination problem for the economy because:
A) they increase the transaction costs in open market auctions.
B) they confuse the system of custom prices.
C) they are likely to cause the CPI to understate the actual increase in the cost of living.
D) they confuse the signal system that brings together consumers and producers.
Table 3.1
Table 3.1 illustrates Willy and Blythe’s hourly production for apples and carrots. From
the table, we can conclude that:
A) Blythe should specialize in carrots and trade for apples.
B) Blythe should specialize in apples and trade for carrots.
C) Blythe should specialize in both goods.
D) Willy should specialize in both goods.
The downward sloping labor demand curve demonstrates that as the ________
increases the ________ decreases.
A) real wage; amount of labor supplied
B) real wage; amount of labor hired
C) nominal wage; amount of labor supplied
D) nominal wage; amount of labor hired
Table 6.8
Answer parts (a) through (e) using the information in Table 6.8.
(a) Calculate the number in the labor force.
(b) Calculate the number of unemployed workers.
(c) Calculate the unemployment rate.
(d) The government of the country described in Table 6.8 has determined that the
natural rate of unemployment is 6%. How many cyclically unemployed workers are
there?
(e) Suppose that the economy described in Table 6.8 moves out of a long recession, job
openings increase, and 100,000 discouraged workers become “encouraged” and begin
searching for a job. Calculate the new unemployment rate.
Recall the Application about the Brazilian city of Silva Jardim that has issued its own
local currency to answer the following question(s). In order to entice local residents to
spend their money on stores in town, the small city of Silva Jardim in Brazil, hatched a
plan for its own currency. The currency is called the capivari and features a picture of a
local rodent on the bills. The capivaris are issued by a local bank, which holds one unit
of official Brazilian currency for each capivari it issued. Local merchants, however,
give discounts for paying in capivaris so that local residents are therefore encouraged to
make local purchases.
According to this Application, the small city of Silva Jardim in Brazil has issued its
own currency called the capivari. If this currency had nothing backing its value and was
simply created by decree of the issuing city government, the city-issued money would
be considered
A) commodity money.
B) fiat money.
C) barter money.
D) gold standard money.
The quantity equation can be written as:
A) MV = PY.
B) M/V = PY.
C) MV = P/Y.
D) MP = VP.
Recall the Application about the size of Wal-Mart to answer the following
question(s). During 2008, Wal-Mart’s sales were approximately $374 billion, or
roughly 2.6 percent of U.S. GDP, and its cost of sales was $286 billion.
According to this Application, why is the value of Wal-Mart’s 2008 sales NOT an
accurate measurement of its actual sales impact on the U.S. economy?
A) The sales figure did not account for chain-weighted inflation measurements.
B) The sales figure includes the value of purchases from other firms.
C) The sales figure did not take into account the recession of 2008.
D) The sales figure was in nominal, not real, dollars..
Recall Application 2, “Using Long-Term Macro Data to Measure Multipliers,” to
answer the following questions:
According to the application, the multiplier for defense spending during wars was:
A) less than one.
B) less than zero.
C) greater than one.
D) greater than 5.
Give some examples of transactions in markets which are not regulated or controlled.
Explain liabilities and assets as they relate to a bank’s balance sheet.
Name two ways or methods a government can employ to eliminate budget deficits.
Why do most economists believe that the Laffer argument does not apply to
broad-based taxes?
Suppose labor unions in most industries contemplate negotiating a large nominal wage
increase that is expected to cause significant inflation. How will the credibility of the
Fed in its fight against inflation affect their decision to pursue such wage increase?
Describe the relationship between the Federal Reserve and the legislative and executive
branches of the U.S. government.
Explain the trade-off between holding bonds and holding money. Why don’t people
keep all their assets in the forms that are the easiest to use for making transactions?