MACROECONOMIC STUDY REVIEW SHEET

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MACROECONOMIC
STUDY

REVIEW

SHEET


1.

Bond prices move in the ____________ direction of interest rates.

2.

When interest rates fall, price level __________ because _____ shifts ______.

3.

When interest rates rise, price level __________ because _____ shifts ______.

4.

Open Market Operations that
involve
____
____
_ bonds raise interest rates.

5.

Open Market Operations that
involve
____
____
_ bonds lower interest rates.

6.

When the FED sells bonds, the __________ interest rate rises, the price level ____________, and the
Real In
terest Rate ___________.

7.

When the FED buys bonds, the __________ interest rate falls, the price level ____________, and the
Real Interest Rate ___________.

8.

When the FED __________ the Mon
ey Supply, Real Wages will _____

because of inflation.

9.

When the FED _
_________ the Money Supply, Real
Wages ______

because of deflation.

10.

During a recession, the Federal Budget experiences a ____________.

11.

Compared with an increase in
Government Spending

of $1 Billion
, a decrease in Federal Taxes by the
same amount will have

a _____________ effect on Aggregate Demand.

12.

An increase in Government Spending will __________ the Real Interest Rate in the ________

______
Market.

13.

A lower Real Interest Rate will shift ______ outward, increasing the growth rate of the economy.

14.

The two
major subaccounts of payments accounts are the ____________________ and the
__________________________.

15.

When a U.S. resident buys a foreign good, the U.S. __________ account is a _____________ and the
U.S. _________________ account is a _______________.

16.

Wh
en a foreign resident buys a U.S. good, the U.S. __________ account is a _____________ and the
U.S. _________________ account is a _______________.

17.

An increase in U.S. foreign investment will cause the value of the dollar to _________ in the Foreign
Curren
cy Exchange Market.

18.

When ______ shifts either in or out, the SRPC will experience a movement along its curve.

19.

When ______ shifts in, the SRPC will shift _____.

20.

When ______ shifts out, the SRPC will shift _____.

21.

In order to finance the increase in governmen
t spending, the government borrows money from the
__________.

22.

When U.S. residents demand more money, the ____________ Interest Rate will ____________.

23.

If the economy is experiencing less than full employment, the Passive Approach will eventually involve
__
___ shifting outward because _________ & _________ within the economy will eventually
_________.

24.

If the economy is experiencing an inflationary gap, the Passive Approach will eventually involve the
__________ shifting inward because ___________ & _________

within the economy will eventually
rise.

25.

Capital Flight will involve investors (both domestic & foreign) moving their money _______ the


country. This will cause the Real Interest Rate in the Domestic Loanable Funds Market (i.e.


the


country experiencing the flight) to __________ because the ________ curve will shift ___________.


Additionally, it will cause the Real Exchange Rate to ______________ in the domestic country.

26. Assume a 20% Reserve Requirement: When the FED buy
s $100 million in bonds, the maximum


increase in the money supply will be ______________ million. The maximum change in new loans


will be ____________ million.

27. Assume a 20% Reserve Requirement: When
Sarah Miller deposits $50,000 fro
m her pocket into her


banking account, the maximum increase in the money supply will be _______________. The


maximum change in demand deposits will be _____________.

28. A ____________ in personal tax rates will shift AD out.

29. Assume
a 20% Reserve Ratio: If the FED sells $50 million in government securities on the open


market, the total change in reserves in the banking system will be _________________, while the


maximum possible change in the money supply will be _______
__________.

30. An increase in AD will cause Price Level to _________ , Real Output to _______, and unemployment


to __________.

31. A decrease in AD will cause Price Level to __________, Real Output to _______, and unemployment


to ________
___.

32. An increase in AS will cause Price Level to __________, Real Output to _______, and unemployment


to ____________.

33. A decrease in AS will cause Price Level to ___________, Real Output to _______, and unemployment


to ___________
__.

34.
The GDP Deflator is found by dividing __________________ by the _________________

and then


multiplying by 100
.

35. During an inflationary period, a borrower with a fixed loan would be ________ off while the


corresponding lending in
stitution would be _________ off.

36. The Investment component of GDP includes ___________, ______________ and ______________.

37.

If Countries A & B are trading partners and Country A is in a recessionary gap, Country B’s AD will


shift

_____________, causing its Price Level to _______________, and its Real Output to


__________.
Additionally, Country B’s currency will _____________ because _________ will shift


_______.

38. A tax credit for business is meant to increase

______________. In the Loanable Funds Market, the


ripple effect of the tax credit is that ______________ shifts ____ and the Real Interest Rate


__________.

39. Due to an adverse supply shock such as an increase in the world price of oil,
the U.S. experiences


_____________. Since the U.S. and Japan are trading partners, this situation causes the value of the


Dollar, in comparison to the Yen, to ________________

as the U.S. Real Interest Rate has ________
.

40. If the governme
nt increases the incentive to save by enacting a lower tax rate on personal savings,


the effect in the Loanable Funds Market is that ___________ will shift ________, _________ the


Real Interest Rate. Ultimately, this ________ interest rate
will lead to _____________ investment.

41. The Crowding Out Effect is when the government competes

with domestic firms & residents for the


country’s _____________________. This governmental action ____________ the ________ interest


rate.

42.
The ________ Run Phillips Curve is vertical because changes in the _______ _______ & _______


______ do not affect ____________ variables such as unemployment and real output. This theory is


based on the concept of __________ ___________.

Therefore, there is no relationship between the


unemployment rate and the inflation rate in the long run.

43. The Nominal Interest Rate will differ from the Real Interest Rate in the economy when __________


is present.

44. The Open Market

Operation of buying bonds will cause a movement along the SRPC in the


____________ direction. If the FED sold bonds, then there would be a movement along the SRPC in


the _____________ direction.

45.
______________________ or ______________
_____ would be Fiscal Policy initiatives that would


cause a movement along the SRPC in the upward direction.


46. If the U.S. increases its national savings, the Nominal Interest Rate will __________, AD will shift


______ causing Price Lev
el to ______________. As a result, the Real Interest Rate will


_________________. This new Real Interest Rate in the U.S. will cause imports to ___________ and


exports to _____________.

47.
Assume a 10% Reserve Requirement: If the FED buys $100,000 in bonds, the maximum increase in


the money supply will be ___________. If banks keep an additional 10% in excess reserves at all



times, the maximum increase in the money supply wi
ll be _____________.

48.
Assume a MPC of 90%: Which Fiscal Policy Initiative will have a greater impact in moving AD


outward, a $10 billion increase in government spending or a $10 billion tax cut in the nation? Why?

49. The Multiplier Effect ___
____________ the initial increase in government spending while the


Crowding Out Effect works in the opposite direction, reducing the maximum increase in AD due to


the fact that _____ _____ _____ are driven up in the economy.

50.
Unanticipa
ted inflation causes a family with a fixed
-
rate Certificate of Deposit to ________ while a


business repaying a long
-
term, fixed rate loan will _______.

51. At Full Employment Output, the economy’s long
-
run unemployment rate is equal to


_
_________________________________________________________.

52. Trade between two countries is based on _____________ _________________.

53. A drop in inflationary expectations will cause AS to shift _________________. As a result, Price Level


will

__________, Real Output will ____________, and unemployment will __________. This will


impact the SRPC by causing a ___________________________.

54.
If the U.S. is experiencing a high rate of unemployment, what Fiscal Policy Initiative could Cong
ress


initiate to decrease the unemployment rate?

55. When AD shifts out, the Nominal Interest Rate in the Money Market ______________ because


__________ shift out.

56. If the Central Bank continues to ___________ bonds over time, the long
-
run effect on inflation will


be that the Price Level ____________ and the country’s currency ________________.

57. If the government elects to replace the current income tax with a national sales tax, domestic


consumption will ____________
_, while domestic savings will _________________.

58. An increase in Government Spending leads to the _____________ ______ ____________ whereby


the government competes for the available ________ _________, increasing the _________ for or


d
ecreasing the _________ of loanable funds. This causes the Real Interest Rate to _________.

59. If Congress decides to decrease the taxes on corporate profits, the economy’s production


possibilities curve will ______________ _____________.

60. An increase in Net Investment will cause AD and LRAS to __________ ________.

61. In a closed economy, a decrease in the money supply will cause the Nominal Interest Rate to _____,


Consumption to ________, Investment to ________ and Government
Spending to _______ in the


short run.

62. To shift AD outward, the FED buys bonds. This action causes the Nominal Interest Rate to _______.


Furthermore, the price of bonds within the financial system will ______.

63. The two approaches to

measuring GDP are the ____________ approach and the _______________


approach. Both approaches will equal each other because there are 2 sides to every transaction.

64. The study of how individual households and firms make decisions and how they i
nteract with one


another is referred to as ______________________.

65. The study of the economy as a whole is called ________________. The goal is to explain the


economic changes that affect households, firms and markets simultaneously.

66
. GDP is the __________ value of the total ________ goods & services produced ___________ in a


given ____________ period. GDP doesn’t include ___________
__ goods or goods that were

sold


new
in a ___________ year.

67. GDP is actually under
stated because it fails to include ______________ activities, _____________


activities, ______________ market activity, ___________ activities and the _____________ of the


nation’s income.

68. _____ __________ GDP is found by dividing
GDP by the Total Population.


69.
Savings,
Taxes and Imports are considered _____________ while
Investments, Government


Purchases,
Transfer Payments and Exports are

considered ______________.

70. ___________ ____________ are not included in GDP because they do not represent a 2
-
sided


transaction (i.e.


there is not an exchange that takes place).

71.
In calculating Real GDP, prices are affixed to a _____ year in order to analyze change
s in real output.


In calculating Nominal GDP, the equation uses ________ year prices to determine total output.

72. The CPI can be used to find the inflation rate by subtracting base year prices from current year prices


and

then dividing the answer by _______ year prices.

73. If a country or firm doubles its inputs, which causes its output to double, they are experiencing


____________ __________ to scale.

74. If a country or firm doubles its inputs, and output incr
eases by more than double, they are


experiencing _________ ________ to scale.

75. If a country or firm doubles its inpu
ts, and output increases by less

than double, they are


experiencing _________ ________ to scale.

76. _______ __________

Investment occurs when a foreign company enters a country to builds and


operate a factory, while _______ ____________ investment is when an investment within a country


is financed by foreign money, but operated domestically.

77. The ____
___ __________ encourages the flow of capital to poor countries as a way of promoting


economic prosperity around the globe.

78. The ________ _________ hypothesis is the theory that asset prices of stocks, bonds, and mutual


funds reflect al
l publicly available information about the value of an asset. As new information


becomes available, the market reacts accordingly and adjusts asset prices either up or down to


reflect the new information.

79. ___________ must always = ____
__________ in a closed economy.

80. ___________ = _____________ + __________ in an open economy.

81. The ________ of _________ __________ is responsible for calculating unemployment in the U.S.

82. The Labor Force includes those __________ and those ___
_______, _____ ___________ ________.

83. The unemployment rate is found by diving the _______

___

_
_
_____ by the ___________ _______


and then multiplying the quotient by 100.

84. The _____ ___________ _______ is found by dividing the Labor For
ce by the Adult Population and


then multiplying x 100.

85. Two problems associated with the unemployment rate are that it ignores the fact that it fails to


include __________ _____________ in the unemployment rate and also counts _________
_______


(i.e.


those who are working part
-
time when they would like to work full
-
time) workers as working


and not unemployed.

86. Even at Full Employment, there will always be _________________ unemployment.

87. _________________ unemployment results when the skills in demand do not match those of the


unemployed or that the unemployed do not live where there is a demand for their skills.

88. _______________ unemployment is caused by changes in demand f
or certain kinds of labor at


different times during the year.

89. _______________ unemployment results due to short
-
run fluctuations in SRAS & AD.

90.
The ___________ __ ___________ ______ pertains to the situation when firms pay above


equ
ilibrium wages in order to attract better applicants that will be more productive.

91. _____ Money is when a country’s currency is backed only by the full faith of the issuing country’s


government.

92. M1 includes __________, __________, and _____
_____.

93. M2 includes M1 and ________, ___________, ______________ and ______________.

94. The FED Board of Governors consists of _______ members who are __________ by the President


and ________ by the Senate. Each governor serves a _______ year
term.

95.
The Federal Reserve System has ____ regional banks.

96. The ________ _____ __________ ___________is made up of 12 members, 7 of which are the Board


of Governors. The five remaining positions are for regional bank presidents. The New Yor
k FED


President is always on the committee because this person is responsible for the daily trading in the


NY Bond Market.

97. The _________ Multiplier is the amount of money the banking system generates with each dollar of


reserve
s. It is found by dividin
g 1 by the Reserve Requirement and then multiplying by the amount


of money inserted or removed from the economy.

98. The _________
Multiplier is
describes a process by which an initial increase of one


economic aggr
egate is amplified and provokes an increase in the same or/and other aggregate(s)


larger than the initial raise.

It is found by dividing 1 by (1
-
MPC) and then multiplying by the initial


increase of one economic aggregate (AD for example).

99.
With the _______________ Rate, member banks of the Federal Reserve system borrow directly from


the Fed Window (i.e.


the FED itself), while with the ____________________ Rate, member banks


borrow from each other on overnight loans.

100. In T Account format, when a deposit is made by a customer, the bank enters the amount as a


______ to Checkable Deposits and ____________ Reserves.

101.
The rate at which money changes hands within the economy during the year is referred to
as the


__________________ of money.

102. The
Classical Dichotomy

is represented by _______________ x ____________ =


___________________ x ___________________.

103.
Within the Classical Dichotomy, because Velocity is stable and Real O
utput is not influenced by


changes in the money supply, when the money supply is changed, it directly influences the


________ ________.

104. _______________ _____________ ______________ states that as long as exchange rates are



flexible, the exchange rate between two countries will adjust in the long
-
run to reflect price level


differences between the two countries. As a result,

a given basket goods that is traded


internationally should sell for about the s
ame price around the world.

105. When the Domestic Real Interest Rate increases, NCO _______________.

106. When the Domestic Real Interest Rate decreases, NCO ______________.

107. Budget Deficits ___________ the Real Interest Rate, _______ NCO, _______ _
____ Domestic


Investment, cause the Dollar to _______________, and pave the way for a ____________ Deficit.

108. Using the 45 Degree Line and an intersecting Aggregate Expenditure (AE) Line, if the 45 Degree Line


is above AE, then ____
________ > _____________. If the 45 Degree Line is below the AE Line, then


_______________ < ______________. Remember, there can only be one point where the two


lines intersect and, at that point, Real GDP and Real Expenditure will equ
al.

109.
A Recession is ____________ or ______ ________ _________ of negative group in Real Output.

110. There are three reasons why the Aggregate Demand Curve is downward sloping. They are


_____________________, __________________ and _______
_________________.


111. The LRAS is also called ___________ _____________, ____________ __________________


_____________ or _________ _______________ _________.

112. SRAS & LRAS will only shift when one of the __________ __ __________________
_ change.

113. The SRAS is upward sloping because of ____________ _____________ and ___________


______________.
Both are rigid in the downward direction.

114. Prices are “sticky” downward because of ______________ ________.




ANSWERS

(PAGE
1: 1
-
27)

1.
Opposite

2.
Rise, AD, out

3.
Falls, AD, in

4.
Selling

5.
Buying

6.
Nomimal, falls, rises

7.
Nominal, rises, falls

8.
Increases
, fall

9.
Decreases
, rise

10.
Deficit

11.
Smaller

12.
Raise, Loanable Funds

13.
AD

14.
Current account, capital
account

15.
Current account is a deficit, capital account is a surplus

16.
Capital account is a deficit, current account is a surplus.

17.
Depreciate

18.
AD

19.
AS, out

20.
AS, in

21.
Public

22.
Nominal, rise

23.
AS, wages & prices, fall

24.
AS, wages &
prices, rise

25.
Out of, Rise, supply shift in or demand shift out, depreciate

26.
$500, $400

27.
$200,000, $250,000


(PAGE 2: 28
-
46)

28.
Decrease

29.
$50 million, $250 million

30.
Rise, rise, fall

31.
Fall, fall, rise

32.
Fall, rise, fall

33.
Rise, fall,
rise

34.
Nominal GDP, Real GDP

35.
Better, worse

36.
New spending on capital goods, new inventories, and new housing construction.

37.
In, fall, fall
, depreciate, demand, in

38. Investment or AD are acceptable, demand, out, rises

39. stagflation,
appreciat
e, risen due to NCO shifting inward. Note: We’ll import more from Japan b/c their
products are cheaper than U.S. products. The Current Account is a deficit while the Capital Account is a
surplus.

40.

supply, out, lowering, lower, increased

41.

Domestic sa
vings, raises, Real

42.

Long, money supply, price level, Real, monetary neutrality

43.

present

44.

upward, downward

45.

increase government spending, lowering taxes

46.

fall, out, rise, fall, decrease, increase


(PAGE 3: 47
-
68)

47.

$1 million, $500,000

48.

The $10 billion dollar increase in government spending immediately is entered into the economy. AD
will shift outward by $10 billion and since the spending multiplier is 10, it could increase out to $100 billion.
Of the $10 billion saved in taxes, only 90
% ($9 billion) of that will initially find its way into the economy as
the other $1 billion will be saved. Using the spending multiplier, the maximum that AD could shift out
would be $90 billion ($9 billion x 10).

49.

amplifies, real interest rates

50.
lo
se, win

51. the natural rate of unemployment or between 4% & 6% (5% will also do)

52. comparative advantage

53. outward, fall, rise, fall, the SRPC will shift inward

54.

either increase govt. spending or decrease taxes

55.

increases, demand

56.

buy, increa
ses, depreciates

57.

decrease, increase. The current income tax taxes both consumption and savings. A new sales tax would
only tax consumption. As a result, consumption would be lower. Furthermore, there would be a greater
incentive to save so the supply c
urve in the Loanable Funds Market would shift out, lowering the Real
Interest Rate.

58.

Crowding Out Effect, domestic savings, demand, supply, rise

59.

shift outward

60.

shift outward

61.

rise, fall, fall, fall (C, I & G all fall because the cost of borro
wing increases)

62.

fall, rise

63. income, expenditure

64. microeconomics

65. macroeconomics

66. market, goods & services, domestically, time, intermediate, prior

67.

leisure, household, black, volunteer, distribution

68.

per capita


(PAGE 4: 69
-
94)

69.

le
akages, injections

70.

transfer payments

71.

base, current

72.
base

73.

constant returns

74.

increasing returns

75.

decreasing returns

76.

Foreign Direct, Foreign Portfolio

77.

World Bank

78.

Efficient Market

79.

savings, investment

80.

savings,
investment, NCO

81. Bureau of Labor Statistics

82.

employed, unemployed but seeking work

83.

number of unemployed
, labor force

84.

Labor Participation Rate

85.

discourages workers, underemployed

86.

Frictional

87.

Structural

88.

Seasonal

89.

Cyclical

90.

Theory of Efficiency Wages

91.

Fiat

92.

Currency & Coin, Demand Deposits such as checking accounts, Travelers Checks

93.

Savings accounts, CDs (Timed Deposits), Money Market Accounts, Money Market Mutual Funds

94.

7, appointed, confirmed, 14


(PAGE 5: 95
-
114)

95.

12

96.

Federal Open Market Committee

97.

Money

98.

Spending

99.

discount, federal funds

100.
credit, debits

101.

velocity

102.

Money Supply x Velocity = Price Level x Real Output

103.

Price Level

104.

Purchasing Power Parity

105.

decreases

106.

increases

107.

raise, lower, Crowd Out, appreciate, Trade

108.

output > spending, output < spending

109.

6 months, 2 consecutive quarters

110.

The Wealth Effect (causes C to increase), The Interest Rate Effect (Causes I to increase), The Exchange
Rate Effe
ct (causes NX to increase)

111.

Potential Output, Full Employment Output, Natural Rate of Output

112.

Factors of Production

113.

Sticky Wages, Sticky Prices

114.

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