Bond prices move in the ____________ direction of interest rates.
When interest rates fall, price level __________ because _____ shifts ______.
When interest rates rise, price level __________ because _____ shifts ______.
Open Market Operations that
_ bonds raise interest rates.
Open Market Operations that
_ bonds lower interest rates.
When the FED sells bonds, the __________ interest rate rises, the price level ____________, and the
terest Rate ___________.
When the FED buys bonds, the __________ interest rate falls, the price level ____________, and the
Real Interest Rate ___________.
When the FED __________ the Mon
ey Supply, Real Wages will _____
because of inflation.
When the FED _
_________ the Money Supply, Real
because of deflation.
During a recession, the Federal Budget experiences a ____________.
Compared with an increase in
of $1 Billion
, a decrease in Federal Taxes by the
same amount will have
a _____________ effect on Aggregate Demand.
An increase in Government Spending will __________ the Real Interest Rate in the ________
A lower Real Interest Rate will shift ______ outward, increasing the growth rate of the economy.
major subaccounts of payments accounts are the ____________________ and the
When a U.S. resident buys a foreign good, the U.S. __________ account is a _____________ and the
U.S. _________________ account is a _______________.
en a foreign resident buys a U.S. good, the U.S. __________ account is a _____________ and the
U.S. _________________ account is a _______________.
An increase in U.S. foreign investment will cause the value of the dollar to _________ in the Foreign
cy Exchange Market.
When ______ shifts either in or out, the SRPC will experience a movement along its curve.
When ______ shifts in, the SRPC will shift _____.
When ______ shifts out, the SRPC will shift _____.
In order to finance the increase in governmen
t spending, the government borrows money from the
When U.S. residents demand more money, the ____________ Interest Rate will ____________.
If the economy is experiencing less than full employment, the Passive Approach will eventually involve
___ shifting outward because _________ & _________ within the economy will eventually
If the economy is experiencing an inflationary gap, the Passive Approach will eventually involve the
__________ shifting inward because ___________ & _________
within the economy will eventually
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.
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.
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
31. A decrease in AD will cause Price Level to __________, Real Output to _______, and unemployment
32. An increase in AS will cause Price Level to __________, Real Output to _______, and unemployment
33. A decrease in AS will cause Price Level to ___________, Real Output to _______, and unemployment
The GDP Deflator is found by dividing __________________ by the _________________
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 ______________.
If Countries A & B are trading partners and Country A is in a recessionary gap, Country B’s AD will
_____________, 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
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 __________
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.
______________________ 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 _____________.
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 _____________.
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.
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
__________, Real Output will ____________, and unemployment will __________. This will
impact the SRPC by causing a ___________________________.
If the U.S. is experiencing a high rate of unemployment, what Fiscal Policy Initiative could Cong
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
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
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.
. GDP is the __________ value of the total ________ goods & services produced ___________ in a
given ____________ period. GDP doesn’t include ___________
__ goods or goods that were
in a ___________ year.
67. GDP is actually under
stated because it fails to include ______________ activities, _____________
activities, ______________ market activity, ___________ activities and the _____________ of the
68. _____ __________ GDP is found by dividing
GDP by the Total Population.
Taxes and Imports are considered _____________ while
Transfer Payments and Exports are
70. ___________ ____________ are not included in GDP because they do not represent a 2
there is not an exchange that takes place).
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
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 _________
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.
The ___________ __ ___________ ______ pertains to the situation when firms pay above
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
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
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
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
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 _________
describes a process by which an initial increase of one
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).
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.
The rate at which money changes hands within the economy during the year is referred to
__________________ of money.
is represented by _______________ x ____________ =
___________________ x ___________________.
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, _______ _
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
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 __________ __ __________________
113. The SRAS is upward sloping because of ____________ _____________ and ___________
Both are rigid in the downward direction.
114. Prices are “sticky” downward because of ______________ ________.
Rise, AD, out
Falls, AD, in
Nomimal, falls, rises
Nominal, rises, falls
Raise, Loanable Funds
Current account, capital
Current account is a deficit, capital account is a surplus
Capital account is a deficit, current account is a surplus.
AS, wages & prices, fall
AS, wages &
Out of, Rise, supply shift in or demand shift out, depreciate
(PAGE 2: 28
$50 million, $250 million
Rise, rise, fall
Fall, fall, rise
Fall, rise, fall
Nominal GDP, Real GDP
New spending on capital goods, new inventories, and new housing construction.
In, fall, fall
, depreciate, demand, in
38. Investment or AD are acceptable, demand, out, rises
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
supply, out, lowering, lower, increased
vings, raises, Real
Long, money supply, price level, Real, monetary neutrality
increase government spending, lowering taxes
fall, out, rise, fall, decrease, increase
(PAGE 3: 47
$1 million, $500,000
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).
amplifies, real interest rates
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
either increase govt. spending or decrease taxes
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
Crowding Out Effect, domestic savings, demand, supply, rise
rise, fall, fall, fall (C, I & G all fall because the cost of borro
63. income, expenditure
66. market, goods & services, domestically, time, intermediate, prior
leisure, household, black, volunteer, distribution
(PAGE 4: 69
Foreign Direct, Foreign Portfolio
81. Bureau of Labor Statistics
employed, unemployed but seeking work
number of unemployed
, labor force
Labor Participation Rate
discourages workers, underemployed
Theory of Efficiency Wages
Currency & Coin, Demand Deposits such as checking accounts, Travelers Checks
Savings accounts, CDs (Timed Deposits), Money Market Accounts, Money Market Mutual Funds
7, appointed, confirmed, 14
(PAGE 5: 95
Federal Open Market Committee
discount, federal funds
Money Supply x Velocity = Price Level x Real Output
Purchasing Power Parity
raise, lower, Crowd Out, appreciate, Trade
output > spending, output < spending
6 months, 2 consecutive quarters
The Wealth Effect (causes C to increase), The Interest Rate Effect (Causes I to increase), The Exchange
ct (causes NX to increase)
Potential Output, Full Employment Output, Natural Rate of Output
Factors of Production
Sticky Wages, Sticky Prices