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"Hoovervilles"

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term sprang up during the Great Depression, named after the economically clueless President Herbert Hoover

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The Origins of Macroeconomics (fact)

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Hoover's failure to understand what caused the Great Depression (or how it could be tamed) was common at the time Microeconomics was well-developed Macroeconomics was not

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The Origins of Macroeconomics (fact)

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The effort to understand economic slumps and find ways to prevent them is at the core of macroeconomics

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Micro vs. Macro

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Micro - individual Macro - economy as a whole

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Micro- Should I go to business school or take a job right now?

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Macro- How many people are employed in the economy as a whole this year?

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Micro- What determines the salary offered by Citibank to Cherie Camajo, a new MBA?

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Macro- What determines the overall salary levels paid to workers in a given year?

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Micro- What determines the cost to a university or college of offering a new course?

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Macro- What determines the overall level of prices in the economy as a whole?

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Micro- What government policies should be adopted to make it easier for low-income students to attend college?

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Macro- What government policies should be adopted to promote employment and growth in the economy as a whole?

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Micro- What determines whether Citibank opens a new office in Shanghai?

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Macro- What determines the overall trade in goods, services, and financial assets between the United States and the rest of the world?

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Which of the following questions is appropriate to the study of macroeconomics? A. how does the aggregate price level affect overall consumer spending? B. how does the level of interest affect Delta's decision to buy a new airplane? C. How much will Sony charge for the new game system to be introduced later this year? D. What determines whether Wachovia opens a new office in Beijing?

answer

A. how does the aggregate price level affect overall consumer spending?

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Macroeconomics: The Whole is Greater than the Sum of it's Parts (example)

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Paradox of thrift: when families and businesses are worried about the possibility of economic hard times, they prepare by cutting their spending. This reduction in spending depresses the economy as consumers spend less and businesses react by laying off workers. As a result, families and businesses may end up worse off than if they hadn't tried to act responsibly by cutting their spending

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Self-regulating Economy (pre-1930s)

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problems such as unemployment are resolved without government intervention through the working of the "invisible hand"

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Keynesian Economics (post-1930s)

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Economic slumps are caused by inadequate spending, and they can be mitigated by government intervention

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Keynesian economics promotes economic ideas A. that the government can help a depressed economy via fiscal and monetary policies B. that the private sector is perfectly capable to regulate itself C. that the free market system will always prevail

answer

??

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The Business Cycle - define - 4 phases

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- alternating increases and decreases in economic activity over time - peak, recession, trough, expansion

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Recessions (contractions)

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periods of economic downturn, when output and employment are falling

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Expansions (recoveries)

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periods of economic upturn, when output and employment are rising

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When does a Business-Cycle Peak occur?

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the point at which the economy turns from expansion to recession business cycle: the short-run alternation between recessions and expansions

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Periods in which output and employment are falling are known as A. recessions B. booms C. expansions D. deflations

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A. recessions

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In a typical business cycle, the business cycle trough is immediately followed by the A. business cycle peak B. recession C. depression D. expansion

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D. expansion

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Monetary Policy

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uses changes in the quantity of money to alter interest rates and affect overall spending

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Fiscal Policy

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uses changes in government spending and taxes to affect overall spending

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The most important effect of a recession is....

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its effect on the ability of workers to find a hold jobs (the pain of recession)

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The use of taxes and government spending to change the overall level of spending in an economy is called A. monetary policy B. fiscal policy C. either monetary or fiscal policy depending upon what is happening to the interest rate

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B. fiscal policy

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True/False? Not all recessions are created equal

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True !!!

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Long-Run Economic Growth..... (relatively modern phenomenon)

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is the sustained upward trend in the economy's output over time (Americans have become able to afford many more material goods over time thanks to long-run economic growth)

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Inflation

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a rising overall level of prices

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Deflation

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a falling overall level of prices

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Price Stability

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when the overall level of prices changes slowly or not at all

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The Causes of Inflation and Deflation

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In the short run, movements in inflation are closely related to the business cycle --- When the economy is depressed and jobs are hard to find, inflation tends to fall; when the economy is booming, inflation tends to rise In the long run, the overall level of prices is mainly determined by changes in the money supply

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Why is INFLATION a problem?

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Inflation discourages people from holding onto cash (because cash loses value if prices are rising) extreme case: people stop using cash altogether

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Why is DEFLATION a problem?

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Since cash gains value if the price level is falling, holding on to it is more attractive than investing in new factories and other productive assets. This can deepen a recession.

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Inflation... A. is defined as a movement of the economy toward economic growth B. can be thought of as an increase in a nation's standard of living C. is a sustained fall in the overall level of prices D. is an increase in the overall level of prices

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D. is an increase in the overall level of prices

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The United States is an OPEN ECONOMY. What does that mean?

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It trades goods and services with other countries

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Trade Deficit

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the value of goods and services bought from foreigners (imports) is more than the value of goods and services sold to them (exports)

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Trade Surplus

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the value of goods and services bought from foreigners (imports) is less than the value of the goods and services sold to them (exports)

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What Causes Trade Imbalances?

answer

The determinants of the overall balance between exports and imports lie in decisions about savings and investment spending. Countries with high investment spending relative to savings run trade deficits Countries with low investment spending relative to savings run trade surpluses

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This year the value of a country's imports is equal to $1.2 billion, and the value of its exports is equal to $1.3 billion. This country is running a A. trade surplus B. trade deficit

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A. trade surplus

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Which of the following is most likely a macroeconomics question rather than a microeconomics question? A. are salaries for nurses rising or falling? B. should a tax be levied on each ton of carbon a factory emits? C. are consumers buying more bottled water and less fruit juice? D. is the national unemployment rate rising or falling?

answer

D. is the national unemployment rate rising or falling?

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Periods in which output and employment are falling are known as: A. booms B. deflations C. expansions D. recessions

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D. recessions

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The most painful consequence of a recession is: A. rising unemployment B. increasing aggregate output C. increasing inflation D. higher interest rates

answer

A. rising unemployment

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Controlling interest rates is an example of: A. monetary policy B. exchange rate policy C. tax policy D. fiscal policy

answer

A. monetary policy

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Setting government spending and taxes in an effort to change overall spending in an economy is called: A. monetary policy B. the stock market C. fiscal policy D. investment

answer

C. fiscal policy

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Fiscal policy refers to: A. the control of interest rates B. the control of interest rates and of government spending C. the control of government spending and taxation D. the control of the quantity of money

answer

C. the control of government spending and taxation

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With regard to the aggregate price level, economists generally believe: A. inflation is worse than deflation B. inflation actually benefits most retired people C. deflation is worse than inflation D. price stability is a desirable goal

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D. price stability is a desirable goal

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In macroeconomics: A. long-term growth is not considered to be important B. market intervention from the government is not considered important C. individual and firm decisions regarding utility and profit maximization are studied D. aggregate data such as real GDP, the price level, and unemployment are analyzed

answer

D. aggregate data such as real GDP, the price level, and unemployment are analyzed

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When an economy is in an expansion, unemployment: A. tends to fall, and overall prices tend to rise B. and overall prices tend to fall C. tends to rise, and overall prices tend to fall D. and overall prices tend to rise

answer

A. tends to fall, and overall prices tend to rise

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The alternation between recessions and expansions is known as the: A. long-run economic growth B. macroeconomy C. unemployment rate D. business cycle

answer

D. business cycle

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The paradox of thrift highlights: A. the role investment plays in the macroeconomy B. how individual decisions to save more may worsen a recession C. how an increase in spending occurs during recessions D. the irrational behavior on the part of households

answer

B. how individual decisions to save more may worsen a recession

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Long-run growth is: A. the sustained upward trend in aggregate output per person over several decades B. the sustained downward trend in the employment rate over several decades C. the expansion phase of business cycles D. the downturn phase of business cycles

answer

A. the sustained upward trend in aggregate output per person over several decades

question

During a recession, one will often observe: A. zero unemployment rates B. rising unemployment rates and falling aggregate output C. rising aggregate output D. rising employment rates

answer

B. rising unemployment rates and falling aggregate output

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Deflation: A. encourages people to hold cash rather than invest in new factories and productive assets B. raises the cost of making purchases and sales for which cash is required C. is caused by changes in interest rates D. can result in an increase in employment

answer

A. encourages people to hold cash rather than invest in new factories and productive assets

question

Setting interest rates and the money supply in an effort to change overall spending in an economy is called: A. the stock market B. fiscal policy C. investment D. monetary policy

answer

D. monetary policy

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With inflation: A. overall prices are increasing, although some prices may be increasing and some may be decreasing B. the economy must be producing at full employment C. the economy must be contracting D. all prices must be increasing

answer

A. overall prices are increasing, although some prices may be increasing and some may be decreasing

question

The topics studied in macroeconomics include: A. how much ice cream consumers buy B. the wages of engineers C. the average price level in the economy D. the price of a motorcycle

answer

C. the average price level in the economy

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When the value of a nation's imports exceeds the value of that nation's exports, the nation is said to have: A. a trade deficit B. price stability C. a trade surplus D. hyperinflation

answer

A. a trade deficit

question

Which of the following is true? A. inflation was first a problem in the recession of 1929-1933 B. deflation refers to a decrease in prices only in the energy and transportation sectors. C. inflation means an increase in the overall level of prices D. during inflation most people hold more cash than usual

answer

C. inflation means in increase in the level of prices

question

Fiscal and monetary policies: A. are most effective in microeconomic settings B. have no role in macroeconomic policies C. have been used by the government for over 250 years D. are used to correct for short-term economic fluctuations

answer

D. are used to correct for short-term economic fluctuations

question

Changing the level of government spending is an example of: A. fiscal policy B. interest rate policy C. monetary policy D. exchange rate policy

answer

A. fiscal policy

question

An expansion is a period in which: A. output declines B. the price level falls C. output rises D. unemployment rises

answer

C. output rises

question

Long-run growth is: A. the sustained upward trend in aggregate output per person over several decades B. the expansion phase of business cycles C. the downturn phase of business cycles D. the sustained downward trend in the employment rate over several decades

answer

A. the sustained upward trend in aggregate output per person over several decades

question

With inflation A. overall prices are increasing, although some prices may be increasing and some may be decreasing B. all prices must be increasing C. the economy must be contracting D. the economy must be producing at full employment

answer

A. overall prices are increasing, although some prices may be increasing and some may be decreasing

question

The trade balance is the difference between the value of the A. trade deficit and the budget deficit B. goods and services that a country sells to other countries and value of the goods and services it buys in return C. exchange rates of two countries that are engaged in international trade D. national debt and the foreign debt

answer

B. goods and services that a country sells to other countries and value of the goods and services it buys in return

Econ 202 – Chapter 6 – Flashcards

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