Group Exercise

Flashcard maker : Lily Taylor
The long-run growth framework focuses on factors affecting
incentives to produce
The short-run business cycle framework focuses primarily on factors
affecting demand
policies that affect aggregate expenditures are primarily relevent to the
short-run business cycle framework
policies that affect work, capital accumulation, and technological change are primarily relevant to
the long-run growth framework
per capita real output would be certain to increase if
real GDP increases and population decreases
Between 1990 and 2001, both Finland and France had average annual population growth rates of 0.4 percent. The growth rate of real GDP in the two countries in the same time period, however, was 3 percent in Finland and 1.8 percent in France. From this we can conclude that France’s per capita GDP
grew less rapidly than Finland’s per capita GDP
The secular trend growth rate is the
average rate of growth in real output over many years
There is a tradeoff between the level of material consumption and the level of pollution
As more goods are used to control pollution, fewer must be available for material consumption and vice versa
Which of the following statements best characterizes the Classical view of business cycles?
Fluctuations in business activity are to be expected and should be accepted just as changes in the seasons are accepted
Which of the following statements best characterizes the Keynesian view of business cycles?
Expansions and contractions of the business cycle are symptoms of underlying problems and should be dealt with through activist government policies
During the business cycle, an economic expansion occurs
in between the trough and peak
The business cycle consists of several stages or phases. Which is the accurate sequence?
Recession, trough, expansion, peak
Most economists agree that during a depression
economic policy should be used to improve economic conditions
Aggregate accounting
provides a way of measuring total or aggregate production
Which of the following statements about aggregate accounting is false?
It provides the only way to measure social welfare
GDP is the
market value of an economy’s production of final goods and services in a one year period
GNP is the
aggregate final output of the citizens and businesses of an economy in a one year period
Net foreign factor income is
the difference between the income earned abroad by domestic factors and the income earned domestically by foreign factors
The value of intermediate goods is
excluded from both GDP and GNP
If you decide not to spend $1,000 you earned at your summer job but instead intend to buy shares in a mutual fund, in terms of aggregate economic accounting you would be
Government expenditures for social security and unemployment insurance are, for GDP accounting purposes, considered
transfers, and are not included in government spending as part of GDP
To move from gross domestic product (GDP) to gross national product (GNP), one must
add net foreign factor income to GDP
Which of the following is not included in GDP but is included in GNP?
Economic activity of U.S. citizens working abroad
If substantially more foreign money is invested in Ireland than Irish citizens have invested abroad, then one will likely expect Irish
GDP to exceed Irish GNP
The value of the productive capacity of the assets of an economy, measured by the goods and services it can produce both now and in the future rather than by the money prices of the assets, is called
real wealth
Which of the following is most likely to be asset price inflation?
A rise in the current price of assets caused by expectation of higher asset prices in the future
Suppose real estate prices rise by 40 percent in a four-year period, while goods and services rise in price by eight percent in the same time period. Population, the stock of houses, and other variables important to real estate prices have remained almost constant. Which of the following is most likely?
Asset inflation has occurred
If nominal wealth increases faster than real wealth,
asset inflation has occurred
When real wealth increases,
the economy can produce more goods and services than it did before
To calculate GDP
weight the output of each final good and service produced in an economy in a year by its price in that year and then sum the result
The reason economists include only the value of final goods and services when they calculate GDP is that intermediate goods
would be double counted otherwise
Transfers of assets, such as stock sales are
not included in GDP because they do not increase domestic production
Which of the following would increase this year’s GDP?
A commission charged by your broker when you sold 100 shares of Borden stock
Aggregate income is a measure of
household and business earnings from the sale of productive resources
The key to the equality of output and income is
estimates the decrease in value of capital goods due to wear and tear over the year
In 2008, gross investment was $2,593 billion and net investment was $873 billion; therefore depreciation was
$1,720 billion
In comparing the per capita GDPs of two countries, purchasing power parity adjusts for differences in
The total annual market value of a nation’s final output of goods and services computed at existing prices is called
nominal GDP
Real GDP is calculated by
dividing nominal GDP by the appropriate price index times 100
Given nominal GDP of $4.2 trillion and a GDP deflator which is 40 percent greater than the base year, we can conclude that real GDP is equal to
$3.0 trillion
Bhutan’s government publishes a “gross national happiness” measure that embraces everything from protecting national resources to promoting a strong national culture and ensuring democratic government. This approach to measuring progress is similar to the approach that the text calls
Genuine Progress Indicator
If real GDP has increased by 3% and nominal GDP has increased by 5%, then
inflation is 2%
As a result of the Great Depression, economic thought placed greater emphasis on
short-run fluctuations
Modern macroeconomics developed as an attempt to explain
short-run business cycles
The study of economic growth focuses on the factors that cause an
economy’s production possibility curve to shift out
Say’s Law allows growth theorists to
ignore aggregate demand and focus only on aggregate supply
The Rule of 72 implies that a country with a growth rate of 8 percent will double its income in about
9 years
Suppose Botswana doubles its income in 6 years while South Africa doubles its income in 9 years. According to the Rule of 72, the growth rate in Botswana is
4 percentage points higher than the growth rate in South Africa
Markets help to promote growth by
increasing specialization and the division of labor
By increasing specialization and the division of labor, markets make it possible for a country to focus its production more heavily on its area of comparative advantage. This increases efficiency and productivity
makes the average person better off but may worsen the distribution of income
Economic growth through the market has
helped both rich and poor
If output increases by 5 percent and population growth is 3 percent, per capita output
grows by 2 percent
If the distribution of the gains from growth matter, growth in median income is
a more informative measure of growth than growth in per capita income when the gains from growth are concentrated on a small segment of the population
What effect would we expect the market for loanable funds if people increase their saving?
Supply will shift right and demand will not change
In the early 2000s, analysts feared that low academic achievement in math in the United States may reduce U.S. economic growth by as much as half a percentage point a year. In terms of factors leading to growth, the low math scores indicate that the U.S. may be at a disadvantage in terms of
human capital
Some economists argue that well-functioning capital markets that allow funds to move from those who have but do not need funds to those who need but do not have funds, are essential for rapid economic growth. Well-functioning capital markets are an example of
growth compatible institutions
Over the last three decades, the Chinese government has adopted a series of market-oriented reforms that have shifted control of many parts of the Chinese economy from government officials to private individuals. These reforms have most likely stimulated China’s growth for which of the following reasons?
They have provided individuals with a greater incentive to be efficient
The Indian government is known for creating obstacles to foreign investment with tariffs, investment caps and tons of red tape. What effect does “red tape” have on growth?
it discourages entrepreneurship
Growth compatible institutions
have incentives built into them that lead people to put forth effort
Which of the following would tend to inhibit growth?
Government approval of all economic activity
Many economists now de-emphasize capital accumulation as a source of growth because
capital accumulation alone does not necessarily lead to growth
To an economist, a production function is
an equation showing how much output can be produced from various combinations of inputs
The law of diminishing marginal productivity implies that opportunity cost
increases as one input is increased to produce successive units of output
The most important policy implication of the Classical growth model is that
policies to stimulate saving and investment will stimulate economic growth
Jamaica has far less capital than Singapore. Based on this, the Classical growth model would predict that as each accumulates more capital Jamaica would grow
more rapidly than Singapore
How do investment in technology and investment in capital differ?
They have different effects on output because of the positive externalities associated with investments in technology
Learning by doing implies that
greater experience increases efficiency
The law of diminishing marginal productivity
may apply even when learning by doing is present
. New growth theory emphasizes the importance of all of the following except
diminishing marginal productivity
Network externalities
can explain why the economy fails to adopt the most efficient technologies
Keynesian economists believe
. government can implement policy proposals that can positively impact the economy
. Laissez-faire economists believe
most government policies would probably make things worse
“Classical economist” is often used interchangeably with which term?
Laissez-faire economist
Keynesian economists focus their analysis on
the short run
Between 2007 and 2009, the U.S. unemployment rate rose from under 5 percent to over 8 percent. A Keynesian economist would most likely blame this increase in unemployment on
a decline in the level of aggregate demand
Which of the following statements would a Classical economist of the 1930s most likely disagree with?
Unions do not impede wage and price adjustment
The Classical economists argued that
if unemployment occurs, it will cure itself because wages and prices will fall
Which of the following was not a solution to the Depression favored by Classical economists?
Hire unemployed workers for public works programs
Equilibrium income is that level of income
toward which the economy gravitates in the short-run
Keynes believed equilibrium income was
not fixed at the economy’s potential income
In 2009, the personal savings rate rose. If the additional savings were not translated into investment, Keynes would predict that aggregate income would
decline and remain there
The paradox of thrift occurs when
an increase in saving reduces output
Keynes argued that
the short-run is a more important policy concern than the long-run
The shapes of the curves in the AS/AD model are based
on the relationship between the price level and total output
How is the AS/AD model related to the supply and demand model of microeconomics?
It looks similar to the supply and demand model but is not based on it
As prices fall, people become richer and buy more. This occurs as a result of
the money wealth effect
An increase in the price level
decreases the purchasing power of money, leading to higher interest rates and decreases investment
If the price level rises, the interest rate effect will cause investment
and the quantity of aggregate demand to decrease
A rise in the U.S. price level will cause
exports to decrease and imports to increase
In the AS/AD model, the repercussions that a change in quantity demanded has on production and subsequently on income and expenditures is called the
multiplier effect
The multiplier effect exists because
production and expenditures are interdependent
When aggregate demand is declining and the price level needs to fall to bring about equilibrium, pressure for the price level to fall brings expectations of falling aggregate demand, lower asset prices, and financial panics triggered by the decline in the value of financial assets. If these forces are strong enough, these dynamic effects can create a
leftward shift in the aggregate demand curve
A decrease in the expected future income of the U.S. would likely
shift its AD curve to the left
Which of the following would shift the aggregate demand curve to the right?
an increase in foreign income
A change in the distribution of income affects the AD curve because
workers are more likely than stockholders to spend the income they receive
If the multiplier effect is 4, a $15 billion increase in government expenditures will shift the AD curve
to the right by $60 billion
If productivity increases by 5% but wages increase by 2%, then it is most likely that the price level will
fall by 3 percent
If actual output exceeds potential output, the economy
is experiencing an inflationary gap
Fiscal policies are policies that directly affect
government spending and taxes
A policy that raises taxes or reduces government spending is called
a contractionary fiscal policy
Contractionary fiscal policies are most appropriate when the economy is in
an inflationary gap
output is beneath potential output so
expansionary fiscal policy like a tax cut is most appropriate
An expansionary fiscal policy is most appropriate when
an economy is experiencing a recessionary gap
A contractionary fiscal policy is most appropriate when
an economy is experiencing an inflationary gap,
When output equals potential output an economy is in long-run equilibrium,
so no change in fiscal policy is desirable
The multiplier model
provides numerical estimates of how equilibrium output changes in response to changes in aggregate expenditures
The multiplier model is designed to answer which one of the following questions?
How will output be affected by changes in aggregate expenditures?
Graphically, the aggregate production curve is a straight line that
. goes through the origin and has a slope of 1
At all points on the aggregate production curve
income equals production
Autonomous expenditures are defined as expenditures that
occur regardless of the level of income
Induced expenditures are defined as expenditures that
change as income changes
Autonomous expenditures are expenditures that occur when
income is zero
The marginal propensity to expend equals the ratio of
the change in aggregate expenditure to a change in income
As the mpe rises, the slope of the expenditures curve
The marginal propensity to expend
depends on the marginal propensity to consume but is not entirely determined by it
An increase in the marginal propensity to import
will reduce the marginal propensity to expend
Income tends to vary
more than induced aggregate expenditures
An increase in the marginal propensity to expend
raises output by raising induced expenditures
The multiplier effect would not occur if
the marginal propensity to expend equaled 0
During the first year of the Reagan administration, taxes were cut significantly. At that time, potential GDP was $5.4 trillion while actual GDP was $5.3 trillion. Given this, the tax cut most likely
decreased a recessionary gap
Assume the mpe = 0.8, GDP = $2,400 billion, and potential GDP = $2,200 billion. According to the multiplier model, the economy could achieve potential GDP if government spending were
decreased by $40 billion
If the marginal propensity to consume is 0.8, the marginal tax rate is 0.25, and the marginal propensity to import is 0.1, the multiplier is
Suppose the marginal propensity to consume is 0.8 and the tax rate is 0.25 and all other components of aggregate expenditures are determined outside the model. If the president wants to increase income by 500, her advisers would suggest that she increases government spending by

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