Week 5: Chapters 10 and 11 – Flashcards
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What is the name of the high point of economic activity called?
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A peak
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What is the name of the low point of economic activity called?
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A trough
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What is the name of the period between the high point of economic activity and the following low point called?
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A recession
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What is the name of the period between the low point of economic activity and the following high point called?
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An expansion
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Recessions were more _________ and lasted _________ in the first half of the twentieth century and became _________ and __________ in the second half
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severe; longer shorter; milder
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Since the 1950s: A. The unemployment insurance program and other government transfer programs have aided the economy. B. The economy has become more service oriented and less dependent on the production of goods. C. People have become more rational and control their spending behavior countercyclically. D. The federal government has stabilized the economy by using active fiscal and monetary policies.
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C. People have become more rational and control their spending behavior countercyclically.
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Ford F-150 Trucks: Production of this good is likely to fluctuate ___________ fluctuations of real GDP during the business cycle.
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more than
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McDonald's Big Macs: Production of this good is likely to fluctuate ___________ fluctuations of real GDP during the business cycle.
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less than
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Kenmore Refrigerators: Production of this good is likely to fluctuate ___________ fluctuations of real GDP during the business cycle.
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more than
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Huggies Diapers: Production of this good is likely to fluctuate ___________ fluctuations of real GDP during the business cycle.
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less than
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Catepillar Industrial Tractors: Production of this good is likely to fluctuate ___________ fluctuations of real GDP during the business cycle.
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more than
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The unemployment rate _______ and the inflation rate _______ during recessions.
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increases; falls
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Why might the unemployment rate continue to rise during the early stages of recovery?
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Employment growth may be slow relative to the growth in the labor force and the number of discouraged workers may continue to increase.
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During expansion, inflation and employment:
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increase
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During recessions, inflation and employment:
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decrease
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The agency that identifies a recession is the:
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NBER - National Bureau of Economic Research
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Which of the following contributes to shorter recessions, longer expansions, and less severe fluctuations in real GDP? A. A service-based economy B. Unemployment insurance C. Fiscal policy D. All of the above E. A and C only
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1. Increasing importance of services and the declining importance of goods: During a recession, households reduce purchases of durable goods more than they reduce purchases of services, such as medical care. 2. Unemployment insurance and government transfer programs: These programs make it possible for workers who lose their jobs during recessions to have higher incomes. As a result, they spend more than they would otherwise. 3. Government policies: Arguably, policies, such as monetary policy (conducted by the Federal Reserve Bank) and fiscal policy (conducted by the federal government), have played a key role in stabilizing the economy.
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In the first half of the twentieth century, real GDP had much ___________ than in the second half of the twentieth century.
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more severe
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The effects of the recession on Boeing are ___________ and _________ than the effects on the economy as a whole.
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much more dramatic; long-lived
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T/F: The unemployment rate usually continues to rise even after the recession has ended.
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True
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Which of the following is not a reason that the economy is considered to have been more stable in the 1950-2007 period than in other periods? A. the increasing importance of services and the declining importance of goods B. the use of active government policies to stabilize the economy. C. the establishment of unemployment insurance programs D. continually falling oil prices
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D. continuing falling oil prices
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During the last half of the twentieth century, the U.S. economy experienced: A. long recessions, interrupted by relatively short expansions B. long expansions, interrupted by relatively short recessions. C. much more severe swings in real GDP than in the first half of the twentieth century D. an inflation rate that increased during both recessions and expansions
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B. long expansions, interrupted by relatively short recessions.
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The financial system of a country is important for long-run economic growth because: A. most firms rely on their own retained earnings and do not use the financial system B. firms that use the financial system predominantly are being reckless C. firms need the financial system to acquire funds from households D. people can increase their wealth very quickly under a healthy financial system
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C. firms need the financial system to acquire funds from households
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The financial system - either financial markets or financial intermediaries - provides savers and borrowers with all of the following except: A. providing security to savers by warranting that their funds are fully insured against loss. B. providing risk sharing to savers by giving them the opportunity to diversify their funds among different investment choices. C. providing liquidity to savers by giving them the opportunity to buy and sell their financial securities. D. providing savers with facts and information about borrowers and about expected returns on their financial investments.
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A. providing security to savers by warranting that their funds are fully insured against loss.
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What is the investment-saving equality formula?
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S = Y - C - G S = S(private) +S(public) Y = GDP C = Consumption Expenditure G = Government Expenditure
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Which is not a "loanable fund"? A. Bank certificates of deposit B. Real estate C. Mutual fund shares D. Bonds
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B. Real estate
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Households supply loanable funds because of the: A. interest income received from the borrowers B. rent income they received as a resource owner C. wage income earned from working in the financial markets D. profit income earned from running a money-lending business
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A. interest income received from the borrowers
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Business demands loanable funds because: A. households charge a much higher rate of interest than the going rate of interest in the loanable funds market B. loanable fund interest rates are always lower than the rate of return on their new investments C. firms need to borrow funds so that they can pay the wage costs and other recurring expenses of the business D. firms need to borrow funds for new projects, such as building new factories or carrying out new research projects
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D. firms need to borrow funds for new projects, such as building new factories or carrying out new research projects
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Consider the following data for a closed economy: Y = $12 trillion C = $8 trillion I = $1 trillion TR = $1 trillion T = $3 trillion Use the data to calculate the following: a. Private saving: b. Public saving: c. Government purchases: d. The government budget balance is $ ___ trillion and as a result the government budget is in ______.
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a. Y+TR-C-T => $12+$1-$8-$3 = $2 trillion b. Solve for G by rearranging investment: I = Y-C-G => G = Y-C-I => G = $12-$8-$1 = $3 trillion => T-G-TR = public saving => $3-$3-$1 = -$1 trillion c. G = Y-C-I => G = $12-$8-$1 = $3 trillion d. Government's Budget Balance = T-G-TR => $3-$3-$1 = -$1 and is in deficit.
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Consider the following data for a closed economy: Y = $14 trillion C = $7 trillion G = $3 trillion S(public) = $-.5 trillion T = $3 trillion Use the data to calculate the following: a. Private saving: b. Public saving: c. Government purchases: d. The government budget balance is $ ___ trillion and as a result the government budget is in ______.
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a. Solve for TR by rearranging public saving: T-G-TR = S(public) => TR = T-G-S(public) => TR = $3-$3-(-$0.5) => TR = 0.5 Y+TR-C-T = ? => $14+$0.5-$7-$3 = $4.5 b. I = Y-C-G => $14-$7-$3 = $4 c. Rearrange S(public) savings: S(public) = T-G-TR => TR = T-G-S(public) => $3-$3-(-$0.5) => TR = 0.5 d. Government's Budget Balance = T-G-TR => $3-$3-$0.5 = -$0.5
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Consider the following data for a closed economy: Y = $12 trillion C = $8 trillion G = $2 trillion S(public) = $-.050 trillion T = $2 trillion Now suppose that government purchases increase from $2 trillion to $2.50 trillion but the values of Y and C are unchanged. What must happen to the values of S and I? A. S and I drop by $0.50 trillion B. S and I increase by $0.50 trillion C. S drops by $0.50 trillion and I increases by $0.50 trillion D. S increases by $0.50 trillion and I drops by $0.50 trillion
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A. S and I drop by $0.50 trillion
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Evaluate the following statement: "Saving money is not lending. How can it be? When I save my money, I put it in a bank. I don't loan it out to someone else." The statement is: A. correct. Depositing money in a bank is borrowing, not saving. B. correct. Depositing money in a bank is neither saving nor borrowing. C. incorrect. The supply of loanable funds is determined by firms' willingness to borrow. D. incorrect. The supply of loanable funds is determined by household saving.
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C. incorrect. The supply of loanable funds is determined by firms' willingness to borrow.
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Which of the following are financial securities that represent promises to repay a fixed amount of funds? A. neither stocks nor bonds B. both stocks and bonds C. stocks D. bonds
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D. bonds
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Which of the following is not a service that the financial system provides for savers and borrowers? A. matching savers with borrowers B. increased liquidity for savers C. risk sharing among savers D. guaranteeing savers high rates of return
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D. guaranteeing savers high rates of return
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Potential real GDP is: A. the level of GDP attained when only some firms have excess capacity B. the level of GDP attained when most firms are producing at capacity and unemployment is low C. the level of GDP attained when all firms are producing at capacity. D. the level of GDP attained when all firms have excess capacity.
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C. the level of GDP attained when all firms are producing at capacity.
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Potential real GDP: A. grows over time B. remains constant over time C. declines over time
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A. grows over time
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Consider the graph: X-axis = Loanable Funds ($ per year) Y-axis = Real Interest Rate Supply shifted to the left a. The shift from S1 to S2 represents a ______ in the supply of loanable funds. b. With the shift in supply, the equilibrium quantity of loanable funds ______. c. With the change in the equilibrium quantity of loanable funds, the quantity of saving _______ and the quantity of investment ________.
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a. decrease b. decreases c. decreases; decreases
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Suppose the economy is currently in a recession and that economic forecasts indicate that the economy will soon enter an expansion. As a result, expected profitability of new investment in plant and equipment ______ and the demand for loanable funds _______.
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increases; rises *Demand will shift to the right
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When borrowers and lenders believe that the forecast of economic expansion is accurate, the equilibrium real interest rate _________, the equilibrium quantity of loanable funds _________, and the quantity of saving and investment _______.
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increases; increases; increases
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The federal government in the United States has been running very large budget deficits. 1) Use the line drawing tool to draw a new demand or supply curve for loanable funds to illustrate the effect of a federal budget deficit. 3) Use the line drawing tool to draw a new demand or supply curve for loanable funds to illustrate the effect of an increase in household savings.
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1) S2 shifts to the left of S1 3) S3 shifts to the right of S2, but not further than S1
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When the government begins to run a budget deficit, A. the equilibrium interest rate increases and the quantity of loanable funds decreases B. savings and investment decrease C. the supply of loanable funds curve shifts to the left D. all of the above hold true
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D. all of the above hold true
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When households increase their savings in anticipation of future tax increase, all of the following hold, except that A. the supply of loanable funds increases and the supply curve shifts to the right B. the equilibrium interest rate falls and quantity of loanable funds increases C. savings and investment increase D. investment declines
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D. investment declines
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Crowding out occurs when: A. interest rates increase because the Federal Reserve reduces the economy's money supply B. interest rates increase as firms spend a larger amount of resources on research and development C. firms borrow more to expand operations which results in an increase in interest rates D. governments must borrow funds which causes interest rates to rise and thus private investment is reduced.
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D. governments must borrow funds which causes interest rates to rise and thus private investment is reduced.
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A government budget surplus from reduced government spending (no change in net taxes) will _______ the level of investment in the economy and _______ the level of saving (private plus public) in the economy.
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increase; increase
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If consumers decide to be more frugal and save more out of their income, then this will cause: A. a movement along the supply for loanable funds curve to the left B. a shift in the supply for loanable funds to the right C. a shift in the supply for loanable funds to the left D. a movement along the supply for loanable funds curve to the right
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B. a shift in the supply for loanable funds to the right
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An increase in the demand for loanable funds will occur if there is: A. an increase in expected profits from firm investment projects B. a decrease in the real interest rate C. an increase in the real interest rate D. an increase in the nominal interest rate accompanied by an equal increase in inflation.
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A. an increase in expected profits from firm investment projects
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Purchases of which of the following goods would be dramatically reduced during a recession? A. Tomatoes B. Refrigerators C. Ink pens D. Gasoline
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B. Refrigerators
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What is the general relationship between the business cycle and unemployment and inflation? A. During a recession, unemployment and inflation increase B. During an expansion, unemployment and inflation increase C. During an expansion, unemployment falls and inflation increases D. During a recession, unemployment and inflation decrease
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C. During an expansion, unemployment falls and inflation increases
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Financial securities that represent promises to repay a fixed amount of funds are known as: A. stocks B. pension funds C. bonds D. insurance premiums
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C. bonds
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Since 1950, expansions in the United States have become __________, while recessions have become __________. A. longer; longer B. longer; shorter C. shorter; longer D. shorter; shorter
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B. longer; shorter
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In a closed economy, what is the relationship between saving and investment? A. Investment is greater than saving B. Saving is greater than investment C. Investment may be greater or smaller than saving D. Investment is equal to saving
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D. Investment is equal to saving
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From a trough to a peak, the economy goes through: A. rising real GDP, but falling real GDP per capita B. falling real GDP C. the recessionary phase of the business cycle D. the expansionary phase of the business cycle
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D. the expansionary phase of the business cycle
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When the government runs a budget deficit, we would expect to see that: A. public saving is positive B. investment will fall C. G + TR < T D. private saving will fall
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B. investment will fall
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The following graph shows the market for loanable funds
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Demand shifts to the right Equilibrium increases
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Diagram: Demand shifts to the right. Which of the following is consistent with the diagram? A. Technological change increases the profitability of new investment. B. The government runs a budget surplus C. An expected recession decreases the profitability of new investment. D. Households become spendthrifts and begin to save less
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A. Technological change increases the profitability of new investment.
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Borrowers are ____________ of loanable funds, and lenders are _____________ of loanable funds. A. demanders; suppliers B. demanders; demanders C. suppliers; suppliers D. suppliers; demanders
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A. demanders; suppliers
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Which of the following would increase public saving? A. an increase in taxes B. an increase in transfers C. an increase in government purchases D. All of the above would increase public saving
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A. an increase in taxes
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Potential GDP is estimated to grow at a rate of 3.2% in the United States. Actual GDP in the U.S.: A. always grows at a slower rate than potential GDP B. is the same as potential GDP if all firms in the economy were working at capacity C. always grows at a faster rate than potential GDP D. always grows at the same rate as potential GDP
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C. always grows at a faster rate than potential GDP
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The demand for loanable funds is downward sloping because the ______ the interest rate, the _________ the number of profitable investment projects a firm can undertake, and the ________ the quantity demanded of loanable funds.
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c. lower; greater; greater
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The response of investment spending to an increase in the government budget deficit is called: A. private dissaving B. income minus net taxes C. expansionary investment D. crowding out
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D. crowding out
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What would be expected to happen to each of the following variables during a recession? Unemployment would be expected to __________ . Durable goods production, such as automobiles, would be expected to ___________ . The inflation rate would be expected to __________ .
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Increase Decrease Decrease
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Which of the following is not a reason why the U.S. economy has been more stable since 1950? A. Goods have become a larger fraction of GDP and services have become a smaller fraction of GDP B. The government has actively pursued policy to combat recessions and prolong expansions C. Unemployment insurance and other government programs curtail the decline in spending that occurs during a recession D. Services have become a larger fraction of GDP and goods have become a smaller fraction of GDP.
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A. Goods have become a larger fraction of GDP and services have become a smaller fraction of GDP.
