Macroeconomics Semester Review

  1. If total planned investment spending for 2013 turns out to be less than real GDP, firms are likely to:
    Make an unintended investment in inventory
  2. When is there a recessionary gap?
    Exists when actual GDP falls short of potential GDP
  3. In nations where the central government has control over most major economic decisions, ...
    Per-capital wealth generally grows at a slower rate than in nations that rely on free markets
  4. Okun's Law is based on an observed relationship between:
    The level of unemployment and growth in real GDP
  5. When the government pays unemployment benefits to a worker who has lost his/her job:
    This spending is considered a transfer payment, and is not included in government spending
  6. Circular-flow diagram
    • An economic model
    • Incorporates 2 types of decision makers: household and firms
    • Represents the flow of input and outputs, and spending and income
  7. Factors of production in the circular-flow diagram
    • Labor
    • Land
    • Capital
  8. Used in both macro & microeconomics
    The basic tools of supply and demand
  9. Gross domestic product, or GDP, measures:
    Income and expenditures
  10. If an economy's GDP rises,
    Income and total expenditures must both rise
  11. Currently the rate of unemployment is closest to:
  12. What would increase national spending?
    A increase in national spending
  13. When actual GDP falls below its potential level due to a drop in demand, the typical result is:
    Higher unemployment and lower inflation
  14. The formula Y = C + I + G (X - M) must always hold true because....
    If firms sell fewer goods than anticipated, they wind up making an unintended inventory investment in the amount of the shortfall
  15. The early classical economists believed that a recession caused by a drop in aggregate demand:
    is a temporary problem, and will go away in time - i.e., the market is self-correcting
  16. Business Cycle
    The pattern of actual GDP fluctuating relative to its potential level
  17. According to the circular-flow model that we studied early in the course, GDP can be computed by measuring:
    • Total incomes earned
    • Total expenditures
    • The value of all final goods and services produced
  18. John Maynard Keynes believed:
    • The economy can get "Stuck" for a long period of time at a position of less than full employment
    • Unpredictable shifts in investor confidence can cause dramatic shifts in overall economic prosperity
  19. Real GDP
    The total value of all final goods and services sold in the economy in one year
  20. Current serious problem for the U.S. economy
    • High unemployment 
    • Sluggish growth in real GDP
    • A large federal budget deficit
  21. The economic downturn that the U.S. is currently recovering from began in:
    Winter of 2007
  22. Fiscal Policy
    Strategies designed to use the power of the government's spending and tax policies to stabilize the economy
  23. If most firms expect greater demand for their products and services, they will
    Hire more resources (e.g., labor and capital) and total national spending will rise
  24. The distinction between recessions and depressions is that recessions are
    Shorter and less severe than depressions
  25. Indication of the beginning of an expansion of the economy
    Business inventories unexpectedly decline
  26. Why the aggregate demand curve slopes downward
    All else equal, if the price increases, consumers can't afford to buy as much as before
  27. According to John Maynard Keynes' book, The General Theory of Employment, Interest and Money, in order to get an economy out of a depression, the government should
    Increase its level of spending
  28. On an aggregate demand/aggregate supply graph, the Great Depression can be depicted as:
    A leftward shift of the aggregate demand curve
  29. In what era did the U.S. experience simultaneous increases in the unemployment rate and the inflation rate?
    The period from the early 1970s to the early 1980s
  30. During the Great Depression,
    Unemployment increased while output and price decreased
  31. An unanticipated increase in the overall price level will tend, in the short run, to cause...
    An increase in the quantity of aggregate output supplied
  32. The goals of the Employment Act of 1946 included:
    • Full employment
    • Price stability
    • Steady economic growth
  33. In the circular-flow model we discussed in class, total income and total expenditures are:
    Always equal, because every dollar spent on a good or service is income for someone in the production process
  34. The aggregate demand cure
    • Has a negative slope
    • All else equal, of the price level falls, net exports tend to increase
  35. Causes a decrease in U.S. aggregate demand
    An increase in spending on imports
  36. Example of an expansionary fiscal policy
    An increase in government spending
  37. In the short run, if demand for any good increases while the supply curve for the good remains unchanged,
    The equilibrium price of the good will go up
  38. If the U.S. congress and president were to agree that a Keynesian approach to reducing unemployment was needed, what public policy would they most prefer?
    Increase government spending on public infrastructure, such as roads, bridges and schools
  39. Suppose that aggregate demand turns out to be less than real GDP in the U.S. this year.  It is likely that U.S. manufacturing firms will:
    Wind up investing more heavily in production inventories than they had intended to
  40. After the housing bubble burst in 2007, U.S. aggregate demand contracted substantially.  This sharp drop in spending quickly led to a
    Higher unemployment rate and a lower inflation rate
  41. John Maynard Keynes argued that the most effective way for the federal government to combat a significant collapse in aggregate demand is for it to:
    Increase government spending
  42. The classical economists generally believed that recessions:
    Are temporary problems and in the long run they will be curved by automatic market adjustments
  43. If the supply of homes is elastic and the demand for homes increases, we will observe:
    A relatively small increase in home prices, but a large increase in home buildings
  44. British economist John Maynard Keynes believed that
    Aggregate demand is inherently unstable, and can be dramatically affected by a change in the mood of consumers and investors
  45. Currently, both Republicans and Democrats in Washington are saying we need to reduce the size of the federal budget deficit by cutting government spending, raising taxes or both.  Our aggregate supply/demand model suggests that the short-term outcome of this strategy will be:
    A reduction in both GDP an dnational income
  46. The Smoot-Hawley Tariff Act of 1930 was aimed at protecting American jobs by placing high tariffs on imported goods.  Economists generally agree that these tariffs:
    Increased the severity of the business downturn and led to even greater job losses for workers
  47. Gross Domestic Product, or GDP
    Is the total dollar value of all final goods and services in the economy in one year
  48. In what era did the U.S. experience strong growth in real GDP, low unemployment and a fairly low but steadily increasing inflation rate?
    The mid to late 1960s
  49. In the early 1980s, our nation's federal bank - i.e., The Federal Reserve System -  took steps to combat the high rate inflation at the time by substantially restricting the flow of credit and the rate of money creation.  This is an example of:
    A contractionary monetary policy
  50. Say's Law refers to:
    The idea that the very act of producing goods and services creates enough income to buy whatever is produced
  51. The Great Depression came to a fairly abrupt end in the late 1930s when:
    Government expenditures, particularly on military goods, dramatically increased
  52. John Maynard Keynes argued that if an economy is mired in a severe recession, an increase in government spending will:
    Probably stimulate overall spending more effectively than a tax cut of an equal dollar amount 
  53. When total investment spending is less than GDP,
    Unplanned investment spending by firms will be postive
  54. All else equal, a significant increase in interest rates will likely cause:
    A decline in planned investment spending by firms
  55. Back in the 1980s, typewriters were replaced by computers. As a result, typewriter repair services closed down and laid off their workers.  This type of unemployment is referred to as:
    Structural Unemployment
  56. Expansionary Fiscal Policy
    A decrease in income tax rates
  57. Assume that current GDP is at its potential level.  All else being equal, if there is a sharp drop in aggregate demand, this will tend to cause:
    The unemployment rate to go up, and the inflation rate to go down
  58. Greater than zero only when GDP falls below its potential level
    Cyclical Unemployment
  59. In class, we discussed the so-called "catch-up effect" with regard to productivity and economic capital in different nations.  This catch-up effect results from the fact that:
    The addition of new capital to a poor nation, which has little capital to begin with, cause a bigger increase in productivity than if the same addition occurred in a rich nation with a large capital stock
  60. The U.S. income tax system, which bases a person's total tax payments to the IRS on the level of income that the person earns, is an example of:
    An automatic stabilzer
  61. A recession in the short run caused by a decline in investment or consumer spending will cause:
    • A decline in real GDP
    • An increase in the unemployment rate
    • A decrease in real national income
  62. Reasons why the size of the federal government's budget deficit tends to increase during a recession
    • Income tax receipts fall because unemployed people who earn no income do not pay income taxes
    • Many families slip below the poverty line and qualify for welfare and food stamps
    • Government spending on unemployment compensation increases during a recession
  63. With regard to the component s of national spending 
    National income must equal GDP
  64. The early classical economists believed that a drop in aggregate demand:
    is a temporary problem; price and wage adjustments will restore full employment
  65. In 1930, Congress passed the Smoot-Hawley Tariff Act, which raised tariffs on imported goods by 60 percent.  Other nations responded by taxing the importation of U.S. goods.  These events likely caused a:
    Leftward shift in the U.S. aggregate demand curve
  66. A recession caused by a supply-side shock (e.g., the OPEC oil embargo of the 1970s) will cause:
    • A decrease in real GDP
    • A decrease in overall employment (and an increase in the unemployment rate)
    • A decrease in real national income
  67. Events that cause the short-run aggregate demand curve for the U.S. to shift to the right
    • A decrease in income tax rates
    • A decline in the value of the U.S. dollar in the world currency markets
    • An increase in government spending
  68. In the short run,
    • Real GDP may be below or above its long term potential level 
    • Cyclical unemployment may be positive or negative
    • Frictional unemployment will always be positive
  69. China purchases a variety of goods from the U.S., including automobiles, aircraft and textiles.  If China's economy goes into a recession, this will tend to cause:
    A drop in the short run equilibrium level of GDP in the U.S.
  70. Suppose the economy is initially in equilibrium at a GDP level consistent with full-employment.  In this situation, if the federal government were to increase its spending substantially, we would expect to see:
    A temporary decrease in the unemployment rate accompanied by higher inflation
  71. Suppose the federal government imposes new environmental regulations on the production and transportation of petroleum products that increase the cost of production for the U.S. manufacturing firms.  The short run effect of this change will likely entail:
    An increase in the short run equilibrium price level
  72. Federal spending on welfare benefits and unemployment compensation
    An automatic stabilizer
  73. All else being equal, the public debt to GDP ratio will rise whenever:
    The economy slips into a recession
  74. From 2001 to 2005, there was a dramatic increase in the average price of U.S. homes.  This change made people feel wealthier and likely caused the 
    Aggregate demand curve to shift to the right
  75. One explanation for the positive slope of the short run aggregate supply curve is the notion of "sticky" wages.  This theory says that in the short run, when overall price level rises,
    Wage increases tend to lag behind price increases, so when prices go up production is temporarily more profitable for firms
  76. Historical evidence suggests that after the 2008stock market crash, a great American household chose to save more and spend less in an attempt to rebuild their lost wealth.  Our aggregate supply & demand model tells us that in the short run this sort of change in consumer behavior will cause:
    An increase in the unemployment rate
  77. Though it may make economic sense, the use of expansionary fiscal policy to help the economy recover from a recession is difficult in practice because in the real world:
    • It may take many months for the government to be sure that a recession is indeed occurring
    • National leaders are likely to disagree with regard to what type of fiscal policy measure is appropriate
    • There may be a substantial time lag before any fiscal policy measure actually affects the economy
  78. When the federal government spends more than it collects in tax revenues,
    The government's outstanding debt goes up
  79. Prior to the 2007-2009 recession, the federal government's budget:
    Had been running a large deficit, with spending exceeding total revenues
  80. Suppose researchers announce that they have found a way to produce electricity via nuclear fusion, and this will result in a cheap and virtually unlimited energy.  This will cause the nation's:
    Long run aggregate supply curve to shift to the right, thus increasing GDP and lowering the price level 
  81. If the federal government significantly decreases its spending this year due to the current "sequestration" situation, this will have a short tun effect on the economy that would be comparable to:
    A decrease in autonomous consumption expenditures
Card Set
Macroeconomics Semester Review
Review from the entire semester: Tracking the economy, Definition and measurement of GDP, National Income Accounts, Price Indexes & Measuring Inflation, Unemployment and Inflation, Types of Unemployment, Measurement of the Price Level, Productivity and Growth, The Aggregate Expenditure Model,