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Macroecenomics
Final Exam Study Guide
40
Economics
12/08/2010

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Term
A substantial decrease in marginal income tax rates will encourage individuals to
Definition
work more hours
Term
Which of the following best expresses the central idea of countercyclical fiscal policy?
Definition
Deficits are planned during economic recessions, and surpluses are utilized to restrain inflationary booms.
Term
Restrictive fiscal policy may have some undesirable consequences. Among these is
Definition
higher unemployment
Term
Which of the following is a problem with discretionary fiscal policy as an economic stabilization tool?
Definition
It is difficult to properly time discretionary changes in fiscal policy.
Term

For an oil-importing country such as the United States, the immediate effect of a supply shock caused by an increase in the price of imported oil would tend to be a(n)
Definition
decrease in real output and an increase in the general level of prices.
Term

During 2000-2004, the price of crude oil increased substantially on the world market. Other things constant, how will an unanticipated increase in oil prices influence the general level of prices and real output of oil-importing nations such as the United States and Japan?
Definition
Real output will decrease, and the general level of prices will increase.
Term

How will an increase in the world price of crude oil influence the economy of an oil-importing country such as the United States?
Definition
Aggregate supply will decrease, leading to a decrease in real GDP.
Term
Which of the following would tend to throw the economy into a recession?
Definition
an unanticipated reduction in aggregate demand due to a sharp reduction in stock prices
Term
Which of the following will be most likely to contribute to the growth of a less-developed country?
Definition
secure property rights and low marginal tax rates
Term
Which of the following would be most likely to improve the standard of living of people in less-developed nations?
Definition
an increase in foreign investment
Term
Which of the following would be most likely to encourage capital formation in a less-developed country?
Definition
the expectation that property rights will be highly secure in the years ahead
Term
The replacement of older products by newer improved ones (causing unemployment in the older product sector while improving employment conditions in the newer sector) is called
Definition
creative destruction.
Term
When an economy is operating at its full employment rate of output,
Definition
the actual rate of unemployment will equal the natural rate.
Term
For the United States, which statement best characterizes the labor force participation rates of men and women over the past three decades?
Definition
The participation rate of women has increased while the participation rate of men has decreased.
Term
Number in the labor force
40 million
Number unemployed
2 million
What is the unemployment rate of the economy?
Definition
5 percent
Term
Which of the following will most likely increase the natural rate of unemployment?
Definition
an increase in unemployment benefits
Term
Air travel from New York to Los Angeles costs $600 and takes 5 hours. A bus ticket between the cities costs $100 and takes 105 hours. Other things constant, the minimum value of one's time that would induce a rational individual to fly rather than drive would be
Definition
$5 per hour.
Term
Using a production possibilities curve, a technological advance that increases the amount of output for the same amount of inputs would be illustrated as
Definition
an outward shift of the curve.
Term
"Total output will be maximized when agricultural products are produced in areas where fertile land is cheap and the climate is temperate and when manufactured goods are produced in areas where raw materials are readily accessible, energy sources are relatively cheap, and skilled labor is readily available." This statement most clearly illustrates
Definition
the potential gains resulting from specialization and the application of the law of comparative advantage.
Term
If an economy operates at a point within its production possibilities curve,
Question 20 answers
Definition
it is not efficiently using all of its resources.
Term
When adjusting nominal GDP for price changes, it is preferable to use the GDP deflator rather than the consumer price index because
Definition
the GDP deflator calculates changes in the prices of items that more closely approximate those included in GDP.
Term

(I) GDP measures the market value of final goods and services produced in a country during a time period.
(II) An increase in a nation's GDP indicates that the nation's net economic welfare has increased.
Definition
I is true; II is false.
Term
Gross domestic product is a measure of both
Definition
the market value of the output produced during a period and the cost of producing that output.
Term
If a local shop buys a used motorcycle for $1,000, refurbishes it, and resells it for $2,500, the
Definition
shop contributes value added equal to $1,500, and consequently $1,500 is added to GDP.
Term

In economics, man-made resources such as tools, equipment, and structures that are used to produce other goods and services are referred to as
Definition
capital.
Term
A fact based on observable phenomenon that is not influenced by differences in personal opinion is called
Definition
an objective concept.
Term
New classical conomic theory suggests that the most effective strategy during a recession is for
the government to do nothing. The most likely reason politicians do not follow this is because
Definition
it would lead to their defeat in the next election.
Term
If policymakers cut taxes because they think that recession is a major threat, a proponent of
the new classical view will be most likely to argue that the tax cut is
Question 28 answers
Definition
not very important because the "demand stimulus effects" of lower current taxes will be largely offset by the expectation of higher taxes in the future.
Term
A substantial decrease in marginal income tax rates will encourage individuals to
Definition
work more hours.
Term
If the crowding-out effect is strong, how powerful will the effect of discretionary fiscal policy be?
Definition
Crowding out will make fiscal policy less powerful
Term
Which of the following makes it more difficult for monetary policy makers to time policy changes correctly?
Definition
The primary effects of the policy change will not be felt for 6 to 15 months into the future.
Term
If the Federal Reserve unexpectedly decides to sell bonds, which of the following will most likely happen in the short run?
Definition
The supply of loanable funds will decrease, which will exert upward pressure on the interest rate.
Term
The demand curve for money
Definition
shows the amount of money that households and businesses wish to hold at various rates of interest.
Term
When the Fed unexpectedly decreases the money supply,
Definition
the exchange rate value of the dollar will tend to appreciate.
Term
Suppose the lowest-wage state in the United States is West Virginia and the highest-wage state is New York. Which of the following would be true?
Definition
Both New York and West Virginia will be better off if they are allowed to trade freely.
Term

If the United States imports low-cost goods produced in low-wage countries instead of producing the goods domestically,
Definition
the United States will gain, and U.S. resources will be employed more productively.
Term
Which of the following would most likely cause the current demand for natural gas to decrease?
Definition
a decrease in the price of electricity, a substitute for natural gas
Term
The law of demand indicates that as the price of a good increases,
Definition
buyers buy less of it.
Term

(I) Profits direct producers toward activities that increase the value of resources.
(II) Losses impose a penalty on those who reduce the value of resources.
Definition
Both I and II are true.
Term
Which of the following would lead to an increase in the demand for computer software?
Definition
a decrease in the price of personal computers