Deck 9: B : an Introduction to Basic Macroeconomic Markets

Question 1

When the economy is in macro equilibrium,

A) the sum of savings plus investment must equal the sum of imports plus exports.
B) the sum of savings plus imports plus taxes must equal the sum of investment plus government purchases plus exports.
C) the sum of savings plus government purchases must equal exports minus imports.
D) the government's budget must be in balance.

Answer 1

B

Question 2

The macroeconomy is said to be in long-run equilibrium only if

A) the resource, loanable funds, foreign exchange, and goods and services markets are all in equilibrium.
B) prices were incorrectly estimated by decision makers.
C) the output of the economy exceeds the full-employment level of output.
D) the economy is operating along its short-run aggregate supply curve.

Answer 2

A

Question 3

What are the three reasons why the aggregate demand curve slopes downward? Give an example of each.

Answer 3

The real balance effect occurs because as the aggregate price level declines, a given amount of money will now buy more goods. The interest rate effect occurs because as the aggregate price level declines, the real money supply rises. Given that money is now less scarce, real interest rates will fall, causing an increase in investment and consumption. The international substitution effect occurs because as the aggregate domestic price level declines (relative to the foreign price level), domestic exports become less costly to foreigners, causing domestic net exports to rise.

Question 4

Monetary policy can be most accurately described as

A) the use of government taxation and expenditures to achieve macroeconomic goals.
B) the use of the government's regulatory powers to improve economic efficiency.
C) the government provision of goods to improve economic efficiency.
D) the deliberate control of the money supply to achieve macroeconomic goals.

Question 5

Within the framework of the AS/AD model, which of the following is a true statement regarding short-run aggregate supply?

A) An increase in prices temporarily improves profit margins because important components of costs are fixed in the short run.
B) An increase in prices leads to higher interest rates, which temporarily improves profit margins.
C) An increase in prices leads to an expansion in the money supply, which stimulates additional output.
D) An increase in prices increases real wage rates and thereby expands the size of the economy's resource base.

Question 6

Fiscal policy is

A) the deliberate control of the money supply to achieve macroeconomic goals.
B) the use of the government's regulatory powers to improve economic efficiency.
C) the operation of business enterprises by the government.
D) the use of government taxation and expenditures to achieve macroeconomic goals.

Question 7

In the short run, if prices were above equilibrium,

A) excess aggregate demand for goods and services would place downward pressure on prices.
B) excess aggregate supply of goods and services would place upward pressure on prices.
C) excess aggregate demand for goods and services would place upward pressure on prices.
D) excess aggregate supply of goods and services would place downward pressure on prices.

Question 8

Why do we use two supply curves in the aggregate goods and services market? What is the difference between them, and why do they have different slopes?

Question 9

Which of the following are leakages from the circular flow of income?

A) Savings, taxes, and imports
B) Investment, government purchases, and exports
C) Investment, taxes and bonds
D) Imports, wages and taxes

Question 10

As prices rise, consumers and businesses will want to hold larger money balances. This will lead to

A) a reduction in the demand for resources and reduced resource prices.
B) an increase in the amount of goods and services demanded due to the real balance effect.
C) an increase in exports due to the international substitution effect.
D) a reduction in the supply of loanable funds and an increase in the interest rate.

Question 11

As the real interest rate in the domestic loanable funds market increases,

A) the cost of purchasing goods and services during the current period will decrease.
B) the net inflow of capital from abroad will increase.
C) the inflationary premium will rise and the money rate of interest will decline.
D) a trade surplus will occur.

Question 12

A depreciation in the U.S. dollar on the foreign exchange market will

A) make U.S. exports more expensive to foreigners.
B) make imports less expensive for U.S. consumers.
C) make U.S. exports cheaper for foreign consumers.
D) encourage U.S. consumers to travel abroad.

Question 13

What is the difference between short-run equilibrium and long-run equilibrium in the goods and services market?

Question 14

The exchange rate is

A) the price of one nation's currency in terms of the currency of another nation.
B) the amount households will spend on imports.
C) the amount of foreign capital a nation receives when there is a trade surplus.
D) the amount charged by bankers for loanable funds

Question 15

In 2000, a major U.S. oil company began exploration off the southeastern coast of the United States. Suppose the company discovers huge reserves of natural gas. Using the aggregate demand/ aggregate supply model, predict what shifts will occur and what will happen to output and prices in both the long and short runs.

Question 16

When the loanable funds and foreign exchange markets are in equilibrium,

A) there are no leakages from the circular flow of income.
B) macro equilibrium cannot occur.
C) the leakages from the circular flow will equal the injections into it.
D) injections into the circular flow will exceed leakages from it.

Question 17

The inflationary premium is that portion of the interest rate that reflects

A) the real return derived by lenders.
B) the rush to buy goods before prices rise.
C) the expected annual rate of decline in the purchasing power of money while a loan is outstanding.
D) the price that one must pay for earlier availability of goods and services during a period of price stability.

Question 18

Which two submarkets are included in the resource market?

A) labor and loanable funds
B) physical capital and labor
C) consumption goods and bonds
D) loanable funds and exports

Question 19

Suppose that severe floods destroyed farms, homes, and businesses in the Midwest. Use the aggregate demand/aggregate supply model, to explain the changes you would expect to take place and the effects you would expect these floods to have on both output and prices. (Include both short-run and long-run effects.)

Question 20

How does the aggregate goods and services market differ from the regular supply and demand graph in Chapter 3? Address the measures of price, quantity, and the demand and supply curve(s).

Question 21

Answer the following questions:
a.What is a bond?
b.If bonds make fixed payments every year, explain how a reduction in market interest rates will increase the price of the bond in the market.

Question 22

Suppose that your bank pays 5 percent interest on your savings account balance. Is this the nominal or real interest rate? What would be your real interest rate?

Question 23

Under what circumstances will inflation help borrowers at the expense of lenders? Under what circumstances will both parties be unaffected? Which scenario would you expect in the long run?

Question 24

Beginning in the latter part of 1999, the Federal Reserve raised interest rates. What do you predict happened to the prices of bonds already in the market? How can you explain this behavior?