Midterm 1
Suppose the equilibrium price for ice cream cones is $5. The government decides to implement a maximum selling price of $4. What happens to supply?
No shift in the curve, but the quantity supplied will decrease.
Suppose there is a shift to the left in the demand curve for labor. If wages are rigid downward, how will unemployment compare to the situation where wages fully adjust?
Unemployment will be higher if wages are rigid
What is an expansion? What is a recession?
Expansion--period of positive economic growth
Recession--period of negative economic growth
What is the goal of counter-cyclical monetary policy?
It aims to smooth out the business cycle (reduce fluctuations and the like)
Why is there thought to be a zero lower bound on interest rates
No one would lend at a negative nominal rate if they can hold cash and earn zero
The original iPhone cost $400. The iPhone X sells for $1000. What percent increase does this represent?
(1000-400)/400 = 600/400 = 1.5 = 150%
If the employment-population ratio is 72 percent and the labor force participation rate is 80 percent, what is the unemployment rate
10%
(80-72)/80 * 100 = 10%
What is Okun's Law?
Change in Unemployment = -1/2 * (Change in GDP - 2%)
If banks lent out more of what are now
excess reserves, the money supply
would?
Increase
If the nominal interest rate is 9 percent and the inflation rate is 3 percent, the real interest rate is ________.
6 %
Nominal - inflation = Real
Suppose real GDP is $5 trillion and the GDP Deflator is 150. What is nominal GDP?
GDP deflator = (Nominal/Real) * 100 = $7.5 trillion
According to the quantity theory of money, if the growth rate of the money supply is 3 percent and the growth rate of real GDP is 7 percent, then the inflation rate will be ___?
Inflation rate = Growth rate of money supply - growth rate of real GDP
Rate = -4%
John Maynard Keynes emphasized _____ as the cause of change in GDP
Aggregate Demand
What are the types of stabilizers? What is the difference?
Automatic and Discretionary. Discretionary requires an act of government, automatic triggers as soon as a set of conditions is met.
According to Keynesian ideas, what should be increased during a recession?
Government Spending
"The government should ban jean shorts" is an example of a _______ statement
Suppose that employers nationally have seen a fall in consumer spending, and have responded by laying off workers.
As a result, Meredith recently lost her job. She is currently contacting employers looking for a new job. What type of unemployment is Meredith experiencing?
Frictional!
Karen was making $12 per hour and
got a $3 raise for the next year, but
the inflation rate between those two
years was 10%. By what percent did her
real wage change
15%
% Real Wage Change = % Nominal Wage Change - Inflation rate
15 = 25 - 10
What is the equation for the government expenditure multiplier?
Delta Y/ Delta G
If the Fed increases the supply of bank reserves, the most direct effect is that _______
The federal funds rate falls
If the supply of diamonds in a country falls AND the demand for diamonds falls, what happens to the equilibrium price and quantity?
Quantity will fall, price change will be ambiguous
Tom is hiring some additional workers for his roofing company. Some of his competitors are finding they can get workers for $12 per hour. Efficiency wage theory suggests that it is reasonable for Tom to offer?
More than $12 per hour, so that employees will value the job more and therefore work harder
Using Okun's Law, what is the change in unemployment if GDP is growing at 7%?
Delta U = -(1/2)(7-2) = -5/2 = -2.5%
If $500bn in government spending caused a $700bn change in GDP, what was the multiplier?
1.4
700/500 = 1.4
A countercyclical fiscal policy is conducted by ________ with the overall goal of ________
"The government" and "Reducing Economic Fluctuations"