Chapter 11
The _______ is the most commonly reported measure of inflation by the media.
CPI
Protecting property rights leads to _______.
greater economic growth
True or False
If the number of people unemployed rises from 3 million to 3.2 million while the number of people employed rises from 60 million to 66 million, and the population rises from 100 million 103 million, the unemployment rate rises.
False
The original unemployment rate is 100 x 3/63 = about 4.8 percent, the changes make the unemployment rate = 100 x 3.2/69.2 = 4.62 percent.
Which of the following lists all items included in M2 but not in M1?
a. None, M1 and M2 are essentially the same
b. Demand deposits and savings deposits
c. Small time deposits, money market mutual funds, and other minor categories
d. Currency
Small time deposits, money market mutual funds, and other minor categories
M1 includes currency, demand deposits at banks, and some other liquid deposits such as the balances in savings accounts. M2 includes everything in M1 plus small time deposits and money market funds (except those held in restricted retirement accounts).
True or False
The difference between the nominal interest rate and the inflation rate is equal to the real interest rate.
True
Real Interest Rate = Nominal Interest rate - Inflation.
Give an example of a natural resource
Wind energy, mineral deposits, river, water, forests
Frictional unemployment in the U.S. is inevitable because _______.
sectoral shifts are always happening (moving from one job to another)
Sectoral shifts happen as changes in technology and changes in the demand for goods create changes in how much labor different sectors demand. The time spent moving between jobs creates frictional unemployment.
As the reserve ratio increases, the money multiplier _______.
decreases
The formula for the money multiplier is 1/R, where R represents the reserve ratio of all banks in the economy. This means that as R gets bigger, the denominator of the fraction 1/ R gets larger. This means the fraction 1/R gets smaller. In short, as the reserve ratio increases, the money multiplier must decrease.
(Read carefully the question)
The GDP deflator is the most commonly reported indicator for inflation because _______.
the GDP deflator is not more commonly reported than the CPI.
True or False
Other things the same, when an economy increases its saving rate, consumption increases now and production rises later.
False Because resources are scarce, devoting more resources to producing capital requires devoting fewer resources to producing goods and services for current consumption. That is, for society to invest more in capital, it must consume less and save more of its current income. The growth that arises from capital accumulation requires that society sacrifice consumption in the present to enjoy higher consumption in the future. Thus, when an economy increases its saving rate, consumption falls now, but production rises late.
Tony manages a company where electrical engineers work to improve existing products and develop new ones. He considers paying higher wages in hopes of attracting better applicants. According to efficiency wage theory Tony will get a _______.
better pool of applicants but hire fewer workers
By paying higher wages more quality applicants will apply. The increase in the wage means the firm's demand for workers falls.
What does the Federal Reserve do?
Act as a lender of last resort to banks
When financially troubled banks find themselves short of cash, the Fed acts as a lender of the last resort. In other words, the Fed lends to those banks who cannot borrow anywhere else. The Fed makes such loans to maintain stability in the banking system.
The introduction of new goods creates a problem when measuring the CPI because _______.
the CPI is based on a fixed basket of goods and services and does not reflect the increased value as a result of a larger variety of goods
For a developed nation, a downside of public policy that increases health and nutrition is that _______.
there is little payoff from the increase
Given that developed nations are relatively healthy and there are diminishing returns, expenditures on health and nutrition contribute little to labor productivity in developed nations.
Minimum wages create unemployment in markets where they create a _______.
Surplus or shortage of labor because..
surplus of labor; most U.S. workers get paid more than the minimum wage
A store of value is _______.
an item that people can use to transfer purchasing power from the present to the future
A store of value is an item that people can use to transfer purchasing power from present to the future. One of the primary reasons a seller accepts money for a good or service in the present time period is because that seller can hold the money and use it to purchase another good or service in the future.
The best measure for changes in the price level of a consumer basket of goods and services over time is the _______.
CPI since it measures changes in the prices of a basket of goods and services consumed by a typical consumer over time
Other things equal, relatively rich countries tend to grow _______.
Faster or Slower and Why?
slower than relatively poor countries due to the catch-up effect
Paying efficiency wages means that wages are _______.
above or below equlibrium because....
above equilibrium, and unemployment is higher than otherwise
Efficiency wages are above equilibrium wages intended to raise productivity and profits, but they also raise unemployment.
The Fed changes the discount rate and, as a direct result, reserves have decreased. The Fed has most likely _______.
increased the discount rate
The discount rate is the interest rate on the loans the Fed makes to other banks. When the Fed increases the discount rate, banks will tend to borrow less money from the Fed since the interest they have to pay back has increased. This will lead to decreased borrowing from the Fed, and therefore less money will end up in bank reserves. This means, as the Fed increases the discount rate, borrowing decreases and reserves decrease.