Chapter 5: An Introduction to Macroeconomics

Question 1

What are the two fields of economics?

Answer 1

• macroeconomics
• microeconomics

Question 2

Microeconomics

Answer 2

How individual decision-making units behave
- one market

Question 3

Macroeconomics

Answer 3

behavior of entire economies
- multiple markets

Question 4

Domestic product

Answer 4

represents the total production of a nation’s economy

Question 5

Aggregation

Answer 5

means combining many individual markets into one individual market
- total domestic product

Question 6

Two foundations of aggregation

Answer 6

1.) Composition of demand and supply may be of little consequence for the economy-wide issues of growth, inflation, and unemployment

2.) During economic fluctuations, markets tend to move up or down together

Question 7

Aggregate demand curve

Answer 7

shows the quantity of domestic product that is demanded at each possible value of the price level

Question 8

Aggregate supply curve

Answer 8

shows the quantity of domestic product that is supplied at each possible value of the price level

Question 9

Inflation

Answer 9

sustained increase in the general price level
- pushes the price level up (when AD moves to the right)

Question 10

Recession and unemployment shift the AD curve to the_______

Answer 10

left
(Because total domestic product/output declines)

Question 11

Recession

Answer 11

Period of time during which the total output of the economy declines

Question 12

When both AD and AS shift to the right, it depicts______

Answer 12

Economic growth

Question 13

Gross Domestic Product (GDP)

Answer 13

the sum of the money values of all final goods and services produced in the domestic economy and sold in organized markets during a specified period of time, usually a year

Question 14

Nominal GDP

Answer 14

Calculated by valuing all outputs at current prices

Question 15

Real GDP

Answer 15

calculated by valuing outputs of different years at common prices; therefore real GDP is a better measure than nominal GDP of changes in total production

Question 16

Is Real or Nominal GDP a better measure of changes in total production?

Answer 16

Real

Question 17

Problem with nominal GDP

Answer 17

It rises when prices rise– even if there is no increase in actual production

100 hamburgers are 100 hamburgers regardless of price

Question 18

How to correct inflation (purpose of Real GDP)

Answer 18

values goods and services produced in different years at the same set of prices

“GDP corrected for inflation”

Question 19

Recession is a period in which _____ GDP _____

Answer 19

Real; declines (for two or more consecutive quarters)

Question 20

T/F The GDP for a particular year includes only goods ad services produced within the year; sales of items produced in previous years are explicitly excluded

Answer 20

True

Question 21

T/F Only final goods and services count in GDP

Answer 21

True

Question 22

Final goods and services

Answer 22

those that are purchased by their ultimate users

Question 23

Intermediate goods

Answer 23

a good purchased for resale or for use in producing another good

Question 24

Domestic

Answer 24

GDP counts production in the US only

Question 25

T/F only goods and services that pass through organized markets count in the GDP

Answer 25

True

Question 26

Is gambling counted in GDP

Answer 26

No

Question 27

T/F Gross domestic product is NOT a measure of the nations economic well-being

Answer 27

True

Question 28

T/F Mobilization for a war fought on some other nation's soil normally causes a country's GDP to rise rapidly

Answer 28

True

Question 29

T/F Ecological costs are not deducted from the GDP in an effort to give us a truer measure of the net increase in economic welfare that our economy produces

Answer 29

True

Question 30

Real GDP per capita

Answer 30

ratio of real GDP divided by population

Question 31

A nation becomes richer only if its GDP grows _____ than its population

Answer 31

Faster

Question 32

alternating periods of rapid and slow growth

Answer 32

Macroeconomic fluctuation; business cycles

Question 33

Growth rate

Answer 33

the percentage change from one year to the next

Question 34

Deflation

Answer 34

refers to a sustained decrease in the general price level

Question 35

Great Depression

Answer 35

- decline in economic activity and rapid deflation

Question 36

The General Theory of Employment, Interest, and Money (1936)

Answer 36

John Maynard Keynes

Question 37

Fiscal policy

Answer 37

government plan for spending and taxation; it can be used to steer aggregate demand in the desired direction

Question 38

High levels of Wartime spending causes what?

Answer 38

- Inflation - Unemployment

Question 39

Stagflation

Answer 39

inflation that occurs while the economy is growing slowly or in a recession - economic stagnation AND inflation - aggregate supply curve shifts to the left (inward)

Question 40

Monetary policy

Answer 40

Refers to action taken by the Federal Reserve to influence aggregate demand by changing interest rates

Question 41

Reaganomics

Answer 41

Believed large tax cuts would boost growth and reduce inflation

Question 42

Clintonomics

Answer 42

- forced to concentrate on deficit reduction - "New Economy"

Question 43

"New economy"

Answer 43

a product of globalization and computerization that naturally performed better than the economy of the past - outward AS curve (faster economic growth and lower inflation)

Question 44

Tax cuts and government spending (fiscal policy) led to a shift of the AD curve ______

Answer 44

outward

Question 45

Lower interest rates=

Answer 45

more spending

Question 46

Obamanomics

Answer 46

- recommended more tax cuts, a burst of federal spending, and large-scale aid to state and local governments to help them avoid painful budget cuts

Question 47

Stabilization policy

Answer 47

name given to government programs designed to prevent or shorten recessions and to counteract inflation (that is, to stabilize prices)

Question 48

Government can reduce unemployment by ______ AD

Answer 48

increasing - Congress can spend more or reduce taxes (fiscal policies) as it did with the 2009 stimulus bill - The Federal Reserve can lower interest rates (monetary policy) as it did in late 2007 and 2008 - shifts the AD curve outward to the right

Question 49

Recessions and unemployment are often caused by insufficient aggregate demand; when such situations occur, fiscal or monetary policies that successfully augment demand can be effective ways to _______ output and ______ unemployment. They also normally _______ prices

Answer 49

Increase; reduce; raise

Question 50

Inflation is frequently caused by aggregate demand racing ahead too _____ when this is the case, fiscal or monetary policies that reduce aggregate demand can be effective anti-inflationary devices; but such policies also ______ real GDP and _____ unemployment

Answer 50

fast; decrease; raise