Macroeconomics: Key Concepts and Principles
Macroeconomics: Key Concepts and Principles
1. Monetary Neutrality
According to the principle of monetary neutrality, changes in the money supply do not affect real variables.
2. Marginal Propensity to Consume
A fall in the marginal propensity to consume will cause a reduction in output and a reduction in the government multiplier.
3. Functions of Money
All of the following are functions of money except: Liquid.
4. Calculating GDP
Assume households purchase all greeting cards in calculating GDP, we will include the value of all the greeting cards and of paper that is added to inventory.
5. Real GDP per Capita
Consider an economy with an initial real GDP equal to €4,500 and an initial population equal to 50. What will the real GDP per capita be approximately ten years later if the growth rates of real GDP and population are, respectively, 3% and 1.5%? €104.4
6. Aggregate Price Level
If the aggregate price level rises, people will demand more money, causing the interest rate in the economy to increase.
7. Central Bank Policy
If the economy is in a recession, the central bank will decrease its target for the interest rate by increasing the money supply. Another alternative is that the government decides to increase government expenditures.
8. Government Policy
If the economy is facing an inflationary gap, the government may increase taxes to decrease the aggregate demand. This will increase the budget balance for that year.
9. Nominal GDP
If nominal GDP increased from €1.0 billion in 2000 to €1.2 billion in 2005, we do not have enough information from this to determine how much output actually increased in the economy.
10. Fiscal Policy
Suppose an economy where the average tax rate is 0.3 and the marginal propensity to consume is 0.6. The government decides to increase transfers by 5M. What is the effect on the economy’s income and on the government’s balance? Income increases by 5.9M, and the change in government balance is 3.23M.
11. Payroll Taxes
Suppose that the economy is in long-run equilibrium. What are the short-run effects of an increase in payroll taxes? Higher aggregate price level and lower output.
12. Consumer Price Index
Suppose the cost of the basket in 2016 was $3,300, and the cost of the basket in the base year was $3,000. Find the CPI for 2016: 110.
13. Long-Run Equilibrium
Suppose the economy is in the long-run equilibrium. If consumers and firms become more optimistic about the future, in the new long-run equilibrium we can expect a higher price level and the economy is producing the same output as at the initial output.
14. Stock Market Crash
Suppose the economy is in long-run equilibrium. If the stock market crashes in the short run, we can expect the price level to decrease and output to decrease.
15. Money Supply Curve
The money supply curve is vertical because the central bank controls the monetary base of the economy.
16. GDP Deflator
We know that the GDP deflator in year 1 equals 110, and that the growth rate of real GDP between year 1 and year 0 is 10%. Suppose that year 0 is the base year, which of the following statements is true? The growth rate of nominal GDP was around 20%.
17. Technological Progress
What is the contribution of technological progress to economic growth if the growth rates of human capital, real GDP, and physical capital are, respectively, 2.3%, 2%, and 1.8%? Assume that the capital’s share is 0.3: -0.15%.
18. Recession
When an economy is in recession, household incomes tend to decrease, which results in households paying fewer taxes, this helping to stimulate the economy.
19. Reserve Requirements
Which of the following statements is false: If the reserve requirement is 25%, an increase in deposits equal to 2000 will increase the money supply by 2666.66.
20. Automatic Stabilizers
Which of the following statements is false: Automatic stabilizers cause that the government spending falls when the economy is in a recession.
21. M1 Money Supply
Which of the following is not included in the M1 of the stock of money: Savings account deposits.
22. GDP per Capita
Which of the following statements is false: Among wealthy countries, the countries with the lowest GDP per capita some decades ago have had the slowest growth rates of GDP per capita.
23. GDP Measurement
Which of the following statements is false? GDP can be computed by adding up the value of all final and intermediate goods and services produced in the economy.
24. Investment Spending
Which of the following statements is false? Investment spending fluctuates less than GDP over the business cycle.
25. Aggregate Price Level and Interest Rates
Which of the following occurs when the price level rises? People need to hold more money, so interest rates rise, making firms borrow and invest less.
26. Aggregate Demand and Aggregate Price Level
Which of the following statements is false? In the short run, if the aggregate price level rises, aggregate demand shifts to the left because a higher price level reduces the purchasing power of households’ wealth.
27. GDP Deflator and CPI
Which of the following statements is true? The GDP deflator measures the inflation of everything produced in the country, while the CPI measures the inflation of the goods typically bought by households.