67 Questions
What is the relationship between price and quantity in a demand curve?
They are inversely related
Which of the following is a demand shifter in microeconomics?
Prices of related goods
What does a sloping supply curve indicate about the relationship between price and quantity?
They vary directly
Which of the following is a supply shifter in microeconomics?
Government regulations
What does market equilibrium refer to?
No tendency for the system to change
What is the limitation of supply and demand analysis mentioned in the text?
The 'other things held constant' assumption is not likely to hold when the goods represent a large percentage of the entire economy
What happens to the demand curve when consumer expectations change favorably for a product?
The demand curve shifts to the right
In the context of supply and demand, what does a decrease in population likely lead to?
A leftward shift in the demand curve
What is the formula for budget balance?
Total public revenue – total public expenditure
What does a positive budget balance indicate?
Surplus
What does the formula $rac{ ext{debt}}{ ext{GDP}}$ measure?
Public debt as a percentage of GDP
What is the primary purpose of expansionary fiscal policy?
Stimulate the economy
What is the main risk of borrowing in a foreign currency for a country?
Currency risk
In the context of fiscal policy, what does 'monetizing' the deficit refer to?
Borrowing from the central bank to finance the deficit
What is the potential consequence of a country's inability to pay its public debt?
Hyperinflation
What is the main strength of fiscal policy?
Affects the economy quickly
What is the primary responsibility of central banks in relation to monetary policy?
Control the money supply
What does a negative GDP GAP indicate?
Recession
What is the formula for GDP GAP?
Actual GDP - Natural GDP
What is the primary challenge for businesses and governments in relation to business cycles?
Anticipating turning points
What happens when there is an increase in demand in a competitive market equilibrium?
Equilibrium price and quantity both increase
What is the result of a price ceiling set below the equilibrium price?
Shortages are created
What is the impact of a price floor above the equilibrium price?
Excess supply (surplus) is created
What is the purpose of an excise tax on a specific good?
To increase equilibrium price and decrease equilibrium quantity
What is a characteristic of a market with perfect competition?
Many small firms and consumers with no market power
What is a factor facilitating collusion in an oligopoly?
Market concentration
What is the result of increasing returns to scale in a market?
Output increases by a % greater than the increase in inputs
What is the measurement of Gross Domestic Product (GDP)?
Market value of final goods and services produced in a country over a period of time
What does the 'C' component represent in the GDP equation C + I + G + NX?
Spending by households on goods and services
What is the value of all goods and services bought by households known as in GDP?
Consumption
What is the characteristic of durable goods in the context of GDP?
Goods such as cars and home appliances
What does the 'I' component represent in the GDP equation C + I + G + NX?
Spending for additional production
What is the formula to assess the debt burden on the economy?
$\frac{debt}{income}$
What is the primary force driving the long-term debt cycle?
Productivity growth
What happens when spending increases and prices fall in the short-term debt cycle?
Inflation
What is the main concern expressed by Germany regarding quantitative easing (QE) by the ECB?
It may finance excessive and careless spending by peripheral countries
What is the potential consequence of interest rates being too low and the central bank resorting to printing money?
Inflation
What is the primary role of central banks in reducing debt during a deleveraging period?
Reducing interest rates
What is the potential outcome of a high debt burden on individuals or corporations?
Less spending and less credit
What is the primary concern associated with austerity measures during a deleveraging period?
Painful deflationary effects
What is the potential outcome of a decrease in activity during a deleveraging period?
Less government income from taxes
What is the primary concern associated with central banks buying government bonds during a deleveraging period?
Risky behavior and potential inflation
What is the potential outcome of a beautiful deleveraging process?
Moderate inflation
What is the primary concern associated with bank runs during a deleveraging period?
Banking system shrinkage and bankruptcy
What does the consumption function $C = C_0 + MPC imes (Y – T)$ represent?
The total consumption as a function of disposable income
What is the formula for disposable income?
Disposable income = total income – total taxes
How is the marginal propensity to consume (MPC) defined?
Increase in consumption caused by one-unit increase in disposable income
What does investment (I) include?
Business fixed investment, residential fixed investment, and inventory investment
Which components are part of the national income identity in an open economy?
Government spending (G) and net exports (NX)
How is inflation measured?
With price indexes
What can cause inflation?
Supply and demand factors
How is the unemployment rate calculated?
Number of unemployed individuals divided by the labor force
What are types of unemployment caused by different factors?
Frictional, structural, and cyclical unemployment
What does fiscal policy involve?
Government decisions about public spending and revenue to stabilize the economy
What is the natural rate of unemployment?
The average rate of unemployment around the economy
What are the costs of unemployment?
High social and financial costs, including the opportunity cost of foregone output
What is the formula for the money multiplier in the economy?
$\frac{1}{reserve\ ratio\ %}$
What is the purpose of increasing reserve ratios in monetary policy?
To restrict banks from lending money
What is the measure used to assess the loan loss absorption capacity of a bank before depositors are affected?
$leverage\ ratio = \frac{Debt}{Equity}$
What does it indicate if a bank has high solvency and low liquidity?
Equity capital > cash and Loans > deposits
What does deposit insurance aim to protect depositors from?
Bankruptcy and bank runs
What is the term used to describe the profit made by the government from the difference between the value of money and its production costs?
Seigniorage
What does dollarization refer to in the context of a country's currency?
The use of the US dollar when the national currency's value is low
In the foreign exchange market, what does the term 'OCT' stand for?
Over-the-counter market
What factors influence the equilibrium exchange rate of a currency?
Interest rates and expectations
What does quantitative easing involve in monetary policy?
Investors receive money through central bank bond purchases
What determines the value of a currency in a free market according to the text?
Supply and demand, confidence, and inflation rates
Study Notes
Macroeconomic Concepts and Indicators
- Consumption function C = C0 + MPC X (Y – T)
- Disposable income = total income – total taxes Y – T
- Marginal propensity to consume (MPC) = increase in consumption caused by one-unit increase in disposable income
- Investment (I) includes business fixed investment, residential fixed investment, and inventory investment
- Government spending (G) and net exports (NX) are components of the national income identity in an open economy
- Inflation is a continuous rise in the price level and is measured with price indexes
- Inflation can be caused by supply and demand factors and can be "right" to keep a country competitive
- Unemployment rate is calculated as the number of unemployed individuals divided by the labor force
- Frictional, structural, and cyclical unemployment are types of unemployment caused by different factors
- Fiscal policy involves government decisions about public spending and revenue to stabilize the economy and eliminate output gaps
- The natural rate of unemployment is the average rate of unemployment around the economy
- Unemployment has high social and financial costs, including the opportunity cost of foregone output.
Test your understanding of macroeconomic concepts and indicators with this quiz. Explore topics such as consumption function, disposable income, investment, inflation, unemployment rate, and fiscal policy. Evaluate your knowledge of these crucial economic principles.
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