MACROECONOMIC STUDY REVIEW SHEET

1. Bond prices move in the ____________ direction of interest rates.

2. When interest rates fall, price level __________ because _____ shifts ______.
3. When interest rates rise, price level __________ because _____ shifts ______.
4. Open Market Operations that involve _________ bonds raise interest rates.
5. Open Market Operations that involve _________ bonds lower interest rates.
6. When the FED sells bonds, the __________ interest rate rises, the price level ____________, and the
Real Interest Rate ___________.
7. When the FED buys bonds, the __________ interest rate falls, the price level ____________, and the
Real Interest Rate ___________.
8. When the FED __________ the Money Supply, Real Wages will _____ because of inflation.
9. When the FED __________ the Money Supply, Real Wages ______ because of deflation.
10. During a recession, the Federal Budget experiences a ____________.
11. Compared with an increase in Government Spending of $1 Billion, a decrease in Federal Taxes by the
same amount will have a _____________ effect on Aggregate Demand.
12. An increase in Government Spending will __________ the Real Interest Rate in the ________ ______
Market.
13. A lower Real Interest Rate will shift ______ outward, increasing the growth rate of the economy.
14. The two major subaccounts of payments accounts are the ____________________ and the
__________________________.
15. When a U.S. resident buys a foreign good, the U.S. __________ account is a _____________ and the
U.S. _________________ account is a _______________.
16. When a foreign resident buys a U.S. good, the U.S. __________ account is a _____________ and the
U.S. _________________ account is a _______________.
17. An increase in U.S. foreign investment will cause the value of the dollar to _________ in the Foreign
Currency Exchange Market.
18. When ______ shifts either in or out, the SRPC will experience a movement along its curve.
19. When ______ shifts in, the SRPC will shift _____.
20. When ______ shifts out, the SRPC will shift _____.
21. In order to finance the increase in government spending, the government borrows money from the
__________.
22. When U.S. residents demand more money, the ____________ Interest Rate will ____________.
23. If the economy is experiencing less than full employment, the Passive Approach will eventually involve
_____ shifting outward because _________ & _________ within the economy will eventually
_________.
24. If the economy is experiencing an inflationary gap, the Passive Approach will eventually involve the
__________ shifting inward because ___________ & _________ within the economy will eventually
rise.
25. Capital Flight will involve investors (both domestic & foreign) moving their money _______ the
country. This will cause the Real Interest Rate in the Domestic Loanable Funds Market (i.e. the
country experiencing the flight) to __________ because the ________ curve will shift ___________.
Additionally, it will cause the Real Exchange Rate to ______________ in the domestic country.
26. Assume a 20% Reserve Requirement: When the FED buys $100 million in bonds, the maximum
increase in the money supply will be ______________ million. The maximum change in new loans
will be ____________ million.
27. Assume a 20% Reserve Requirement: When Sarah Miller deposits $50,000 from her pocket into her
banking account, the maximum increase in the money supply will be _______________. The
maximum change in demand deposits will be _____________.
28. A ____________ in personal tax rates will shift AD out.
29. Assume a 20% Reserve Ratio: If the FED sells $50 million in government securities on the open
market, the total change in reserves in the banking system will be _________________, while the
maximum possible change in the money supply will be _________________.
30. An increase in AD will cause Price Level to _________ , Real Output to _______, and unemployment
to __________.
31. A decrease in AD will cause Price Level to __________, Real Output to _______, and unemployment
to ___________.
32. An increase in AS will cause Price Level to __________, Real Output to _______, and unemployment
to ____________.
33. A decrease in AS will cause Price Level to ___________, Real Output to _______, and unemployment
to _____________.
34. The GDP Deflator is found by dividing __________________ by the _________________ and then
multiplying by 100.
35. During an inflationary period, a borrower with a fixed loan would be ________ off while the
corresponding lending institution would be _________ off.
36. The Investment component of GDP includes ___________, ______________ and ______________.
37. If Countries A & B are trading partners and Country A is in a recessionary gap, Country Bs AD will
shift _____________, causing its Price Level to _______________, and its Real Output to
__________. Additionally, Country Bs currency will _____________ because _________ will shift
_______.
38. A tax credit for business is meant to increase ______________. In the Loanable Funds Market, the
ripple effect of the tax credit is that ______________ shifts ____ and the Real Interest Rate
__________.
39. Due to an adverse supply shock such as an increase in the world price of oil, the U.S. experiences
_____________. Since the U.S. and Japan are trading partners, this situation causes the value of the
Dollar, in comparison to the Yen, to ________________ as the U.S. Real Interest Rate has ________.
40. If the government increases the incentive to save by enacting a lower tax rate on personal savings,
the effect in the Loanable Funds Market is that ___________ will shift ________, _________ the
Real Interest Rate. Ultimately, this ________ interest rate will lead to _____________ investment.
41. The Crowding Out Effect is when the government competes with domestic firms & residents for the
countrys _____________________. This governmental action ____________ the ________ interest
rate.
42. The ________ Run Phillips Curve is vertical because changes in the _______ _______ & _______
______ do not affect ____________ variables such as unemployment and real output. This theory is
based on the concept of __________ ___________. Therefore, there is no relationship between the
unemployment rate and the inflation rate in the long run.
43. The Nominal Interest Rate will differ from the Real Interest Rate in the economy when __________
is present.
44. The Open Market Operation of buying bonds will cause a movement along the SRPC in the
____________ direction. If the FED sold bonds, then there would be a movement along the SRPC in
the _____________ direction.
45. ______________________ or ___________________ would be Fiscal Policy initiatives that would
cause a movement along the SRPC in the upward direction.

46. If the U.S. increases its national savings, the Nominal Interest Rate will __________, AD will shift
______ causing Price Level to ______________. As a result, the Real Interest Rate will
_________________. This new Real Interest Rate in the U.S. will cause imports to ___________ and
exports to _____________.
47. Assume a 10% Reserve Requirement: If the FED buys $100,000 in bonds, the maximum increase in
the money supply will be ___________. If banks keep an additional 10% in excess reserves at all
times, the maximum increase in the money supply will be _____________.
48. Assume a MPC of 90%: Which Fiscal Policy Initiative will have a greater impact in moving AD
outward, a $10 billion increase in government spending or a $10 billion tax cut in the nation? Why?
49. The Multiplier Effect _______________ the initial increase in government spending while the
Crowding Out Effect works in the opposite direction, reducing the maximum increase in AD due to
the fact that _____ _____ _____ are driven up in the economy.
50. Unanticipated inflation causes a family with a fixed-rate Certificate of Deposit to ________ while a
business repaying a long-term, fixed rate loan will _______.
51. At Full Employment Output, the economys long-run unemployment rate is equal to
__________________________________________________________.
52. Trade between two countries is based on _____________ _________________.
53. A drop in inflationary expectations will cause AS to shift _________________. As a result, Price Level
will __________, Real Output will ____________, and unemployment will __________. This will
impact the SRPC by causing a ___________________________.
54. If the U.S. is experiencing a high rate of unemployment, what Fiscal Policy Initiative could Congress
initiate to decrease the unemployment rate?
55. When AD shifts out, the Nominal Interest Rate in the Money Market ______________ because
__________ shift out.
56. If the Central Bank continues to ___________ bonds over time, the long-run effect on inflation will
be that the Price Level ____________ and the countrys currency ________________.
57. If the government elects to replace the current income tax with a national sales tax, domestic
consumption will _____________, while domestic savings will _________________.
58. An increase in Government Spending leads to the _____________ ______ ____________ whereby
the government competes for the available ________ _________, increasing the _________ for or
decreasing the _________ of loanable funds. This causes the Real Interest Rate to _________.
59. If Congress decides to decrease the taxes on corporate profits, the economys production
possibilities curve will ______________ _____________.
60. An increase in Net Investment will cause AD and LRAS to __________ ________.
61. In a closed economy, a decrease in the money supply will cause the Nominal Interest Rate to _____,
Consumption to ________, Investment to ________ and Government Spending to _______ in the
short run.
62. To shift AD outward, the FED buys bonds. This action causes the Nominal Interest Rate to _______.
Furthermore, the price of bonds within the financial system will ______.
63. The two approaches to measuring GDP are the ____________ approach and the _______________
approach. Both approaches will equal each other because there are 2 sides to every transaction.
64. The study of how individual households and firms make decisions and how they interact with one
another is referred to as ______________________.
65. The study of the economy as a whole is called ________________. The goal is to explain the
economic changes that affect households, firms and markets simultaneously.
66. GDP is the __________ value of the total ________ goods & services produced ___________ in a
given ____________ period. GDP doesnt include _____________ goods or goods that were sold
new in a ___________ year.
67. GDP is actually understated because it fails to include ______________ activities, _____________
activities, ______________ market activity, ___________ activities and the _____________ of the
nations income.
68. _____ __________ GDP is found by dividing GDP by the Total Population.

69. Savings, Taxes and Imports are considered _____________ while Investments, Government
Purchases, Transfer Payments and Exports are considered ______________.
70. ___________ ____________ are not included in GDP because they do not represent a 2-sided
transaction (i.e. there is not an exchange that takes place).
71. In calculating Real GDP, prices are affixed to a _____ year in order to analyze changes in real output.
In calculating Nominal GDP, the equation uses ________ year prices to determine total output.
72. The CPI can be used to find the inflation rate by subtracting base year prices from current year prices
and then dividing the answer by _______ year prices.
73. If a country or firm doubles its inputs, which causes its output to double, they are experiencing
____________ __________ to scale.
74. If a country or firm doubles its inputs, and output increases by more than double, they are
experiencing _________ ________ to scale.
75. If a country or firm doubles its inputs, and output increases by less than double, they are
experiencing _________ ________ to scale.
76. _______ __________ Investment occurs when a foreign company enters a country to builds and
operate a factory, while _______ ____________ investment is when an investment within a country
is financed by foreign money, but operated domestically.
77. The _______ __________ encourages the flow of capital to poor countries as a way of promoting
economic prosperity around the globe.
78. The ________ _________ hypothesis is the theory that asset prices of stocks, bonds, and mutual
funds reflect all publicly available information about the value of an asset. As new information
becomes available, the market reacts accordingly and adjusts asset prices either up or down to
reflect the new information.
79. ___________ must always = ______________ in a closed economy.
80. ___________ = _____________ + __________ in an open economy.
81. The ________ of _________ __________ is responsible for calculating unemployment in the U.S.
82. The Labor Force includes those __________ and those __________, _____ ___________ ________.
83. The unemployment rate is found by diving the _______ ___ _______ by the ___________ _______
and then multiplying the quotient by 100.
84. The _____ ___________ _______ is found by dividing the Labor Force by the Adult Population and
then multiplying x 100.
85. Two problems associated with the unemployment rate are that it ignores the fact that it fails to
include __________ _____________ in the unemployment rate and also counts ________________
(i.e. those who are working part-time when they would like to work full-time) workers as working
and not unemployed.
86. Even at Full Employment, there will always be _________________ unemployment.
87. _________________ unemployment results when the skills in demand do not match those of the
unemployed or that the unemployed do not live where there is a demand for their skills.
88. _______________ unemployment is caused by changes in demand for certain kinds of labor at
different times during the year.
89. _______________ unemployment results due to short-run fluctuations in SRAS & AD.
90. The ___________ __ ___________ ______ pertains to the situation when firms pay above
equilibrium wages in order to attract better applicants that will be more productive.
91. _____ Money is when a countrys currency is backed only by the full faith of the issuing countrys
government.
92. M1 includes __________, __________, and __________.
93. M2 includes M1 and ________, ___________, ______________ and ______________.
94. The FED Board of Governors consists of _______ members who are __________ by the President
and ________ by the Senate. Each governor serves a _______ year term.
95. The Federal Reserve System has ____ regional banks.
96. The ________ _____ __________ ___________is made up of 12 members, 7 of which are the Board
of Governors. The five remaining positions are for regional bank presidents. The New York FED
President is always on the committee because this person is responsible for the daily trading in the
NY Bond Market.
97. The _________ Multiplier is the amount of money the banking system generates with each dollar of
reserves. It is found by dividing 1 by the Reserve Requirement and then multiplying by the amount
of money inserted or removed from the economy.
98. The _________ Multiplier is describes a process by which an initial increase of one
economic aggregate is amplified and provokes an increase in the same or/and other aggregate(s)
larger than the initial raise. It is found by dividing 1 by (1-MPC) and then multiplying by the initial
increase of one economic aggregate (AD for example).
99. With the _______________ Rate, member banks of the Federal Reserve system borrow directly from
the Fed Window (i.e. the FED itself), while with the ____________________ Rate, member banks
borrow from each other on overnight loans.
100. In T Account format, when a deposit is made by a customer, the bank enters the amount as a
______ to Checkable Deposits and ____________ Reserves.
101. The rate at which money changes hands within the economy during the year is referred to as the
__________________ of money.
102. The Classical Dichotomy is represented by _______________ x ____________ =
___________________ x ___________________.
103. Within the Classical Dichotomy, because Velocity is stable and Real Output is not influenced by
changes in the money supply, when the money supply is changed, it directly influences the
________ ________.
104. _______________ _____________ ______________ states that as long as exchange rates are
flexible, the exchange rate between two countries will adjust in the long-run to reflect price level
differences between the two countries. As a result, a given basket goods that is traded
internationally should sell for about the same price around the world.
105. When the Domestic Real Interest Rate increases, NCO _______________.
106. When the Domestic Real Interest Rate decreases, NCO ______________.
107. Budget Deficits ___________ the Real Interest Rate, _______ NCO, _______ _____ Domestic
Investment, cause the Dollar to _______________, and pave the way for a ____________ Deficit.
108. Using the 45 Degree Line and an intersecting Aggregate Expenditure (AE) Line, if the 45 Degree Line
is above AE, then ____________ > _____________. If the 45 Degree Line is below the AE Line, then
_______________ < ______________. Remember, there can only be one point where the two
lines intersect and, at that point, Real GDP and Real Expenditure will equal.
109. A Recession is ____________ or ______ ________ _________ of negative group in Real Output.
110. There are three reasons why the Aggregate Demand Curve is downward sloping. They are
_____________________, __________________ and ________________________.

111. The LRAS is also called ___________ _____________, ____________ __________________
_____________ or _________ _______________ _________.
112. SRAS & LRAS will only shift when one of the __________ __ ___________________ change.
113. The SRAS is upward sloping because of ____________ _____________ and ___________
______________. Both are rigid in the downward direction.
114. Prices are sticky downward because of ______________ ________.



ANSWERS
(PAGE 1: 1-27)
1. Opposite
2. Rise, AD, out
3. Falls, AD, in
4. Selling
5. Buying
6. Nomimal, falls, rises
7. Nominal, rises, falls
8. Increases, fall
9. Decreases, rise
10. Deficit
11. Smaller
12. Raise, Loanable Funds
13. AD
14. Current account, capital account
15. Current account is a deficit, capital account is a surplus
16. Capital account is a deficit, current account is a surplus.
17. Depreciate
18. AD
19. AS, out
20. AS, in
21. Public
22. Nominal, rise
23. AS, wages & prices, fall
24. AS, wages & prices, rise
25. Out of, Rise, supply shift in or demand shift out, depreciate
26. $500, $400
27. $200,000, $250,000

(PAGE 2: 28-46)
28. Decrease
29. $50 million, $250 million
30. Rise, rise, fall
31. Fall, fall, rise
32. Fall, rise, fall
33. Rise, fall, rise
34. Nominal GDP, Real GDP
35. Better, worse
36. New spending on capital goods, new inventories, and new housing construction.
37. In, fall, fall, depreciate, demand, in
38. Investment or AD are acceptable, demand, out, rises
39. stagflation, appreciate, risen due to NCO shifting inward. Note: Well import more from Japan b/c their
products are cheaper than U.S. products. The Current Account is a deficit while the Capital Account is a
surplus.
40. supply, out, lowering, lower, increased
41. Domestic savings, raises, Real
42. Long, money supply, price level, Real, monetary neutrality
43. present
44. upward, downward
45. increase government spending, lowering taxes
46. fall, out, rise, fall, decrease, increase

(PAGE 3: 47-68)
47. $1 million, $500,000
48. The $10 billion dollar increase in government spending immediately is entered into the economy. AD
will shift outward by $10 billion and since the spending multiplier is 10, it could increase out to $100 billion.
Of the $10 billion saved in taxes, only 90% ($9 billion) of that will initially find its way into the economy as
the other $1 billion will be saved. Using the spending multiplier, the maximum that AD could shift out
would be $90 billion ($9 billion x 10).
49. amplifies, real interest rates
50. lose, win
51. the natural rate of unemployment or between 4% & 6% (5% will also do)
52. comparative advantage
53. outward, fall, rise, fall, the SRPC will shift inward
54. either increase govt. spending or decrease taxes
55. increases, demand
56. buy, increases, depreciates
57. decrease, increase. The current income tax taxes both consumption and savings. A new sales tax would
only tax consumption. As a result, consumption would be lower. Furthermore, there would be a greater
incentive to save so the supply curve in the Loanable Funds Market would shift out, lowering the Real
Interest Rate.
58. Crowding Out Effect, domestic savings, demand, supply, rise
59. shift outward
60. shift outward
61. rise, fall, fall, fall (C, I & G all fall because the cost of borrowing increases)
62. fall, rise
63. income, expenditure
64. microeconomics
65. macroeconomics
66. market, goods & services, domestically, time, intermediate, prior
67. leisure, household, black, volunteer, distribution
68. per capita

(PAGE 4: 69-94)
69. leakages, injections
70. transfer payments
71. base, current
72. base
73. constant returns
74. increasing returns
75. decreasing returns
76. Foreign Direct, Foreign Portfolio
77. World Bank
78. Efficient Market
79. savings, investment
80. savings, investment, NCO
81. Bureau of Labor Statistics
82. employed, unemployed but seeking work
83. number of unemployed, labor force
84. Labor Participation Rate
85. discourages workers, underemployed
86. Frictional
87. Structural
88. Seasonal
89. Cyclical
90. Theory of Efficiency Wages
91. Fiat
92. Currency & Coin, Demand Deposits such as checking accounts, Travelers Checks
93. Savings accounts, CDs (Timed Deposits), Money Market Accounts, Money Market Mutual Funds
94. 7, appointed, confirmed, 14

(PAGE 5: 95-114)
95. 12
96. Federal Open Market Committee
97. Money
98. Spending
99. discount, federal funds
100. credit, debits
101. velocity
102. Money Supply x Velocity = Price Level x Real Output
103. Price Level
104. Purchasing Power Parity
105. decreases
106. increases
107. raise, lower, Crowd Out, appreciate, Trade
108. output > spending, output < spending
109. 6 months, 2 consecutive quarters
110. The Wealth Effect (causes C to increase), The Interest Rate Effect (Causes I to increase), The Exchange
Rate Effect (causes NX to increase)
111. Potential Output, Full Employment Output, Natural Rate of Output
112. Factors of Production
113. Sticky Wages, Sticky Prices
114. menu costs