Macroeconomics Flashcards

Which component of GDP is typically the most volatile over the business cycle?

Answer: Business investment

Business investment (especially inventories and capital expenditures) fluctuates far more than consumption or government spending across business cycles.

The natural rate of unemployment includes which of the following?

Answer: Frictional and structural unemployment

The natural rate consists of frictional unemployment (job search) and structural unemployment (skill mismatches), excluding cyclical unemployment caused by recessions.

If the MPC (marginal propensity to consume) is 0.75, what is the simple spending multiplier?

Answer: 4.0

The simple multiplier = 1/(1-MPC) = 1/(1-0.75) = 1/0.25 = 4.0.

Which measure of money supply includes savings deposits, money market accounts, and small CDs in addition to M1?

Answer: M2

M2 includes all of M1 (currency, demand deposits) plus savings deposits, money market mutual funds, and small-denomination time deposits.

The IS curve slopes downward because:

Answer: Higher interest rates increase savings and reduce investment

As interest rates rise, investment falls and saving becomes more attractive, reducing equilibrium output—giving the IS curve its negative slope.

Stagflation is characterized by which combination of economic conditions?

Answer: High unemployment and high inflation

Stagflation refers to the simultaneous occurrence of high unemployment (stagnation) and high inflation, famously experienced in the U.S. during the 1970s.

When the central bank purchases government securities in the open market, this is known as:

Answer: Expansionary monetary policy

Open market purchases inject reserves into the banking system, increasing money supply—a classic expansionary monetary policy tool.