Ch. 16/20
In a 100-percent-reserve banking system, if people decided to decrease the amount of currency they held by increasing the amount they held in checkable deposits, then...
M1 would not change
aggregate-demand curve
a curve that shows the quantity of goods and services that households, firms, the government, and customers abroad want to buy at each price level
As the price level rises...
people will want to buy fewer bonds, so the interest rate will rise
When the Fed makes open-market purchases bank...
deposits and lending increase
Money is...
the most liquid asset
M2
-everything in M1 + -small time deposits -money market mutual funds -a few minor categories
The 3 Functions of Money
1)medium of exchange 2)unit of account 3)store of value
During World War 2, the economy's production increased about...
100 percent and prices rose about 20 percent
During recessions declines in investment account for about...
2/3 of the decline in real GDP.
If the reserve ratio is 20 percent, then $100 of new reserves can generate
$500 of new money in the economy
The long-run aggregate supply curve...
(all of the above) -is vertical -a graphical representation of the classical dichotomy -indicates monetary neutrality in the long run
Which of the following is a function of money?
(all of the above) -perfect store of value -most liquid asset -intrinsic value, regardless of which form it takes
Which of the following effects helps to explain the slope of the aggregate-demand curve?
(all of the above) -the exchange-rate affect -the wealth affect -the interest-rate effect
During recessions...
(all of the above) -workers are laid off -factories are idle -firms may find that they're unable to sell all they produce
Which is included in both M1 and M2?
(all the above) -currency -demand deposit -other checkable deposits
*Pessimism* In the short run what happens to the price level and real GDP?
Both the price level and real GDP fall.
John and Jane decide to go on vacation. As a result, they withdrew $2,500 from their savings account. As a result of this transfer by itself,...
M1 increases by $2,500 and M2 stays the same
A bank has a 10 percent reserve requirement, $5,000 in deposits, and has loaned out all it can given the reserve requirement.
It has $500 in reserves and $4,500 in loans
The Sticky-Price Theory
emphasizes that the prices of some goods and services also adjust sluggishly in response to changing economic conditions. This slow adjustment in prices occurs in part because there are costs to adjusting prices, called menu costs
Other things the same, if prices fell when firms and workers were expecting them to rise, then...
employment and production would fall
An increase in the interest rate causes investment to...
fall and exchange rate to appreciate
Other things the same, as the price level rises, the real value of a dollar...
falls and interest rate rises
If the money multiplier is 2 and the Fed buys $50,o00 worth of bonds, what happens to the money supply?
increases by $100,000
Commodity money is...
money with intrinsic value
Fiat Money
money without intrinsic value that is used as money because of a government decree
Suppose the economy is in long-run equilibrium. If there's a tax cut at the same time that major new sources of oil are discovered in the country, then in the short-run...
real GDP will rise and price level might raise, fall, or stay the same
When we say that economic fluctuations are "irregular and unpredictable" we mean that...
recessions do not occur at regular intervals
Tax cuts shift aggregate demand...
right as do increases in government spending
The Sticky-Wage Theory
says that the short-run aggregate-supply curve slopes upward because nominal wages are slow to adjust to changing economic conditions (wages are "sticky")
Money
set of assets in the economy that people regularly use to buy goods/services from each other
double coincidence of wants
the unlikely occurrence that two people each have a good or service that the other wants
M1
-demand deposits -traveler's checks -other checkable deposits -currency
During 2008-2009 unemployment rose from about 4.4% to about...
8%
Medium of Exchange
an item that buyers give to sellers when they want to purchase goods and services
Money market mutual funds are included in...
M2, but not M1
Store of Value
an item that people can use to transfer purchasing power from the present to the future
Other things the same, if U.S. price level falls, then...
U.S. residents want to buy more foreign bonds. The real exchange rate falls.
aggregate-supply curve
a curve that shows quantity of goods and services that firms choose to produce and sell at each price level
The recessions of the 1970s are often attributed to...
an increase in oil prices
Banks runs...
are a problem because banks only hold a fraction of deposits as reserves
Demand Deposits
balances in bank accounts that depositors can access on demand by writing a check
If the federal funds rate were above the level the Fed targeted, the Fed could move the rate back towards its target by...
buying bonds. This buying would increase the money supply.
Under a fractional-reserve banking system, banks...
generally lend out a majority of the funds deposited
In a system of 100-percent-reserve banking the purpose of a bank is to...
give depositors a safe place to keep their money
Examples of commodity money
gold and cigarettes in POW camps
Recessions in China & India would cause...
the US price level and real GDP to fall
Which of the following shifts the short-run aggregate supply curve right?
neither an increase in the price level that is greater than expected nor an increase in the expected price level
People had been expecting the price level to be 170 but it turns out to be 165. Diamond Power Tools increases the number of workers it employs. What could explain this?
neither sticky wage theory nor sticky price theory
*political instability abroad* What would the change in exchange rate make happen to US net exports & US aggregate demands?
net exports would fall which by itself would decrease US aggregate demand
Other things the same, an increase in the expected price level shifts...
short-run aggregate supply left
In 1936, John Maynard Keynes published a book, The General Theory, which attempted to explain...
short-run economic fluctuations
Investment is a...
small part of real GDP, yet it accounts for a large share of the fluctuation in real GDP
A decrease in the money supply might indicate that the Fed had...
sold bonds in an attempt to increase the federal funds rate
Other things the same, as the price level falls...
the dollar depreciates
Liquidity
the ease with which an asset can be converted into the economy's medium of exchange
Which of the following shifts aggregate demand right?
the implementation of an investment tax credit but not a decrease in the price level
Unit of Account
the yardstick people use to post prices and record debts
Which of the following typically rises during a recession?
unemployment
The measure of the money stock called M1 includes...
wealth held by people in their checking accounts