Chapter 14 (week 8)

The formula for the simple deposit multiplier is

1/RR

The economic definition of money​ is:

Any asset that people are generally willing to accept in exchange for goods and services.

If the inflation rate for 1970 is greater than the inflation rate for​ 1969, it is likely that the recession was caused by a negative supply shock rather than an increase in aggregate demand .

Decreases in aggregate demand would tend to lead to lower inflation​ rates, while supply shocks would be likely to lead to higher inflation rates.

Which of the following best explains the difference between commodity money and fiat​ money?

Fiat money has no value except as​ money, whereas commodity money has value independent of its use as money.

Which one of the following is not true when the economy is in macroeconomic​ equilibrium?

In the​ long-run macroeconomic​ equilibrium, SRAS =AD at a point on the LRAS curve.​ Thus, at this​ point, the economy will produce potential GDP and will be at full​ employment, so the only unemployment remaining will be frictional and structural unemployment. When the economy is at​ long-run equilibrium, firms will have excess capacity.

The Federal Reserve uses two definitions of the money​ supply, M1 and​ M2, because

M1 is a narrow definition focusing more on​ liquidity, whereas M2 is a broader definition of the money supply.

b. Even though real GDP in 1970 was slightly greater than real GDP in​ 1969, the unemployment rate increased substantially from 1969 to 1970. Which of the following explains how unemployment could have increased even though output did not​ change?

Potential GDP​ rose, but actual GDP did​ not, and thus the economy is now below full employment.​ So, the unemployment rose even though output did not change. Potential GDP increased​ significantly, but actual GDP did​ not, and thus there is unemployment.

i. An increase in the expected price level will cause wages to rise and costs to​ rise, decreasing aggregate supply​ (Graph 1). ii. An increase in​ households' expectations of their future income will increase the aggregate demand​ (Graph 4). iii. A decrease in the price of an important natural resource will lower the cost of production​ (Graph 2). iv. A decrease in​ firms' expectations of the future profitability of investment spending will lower aggregate demand​ (Graph 3).

The aggregate supply curve shifts as a result of increases in the labor force and capital​ stock, technological​ change, expected increases or decreases in the future price​ level, adjustments of workers and firms to errors in past expectations about the price​ level, and unexpected increases or decreases in the price of an important raw material. A supply shock is an unexpected event that causes the​ short-run aggregate supply curve to shift.

a. In​ 1969, actual real GDP was greater than potential real GDP. Which of the following best explains​ this?

The economy can produce a level of GDP above potential GDP in the short run.

How do the banks​ "create money"?

When people deposit currency or checks in their checking​ accounts, there is an increase in checking account deposits. Banks gain reserves. They keep the required reserves and make new loans with the rest of the reserves and new deposits are created. Since money supply equals currency plus checking account​ deposits, the money supply increases too.​ Thus, when banks perform their regular​ day-to-day functions, they​ "create money". When there is an increase in checking account​ deposits, banks gain reserves and make new​ loans, and the money supply expands.

Stagflation is a

When the economy experiences a high rate of inflation along with high unemployment and low actual​ GDP, or what is usually known as​ recession, this unfortunate situation is known as stagflation. combination of inflation and recession

Suppose you decide to withdraw​ $100 in cash from your checking account. Which one of the following choices accurately shows the effect of this transaction on your​ bank's balance sheet.

Your​ bank's balance sheet shows a decrease in reserves by​ $100 and a decrease in deposits by​ $100.

A supply shock is

a sudden increase in the price of an important natural​ resource, resulting in a leftward shift of the SRAS curve.

Stagflation occurs when

a supply shock shifts the SRAS to the left, increasing the price level and decreasing actual GDP

The process of an economy adjusting from a recession back to potential GDP in the long run without any government intervention is known as

an automatic mechanism.

Excess reserves

are reserves banks keep above the legal requirement.

8) Refer to the diagram to the right. Suppose the economy is at point A. If investment spending increases in the​ economy, where will the eventual long run equilibrium​ be?

c

Look carefully at the following list. a. The coins in your pocket. b. The funds in your checking account. c. The funds in your savings account. d. The​ traveler's check that you have left over from a trip. e. Your Citibank Platinum MasterCard. Which of the things above are NOT included in the M1 LOADING... definition of the money​ supply?

c​ & e

In the dynamic aggregate demand and aggregate supply​ model, if aggregate demand increases faster than potential real​ GDP, there will be

inflation

If a person withdraws​ $500 from​ his/her checking account and holds it as​ currency, then M1 will​ ________ and M2 will​ ________.

not​ change; not change

Money serves as a standard of deferred payment when

payments agreed to today but made in the future are in terms of money.

Money serves as a unit of account when

prices of goods and services are stated in terms of money.

A baseball fan with a Mike Trout baseball card wants to trade it for a Miguel Cabrera baseball​ card, but everyone the fan knows who has a Cabrera card​ doesn't want a Trout card. Economists characterize this problem as a failure of the

principle of a double coincidence of wants.

At the new​ long-run equilibrium,

real GDP and the unemployment rate will remain the​ same, but price level will be higher compared to the initial​ equilibrium, prior to the increase in exports.

In the dynamic aggregate demand and aggregate supply​ model, if aggregate demand increases slower than potential real​ GDP, there will be

recession

Which of the following best explains how the economy will adjust back to​ long-run equilibrium?

​Short-run aggregate supply will decrease​ (shift leftward) as firms and workers adjust to the new price level.

Suppose there has been an increase in investment. As a​ result, real GDP will​ ________ in the short​ run, and​ ________ in the long run.

​increase; decrease to its initial value

If a person withdraws​ $500 from​ his/her savings account and puts it in​ his/her checking​ account, then M1 will​ ________ and M2 will​ ________.

​increase; not change