Econ 1202

First National Bank has $80 million in checkable deposits, $15 million in deposits with the Federal Reserve, $5 million cash in the bank vault, and $5 million in government bonds. If the minimum reserve ratio is 20%, how much is the bank required to keep in reserves?

$16 million

The reserve requirement is 20%. Oleg receives $1,000 as a graduation present and deposits the money in his checking account. The bank does NOT want to hold excess reserves. How much of the $1,000 deposit can the bank lend out?

$800

(Figure: Shifts of the AD-AS Curves) Use Figure: Shifts of the AD-AS Curves. A decrease in wages in the short run is illustrated by panel:

(c).

Suppose that real GDP per capita in the United States is $32,000, while its annual growth rate is 2%, and that real GDP per capita in China is $4,000, while its annual growth rate is 7%. How long will it take China's real GDP per capita to double?

10 years

The unemployment rate is _____%.

3.85

Output per capita in the United States in 2016 was about _____ as high as it was in 1900.

8.5 times

According to the latest published figures, what is the present inflation rate in the US?

8.5%

(Figure: The Market for Loanable Funds with Government Borrowing) Use Figure: The Market for Loanable Funds with Government Borrowing. After an increase in government borrowing, the equilibrium interest rate will rise from 6% to _____%, and the amount of private savings will _____.

8; rise

(Figure: Technological Progress and Productivity Growth) Use Figure: Technological Progress and Productivity Growth. Which change in real GDP is MOST likely to have resulted from an increase in the quality (as well as quantity) of government spending on education?

B to C

(Figure: Productivity) Use Figure: Productivity. An improvement in technology, with everything else remaining unchanged, is shown in the diagram as a movement from:

B to C.

Which of the following statements is not true about the financial stsyem?

Historically, recessions that have been caused by disruptions in the financial system have been mild.

As you know, Aggregate demand and our GDP level is made up of all spending in the household, business, government and net export sectors. Which one of these sectors is the largest and about what percentage of GDP does it take up?

Household with about 70%.

Which one of the following statements is true about the US Government's net debt as a percentage of GDP?

In the last six years it has increased from 77% to about 120%.

Identify whether the actions or scenarios would likely increase or decrease the natural rate of unemployment.

Increasing the minimum wage: increase Reducing workers' collective bargaining rights decrease Extra financial benefits for the unemployed increase A large number of young people entering the labor force increase More funding for government worker training programs decrease An increase in union membership increase An increase in information about job opportunities decrease

Which of the following statements is true about the measure of Real GDP Per Capita?

It is a measure of a country's standard of living and most of the world's countries with the highest real per capita GDP are not the countries with the biggest economies.

Which of the following is a correct statement about Demand Pull Inflation?

It is a result of a shift of the Aggregate Demand Curve and with it we see an inverse relationship between inflation and unemployment.

Which of the following is a correct statement about Cost Push inflation?

It is a result of a shift of the Aggregate Supply Curve and with it we see a positive relationship between inflation and unemployment.

The table contains data on the relationship between physical capital per worker and real GDP per worker. Graph the data. Based on the table and the graph, which is true of marginal productivity of physical capital (MPK)?

MPK is positive.

A friend claims that the government should never borrow to finance its expenditures because such borrowing crowds out private investment spending. Is your friend right?

No. If the economy is depressed, government borrowing will have little impact on interest rates and could lead to higher incomes.

Which of the following is true about the relationship between expected future inflation and interest rates?

Over time, the level of interest rate closely follows expected future inflation.

Which of the following government policy actions would have a negative impact on economic growth?

Reducing subsidies to building roads, seaports and information networks.

_____ is the process of setting up assets by pooling individual loans and selling shares in the pool.

Securitization

Which one of the following statements about recent oil prices is true?

Since the beginning of 2021 the world price of oil has more that doubled

Beginning at a macroeconomic equilibrium, when short run aggregate supply for some reason decreases (shifts to the left) we would likely see which of the following occur?

Stagflation

Which group within the Fed meets eight times a year to decide on the direction of Monetary policy?

The Federal Open Market Committee

Which of the following statements about the 12 member banks of the Fed is incorrect?

The Treasury Secretary of the US appoints all of the 9 board of directors for each bank..

Looking at the present economic issues, why is it true that correcting for today's inflation seems to be the job for monetary policy and not fiscal policy?

The economy has to be slowed down some and that may not be a good policical move for politicians in an election year.

Suppose the government increases taxes by more than is necessary to close an inflationary gap. What is the MOST likely result?

The economy will move into recession.

There were a number of causes of the financial crisis of 2008. As we discussed, one major cause of this crisis was the increasing use of mortgage backed securities. How did this change the way banks issued mortgages for houses?

The existance of these mortgage backed securities changed the underwriting behavior of banks. The focus was not creating safe mortgages anymore, rather the motivation was to make as many mortgages as possible so they could sell them through these mortgage backed securities.

In 1999 the new legislation that in effect killed the Glass Steagall laws on banking that were in effect since 1933 lead to what major event?

The financial crisis of 2008

Which one of the following statements is true regarding the inflation that we experienced during the 1960's and 1970's?

The inflation in the 1960's was demand pull related and the inflation in the 1970's was cost push related.

Which is true if a nation is currently experiencing full employment?

The rate of cyclical unemployment is 0% .

How can we show the impact of expansionary Monetary Policy using the Loanable Funds Market Model?

The supply curve will shift to the right thus lowering the rate

How can we show the impact of contractionary Monetary Policy using the Loanable Funds Market Model?

The supply of loanable funds curve will shift to the left thus increasing the rate.

The time period known as the great moderation refers to which of the following?

The time period since the early 1980's to the present where we have seen less volitility in the US annual economic growth rates.

Ruritania's Ministry of Economics has considered various plans to stimulate economic growth in the kingdom. Which proposal would have the best chance of success? Which source of productivity growth does the best proposal directly influence?

To increase the general level of skills in the labor force, develop higher levels of quantitative skills through free classes at community colleges. human capital

Which one of the following measures of unemployment is the official measure that is used by the government when it reports the unemployment rate to the public?

U-3

Which one of the following measures of unemployment would have the highest percent value?

U-6

Which one of the following statements describes today's economic situation?

We are now in an inflationary gap that has likely been caused by too much expansionary fiscal and monetary policy during the last two years.

In what situation is the use of Monetary Policy not effective?

When the economy experiences stagflation

Which of the following best describes stagflation?

With Stagflation we see a positive realtionship between inflation and unemployment rate.

(Figure: Inflationary and Recessionary Gaps) Use Figure: Inflationary and Recessionary Gaps. Which equation measures an inflationary gap?

Y3 - Y2

Suppose that a presidential candidate who promised large personal income tax increases is elected. Which outcome is MOST likely?

a decrease in aggregate demand

Which of the following best defines a financial intermediary?

a financial institution that transforms investor funds into financial assets

(Figure: Policy Alternatives) Use Figure: Policy Alternatives. If the economy is in equilibrium at Y1 in panel (a), and the government does not intervene, the result will likely be:

a shift of SRAS1 to SRAS2.

Classify each government policy according to whether it encourages or discourages convergence. Which phrase best characterizes the speed with which convergence takes place?

encourages convergence: public education higher education subsidies public investment in infrastructure tax breaks for research and development discourages convergence increases in government borrowing increases in corporate tax rates increases in income taxes slowly over many years

If a government runs large budget deficits over consecutive years, with the public debt growing _____ GDP, the ratio of debt to GDP will _____.

faster than; increase

Currency in the United States today is _____ money.

fiat

People who are changing jobs are counted in _____ unemployment.

frictional

The natural rate of unemployment equals

frictional unemployment plus structural unemployment.

(Figure: Policy Alternatives) Use Figure: Policy Alternatives. If the economy is in equilibrium at Y1 in panel (a), it is:

in a recessionary gap.

Suppose that the economy is in a recessionary gap. To move aggregate output closer to potential output, the BEST fiscal policy option is to:

increase government purchases.

A rise in labor productivity will MOST likely result in a(n):

increase in aggregate supply.

(Figure: Shift of the Aggregate Demand Curve) Use Figure: Shift of the Aggregate Demand Curve. A movement from point A on AD1 to point C on AD2 may result from a(n):

increase in the total quantity of consumer goods and services demanded.

(Figure: AD-AS Model I) Use Figure: AD-AS Model I. If the economy is at point X, the appropriate monetary policy is to:

increase the money supply and decrease interest rates.

High unemployment typically leads to political pressure to increase the benefit period for unemployment insurance. In a standard analysis, doing so will:

increase unemployment.

If Congress imposes a $5 tax on each ATM transaction, the demand for money will likely:

increase.

(Figure: Fiscal Policy Choices) Use Figure: Fiscal Policy Choices. If the government uses discretionary fiscal policy in the economy depicted in panel (a) when real GDP is Y1, government spending is likely to be _____, and taxes are likely to be _____.

increased; cut

Which factor is the MOST widely accepted measure of economic growth over time?

increases in real GDP per capita

Suppose you transfer $500 from your savings account to your checking account. With this transaction, M1 _____ and M2 _____.

increases; stays the same

Expansionary fiscal policy includes:

increasing government spending.

(Figure: Short- and Long-Run Equilibrium II) Use Figure: Short- and Long-Run Equilibrium II. If the economy is in short-run macroeconomic equilibrium at E1, it is in a(n):

inflationary gap.

(Figure: AD-AS) Use Figure: AD-AS. Consider an economy that is producing an aggregate output of Y1. The economy faces a(n) _____ gap, which can be closed by _____ fiscal policy.

inflationary; contractionary

A firm does NOT want to borrow money for a project when the:

interest rate is higher than the expected rate of return on the project.

An example of human capital is a person's:

job skills.

Contractionary fiscal policy shifts the aggregate demand curve to the _____ and is used to close a(n) _____ gap.

left; inflationary

Generally, the more liquid an asset is, the:

lower its rate of return.

A bank run occurs when:

many bank customers try to withdraw their funds at one time.

Fiat money is:

money backed by a government's decree that it be accepted as a means of payment.

Four types of financial intermediaries are:

mutual funds, pension funds, life insurance companies, and banks.

Someone who must decide whether to receive $100 now or $100 one year from now will probably choose _____, since there is a(n) _____ in waiting to use the money.

now; opportunity cost

Sub-Saharan Africa is poor mainly because:

of political instability and civil wars.

Productivity is declining when:

population growth exceeds real GDP growth.

An increase in perceived business opportunities will generally _____ the demand curve for loanable funds.

right-shift

(Figure: The Market for Loanable Funds II) Use Figure: The Market for Loanable Funds II. An increase in government borrowing will shift the demand curve for loanable funds to the _____, causing the interest rate to _____.

right; increase

When the short-term interest rate _____, the opportunity cost of holding money _____, and the quantity of money individuals want to hold _____.

rises; rises; falls

The banking crisis of 1907 that preceded the Great Depression and the banking crisis in 2008 were both caused by:

risky speculation in real estate and the stock market.

(Figure: The Money Supply and Aggregate Demand) Use Figure: The Money Supply and Aggregate Demand. If the economy is in an inflationary gap, the Federal Reserve will _____ Treasury bills, which will _____ the money supply and _____ interest rates. This is shown in panel ___________

sell; decrease; raise; (b)

(Figure: An Increase in Aggregate Demand) Use Figure: An Increase in Aggregate Demand. Assume that the economy is initially in long-run equilibrium at YP and P1. Now suppose that there is an increase in the level of government purchases at each price level. This will:

shift the aggregate demand curve from AD1 to AD2.

A general decrease in wages will result primarily in the _____ curve shifting to the _____.

short-run aggregate supply; right

According to the efficient markets hypothesis:

stocks are usually neither overpriced nor underpriced.

An effective minimum wage that is binding on the market can lead to:

structural unemployment.

In the United States during the 1970s, oil prices increased dramatically and shifted:

the SRAS curve to the left.

Which of the factors would decrease the rate of frictional unemployment?

the advent of the Internet, which makes finding available jobs easier

Every year, more and more purchases are made with credit cards on the Internet. Given this trend, all else equal, we would expect:

the money demand curve to shift inward.

All else equal, if the required reserve ratio falls:

the money multiplier increases.

Banks don't lend out all funds that are deposited because:

they have to satisfy any depositor who wants to withdraw funds.

When the economy is doing well, a significant share of unemployment is frictional.

true

(Figure: A Money Market) Use Figure: A Money Market. Holding the money supply constant, which of the following might cause the equilibrium interest rate to decrease to r1?

A recession decreases real GDP.

Which one of the following statements about the economic impact of a financial crisis is true?

A recession that is caused by a financial crisis is usually deeper and has a longer recovery.

(Figure: Fiscal Policy II) Use Figure: Fiscal Policy II. Suppose that this economy is in equilibrium at E1. If there is an increase in government purchases, _____ will shift to the _____, causing a(n) _____ in the price level and a(n) _____ in real GDP.

AD1; right; increase; increase

(Figure: Fiscal Policy I) Use Figure: Fiscal Policy I. Suppose that this economy is in equilibrium at E2. If there is an increase in government transfers, _____ will shift to the _____, causing a(n) _____ in the price level and a(n) _____ in real GDP.

AD2; right; increase; increase

Which of the following illustrates cyclical unemployment?

An autoworker is laid off because of a decline in automobile sales caused by a recession.

Beginning at a macroeconomic equilibrium, when aggregate demand for some reason increases (shifts to the right) we would likely see which of the following occur?

An increase in price level

Raising taxes shifts the _____ curve to the _____.

aggregate demand; left

Lucia withdraws $6,000 from her checking account to pay tuition this semester. Assume that the reserve requirement is 20% and that banks do not hold excess reserves. As a result of the withdrawal, required reserves:

decrease by $1,200.

If the Fed conducts an open-market sale, bank reserves _____, and the money supply is likely to _____.

decrease; decrease

A decrease in the supply of money with no change in the demand for money will lead to a(n) _____ in the equilibrium quantity of money and a _____ in the equilibrium interest rate.

decrease; rise

Shadow banking:

doesn't look like traditional banking but serves similar purposes while posing significantly more risk.

The money demand curve is _____ because the opportunity cost of holding money is _____ related to the interest rate.

downward sloping; positively