Econ 2003 final study guide

Which of the following statements is correct?

All items that are included in M1 are included also in M2

Which of the following explains why production rises in most years?

All of the above are correct (increases in labor force, increases in capital stock, and advances in technological knowledge)

Which of the following shifts short run aggregate supply right?

an increase in immigration from abroad

All else equal, which of the following would tend to cause a real GDP per person to rise?

an increase in investment in human capital

A reduction in personal income taxes increases aggregate demand through

an increase in personal consumption

(figure 34-7) If the economy is at point b, a policy to restore full employment would be

an increase in the money supply

Which of the following events would shift money demand to the right?

an increase in the price level, but not an increase in the interest rate

The curve that shows the quantity of goods and services that firms produce and sell

as it relates to the overall price level is called the aggregate supply curve

High and unexpected inflation has a greater cost

for those who save than for those who borrow

The existence of money leads to

greater specialization and a higher standard of living

Other things the same, if the money supply rises by 2% and people were expecting it to rise by 5% then some firms have

higher than desired prices, which depresses their sales

During periods of deflation, the nominal interest rate will be

lower than the real interest rate

According to liquidity preference theory, the opportunity cost of holding money is

the interest rate on bonds

Your nominal wage increases from $12 per hour to $13 per hour. At the same time, the price level increases from 140 to 147. As a result

the number of dollars you receive increases and the purchasing power of the dollars you receive increases

Suppose the economy is in long run equilibrium. In a short span of time, there is a sharp rise in the stock market, an increase in government purchases, an increase in the money supply and a decline in the value of the dollar. In the short run

the price level and real GDP will both rise

Wages set above the equilibrium wage by

firms to increase productivity are called efficiency wages

(Table 29-4) If someone deposits $500 into the First Bank of Fairfeld and if the bank makes new loans so as to keep its reserve ratio unchanged, then the amount of new loans it makes will be

$437.50

The fisher effect

1 by 1 adjustment of the nominal interest rate to the inflation rate

If the reserve ration is 10 percent, the money multiplier is

10

(Table 24-4) If 2012 is the base year then the consumer price index was

100 in 2012, 123.8 in 2013, and 170 in 2014

(table 24-2) if 2012 is the base year, then the CPI for 2013 was

104.4

Based on the quantity equation if M= 150, V=4, and Y=300 then P=

2

(figure 34-1) There is an excess demand for money at the interest rate of

2%

Assume the MPC is 0.72. The multiplier is

3.57

(Table 29-6) The Bank of Pleasantville's reserve ratio is

6.0 percent

Fran buys 1000 shares of stock issued by Miller Brewer. In turn , Miller uses the funds to buy new machinery for one of its breweries.

Fran is saving; Miller is investing

Ethan purchases a new house for $170000. Ethan's purchase of the house contributes $170000 to which magnitude in the identity Y=C+I+G?

I

For an imaginary economy, the consumer price index was 80 in 2014, 100 in 2015, and 140 in 2016. Which of the following statements is correct?

If the basket of goods that is used to calculate the CPI cost $25 in 2015, then that basket of goods cost $35 in 2016

A bank has a 20 percent reserve requirement, $8000 in loans, and has loaned out all it can given the reserve requirement.

It has $10,000 in deposits

Which of the following is correct?

The Federal Reserve has 12 banks. The board of governors has 7 members who serve 14 year terms

Consider the expressions T - G and Y - T - C. Which of the following statements is correct?

The first one of these is public saving; the second one is private saving

Which of the following is an example of the menu costs of inflation?

Tito's Restaurant has to print new menus to update its prices compared to other prices in the economy

Other things the same, if the US price level falls then

US residents want to buy more foreign bonds. The real exchange rate falls

Which of the following reduces the interest rate?

a decrease in government expenditures and an increase in the money supply

Money

all of the above are correct (is more efficient than barter, makes trade easier, allows greater specialization)

Which of the following is correct concerning the FOMC?

all of the above are correct (members of the board of governors have the majority of the votes, the New York federal reserve bank district president is always a voting member, and all federal reserve bank presidents attend the meetings)

Suppose the economy starts at Z. If changes occur that move the economy to a new short run equilibrium of P1 and Y1 then it must be the case that

aggregate demand has decreased

The costs of inflation are

all of the above (arbitrary redistributions of wealth, increased variability of relative prices, shoeleather costs and menu costs)

A firm may pay efficiency wages in an attempt to

all of the above (reduce incentives to shirk, reduce turnover, and attract a well-qualified pool of applicants)

The Federal Reserve

all of the above are correct (created in 1913, U.S. central bank, & has other duties in addition to controlling the money supply

The natural unemployment rate includes

both frictional and structural unemployment

The money supply increases when the Fed

buys bonds. the increase will be larger, the smaller is the reserve ratio.

GDP includes the value of all

final goods and services produced within a country using primarily market prices to measure the value of goods and services

Suppose stock prices rise. To offset the resulting change in output the Federal Reserve could

decrease the money supply, this decrease would also move the price level farther from its value before the rise in stock prices.

To increase the money supply, the Fed could

decrease the reserve requirement

When the interest rate decreases the opportunity cost of holding money

decreases, so the quantity of money demanded increases

Which of the following is included in both M1 and M2?

demand deposits

If money is neutral, then changes in the quantity of money

do not affect real output

Most economists believe that money neutrality

does not hold in the short run

(Figure 4-18) At a price of $35, there would be

excess supply, and the price would tend to fall from $35 to a lower price

Which of the following policy alternatives would be an appropriate response to a sharp increase in investment spending, assuming policymakers want to stabilize output?

increase taxes

In 2008, the US was in recession. Which of the following things would you not expect to have happened?

increased real GDP

During a recession, unemployment

increases

Aggregate demand shifts right when the federal reserve

increases the money supply

An increase in the MPC

increases the multiplier, so that changes in government expenditures have a larger effect on aggregate demand

An open market purchase

increases the number of dollars in the hands of the public and decreases the number of bonds in the hands of the public

The Fed can reduce the federal funds rate by

increasing the money supply. To increase the money supply it could buy bonds

Recessions come at

irregular intervals. During recessions investment spending falls relatively more than consumption spending

Human capital is

knowledge and skills that workers have acquired

A reduction in U.S net exports would shift U.S. aggregate demand

leftward. In an attempt to stabilize the economy, the government could increase expenditures.

A rational decision maker takes an action only if the

marginal benefit is greater than the marginal cost

According to liquidity preference theory, a decrease in the price level shifts the

money demand curve leftward, so the interest rate decreases

(figure 33-4) If the economy is at A and there is a fall in aggregate demand, in the short run the economy

moves to D

When the dollar appreciates the US

net exports fall, which decreases the aggregate quantity of goods and services demanded

Which of the following shifts aggregate demand to the right?

none of the above

Which of the following is correct?

none of the above (economic fluctuations are easily predicted by competent economists, recessions have never occurred very close together, and spending/income/production do not fluctuate closely with real GDP)

A goal of monetary policy and fiscal policy is to

offset shifts in aggregate demand and thereby stabilize the economy

Banks are able to create money only when

only a fraction of deposits are held in reserve

Other things the same, if technology increases then in the long run

output is higher and prices are lower

As the price level falls

people will want to hold less money so the interest rate falls

Inflation can be measured by the

percentage change in the consumer price index

An increase in the money supply might indicate that the Fed had

purchased bonds in an attempt to reduce the federal funds rate

Reserves decrease if the Federal Reserve

raises the discount rate but not if it auctions more credit

According to the classical dichotomy, which of the following is not influenced by monetary factors?

real GDP

The model of aggregate demand and aggregate supply explains the relationship between

real GDP and the price level

Liquidity

refers to the ease with which an asset can be turned into money

The aggregate demand is described graphically as

sloping downward

Monetary policy is determined by

the Federal Reserve and involves changing the money supply

(figure 30-1) When the money supply curve shifts from MS1 to MS2

the equilibrium value of money decreases

The CPI is a measure of the overall cost of

the goods and services purchased by a typical consumer

The Federal Open Market Committee is

the group at the Federal Reserve that sets monetary policy

According to liquidity preference theory, if the price level decreases then

the interest rate falls because money demand shifts left

When the price level falls

the interest rate falls, so the quantity of goods and services demand rises.

Aggregate demand includes

the quantity of goods and services the government, households, firms, and customers abroad want to buy.

(figure 26-1) What is measured along the vertical axis of the graph?

the real interest rate

When production costs rise

the short run aggregate supply curve shifts to the left

The long run aggregate supply curve shifts left if

there is a natural disaster

In order to maintain stable prices a central bank must

tightly control the money supply

(figure 33-4) If the economy starts at A, a decrease in the money supply moves the economy

to C in the long run

A decrease in taxes shifts aggregate demand

to the right. the larger the multiplier is, the farther it shifts