ECON 211 Exam 3 - MindTap

A bank's reserve ratio is 8 percent and the bank has $1,000 in deposits. Its reserves amount to

$80

Assuming a multiplier effect, but no crowding-out or investment-accelerator effects, a $100 billion increase in government expenditures shifts aggregate

demand rightward by more than $100 billion

The marginal propensity to consume (MPC) is defined as the fraction of

extra income that a household consumes rather than saves

Refer to Figure 33-4. If the economy starts at A and moves to D in the short run, the economy

moves to C in the long run

Refer to 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

Government purchases are said to have a

multiplier effect on aggregate demand

The most common method employed by the Fed to increase the money supply is the

purchase of U.S. government bonds

Refer to Financial Crisis. If nominal wages are sticky, which of the following helps explains the change in output?

real wages rise, so firms choose to produce less

Suppose the economy is in long-run equilibrium. If the government increases its expenditures, eventually the increase in aggregate demand causes price expectations to

rise. This rise in price expectations shifts the short-run aggregate supply curve to the left.

An economic expansion caused by a shift in aggregate demand remedies itself over time as the expected price level

rises, shifting aggregate supply left.

In the long run, fiscal policy influences

saving, investment, and growth; in the short run, fiscal policy primarily influences the aggregate demand for goods and services

When the Federal Reserve increases the Federal Funds target rate, it achieves this target by

selling government bonds. This action will reduce investment and shift aggregate demand to the left.

Refer to Figure 34-8. An increase in government purchases will

shift aggregate demand from AD1 to AD2

Changes in the interest rate

shift aggregate demand if they are caused by fiscal or monetary policy, but not if they are caused by changes in the price level

Refer to Stock Market Boom 2015. In the long run, the change in price expectations created by the stock market boom shifts

short-run aggregate supply left

Refer to Financial Crisis. In the long run, if the Fed does not respond, the change in price expectations created by the crisis shifts

short-run aggregate supply right

Which of the following would cause prices to fall and output to rise in the short run?

short-run aggregate supply shifts right

Economic expansions in Europe and China would cause

the U.S. price level and real GDP to rise.

Which of the following can banks use to borrow from the Federal Reserve?

the discount window or the term auction facility

When the Fed sells government bonds,

the money supply decreases and the federal funds rate increases

The government builds a new water-treatment plant. The owner of the company that builds the plant pays her workers. The workers increase their spending. Firms from which the workers buy goods increase their output. This type of effect on spending illustrates

the multiplier effect

Which of the following tends to make aggregate demand shift further to the right than the amount by which government expenditures increase?

the multiplier effect

Refer to Stock Market Boom 2015. How is the new long-run equilibrium different from the original one?

the price level is higher and real GDP is the same

The term crowding-out effect refers to

the reduction in aggregate demand that results when a fiscal expansion causes the interest rate to increase

When production costs rise,

the short-run aggregate supply curve shifts to the left.

The logic of the multiplier effect applies

to any change in spending on any component of GDP

The Fed purchases $200 worth of government bonds from the public. The reserve requirement is 12.5 percent, people hold no currency, and the banking system keeps no excess reserves. The U.S. money supply eventually increases by

$1,600

If the reserve ratio is 5 percent, then $500 of additional reserves can create up to

$10,000 of new money

Suppose the MPC is 0.9. There are no crowding out or investment accelerator effects. If the government increases its expenditures by $30 billion, then by how much does aggregate demand shift to the right? If the government decreases taxes by $30 billion, then by how far does aggregate demand shift to the right?

$300 billion and $270 billion

Refer to Table 29-6. If the Fed's reserve requirement is 5 percent, then what quantity of excess reserves does the Bank of Pleasantville now hold?

$500

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

10

If the MPC is 3/5 then the multiplier is

2.5, so a $100 increase in government spending increases aggregate demand by $250

If the MPC = 0.75, then the government purchases multiplier is about

4

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

Refer to Figure 33-4. If the economy is in long-run equilibrium, then an adverse shift in aggregate supply would move the economy from

C to D

A bank has an 8 percent reserve requirement, $10,000 in deposits, and has loaned out all it can given the reserve requirement.

It has $800 in reserves and $9,200 in loans

Refer to Figure 33-6. Which of the long-run aggregate-supply curves is consistent with a short-run economic expansion?

LRAS1

Refer to Figure 33-7. Suppose the economy starts at Y. If there is a fall in aggregate demand, then the economy moves to

Z in the long run

Refer to Figure 33-5. In Figure 33-5

Point B represents a short-run equilibrium, and Point A represents a long-run equilibrium

Which of the following shifts aggregate demand to the right?

The Fed purchases government bonds on the open market.

Refer to Stock Market Boom 2015. What happens to the expected price level and what impact does this have on wage bargaining?

The expected price level rises. Bargains are struck for higher wages

Which of the following is an example of a decrease in government purchases?

The government cancels an order for new military equipment

Refer to Figure 33-5. Starting from point B and assuming that aggregate demand is held constant, in the long run the economy is likely to experience

a rising price level and a falling level of output, as the economy moves to point A

If net exports fall $40 billion, the MPC is 9/11, and there is a multiplier effect but no crowding out and no investment accelerator, then

aggregate demand falls by 11/2 x $40 billion

Imagine that in 2015 the economy is in long-run equilibrium. Then stock prices rise more than expected and stay high for some time. Refer to Stock Market Boom 2015. Which curve shifts and in which direction?

aggregate demand shifts right

The price level rises in the short run if

aggregate demand shifts right or aggregate supply shifts left

Which of the following would cause stagflation?

aggregate supply shifts left

The multiplier effect

amplifies the effects of an increase in government expenditures, while the crowding-out effect diminishes the effects

Which of the following would raise the price level in both the short and long run?

an increase in government expenditures

Which of the following would increase output in the short run?

an increase in stock prices makes people feel wealthier government spending increases firms chose to purchase more investment goods

Which of the following policy actions shifts the aggregate-demand curve?

an increase in the money supply an increase in taxes an increase in government spending All of the above are correct

The federal funds rate is the interest rate that

banks charge one another for loans

Suppose that there is an increase in the costs of production that shifts the short-run aggregate supply curve left. If there is no policy response, then eventually

because unemployment is high, wages will be bid down and short-run aggregate supply will shift right.

Suppose that banks are less able to raise funds and so lend less. Consequently, because people and households are less able to borrow, they spend less at any given price level than they would otherwise. The crisis is persistent so lending should remain depressed for some time Refer to Financial Crisis. What happens to the price level and real GDP in the short run?

both the price level and real GDP fall

Imagine that in 2015 the economy is in long-run equilibrium. Then stock prices rise more than expected and stay high for some time. Refer to Stock Market Boom 2015. In the short run what happens to the price level and real GDP?

both the price level and real GDP rise

To decrease the interest rate the Federal Reserve could

buy bonds. The fall in the interest rate would increase investment spending

If the federal funds rate were above the level the Federal Reserve had targeted, the Fed could move the rate back towards its target by

buying bonds. This buying would increase reserves

When the government reduces taxes, which of the following decreases?

consumption take-home pay household saving *None of the above is correct*

Permanent tax cuts shift the AD curve

farther to the right than do temporary tax cuts

Wealth is redistributed from debtors to creditors when inflation was expected to be

high and it turns out to be low

When government expenditures increase, the interest rate

increases, making the change in aggregate demand smaller

If the Fed conducts open-market sales, which of the following quantities increase(s)?

interest rates, but not investment or prices

Refer to Table 29-5. If the bank faces a reserve requirement of 8 percent, then the bank

is in a position to make a new loan of $14,000

When the Fed conducts open-market purchases,

it buys Treasury securities, which increases the money supply

In a fractional-reserve banking system, a bank

keeps only a fraction of its deposits in reserve

Assume the MPC is 0.8. Assuming only the multiplier effect matters, a decrease in government purchases of $100 billion will shift the aggregate demand curve to the

left by $500 billion

When there is a reserve requirement, banks

may hold more than, but not less than, the required quantity of reserves