ECON FINAL!!

According to the loanable funds model, in the short run, expansionary monetary policy

increases the supply of loanable funds

Suppose the Federal Reserve is following the Taylor Rule, which takes both inflation and business cycles into account when setting the federal funds rate. Also suppose that the inflation rate in the economy is 3% and the unemployment gap is 2%. The economy has a

inflationary gap since actual real GDP exceeds potential real GDP

If the Federal Open Market Committee conducts an open market purchase

interest rates will fall

A rise in the aggregate price level will, other things equal, lead to a

decrease in the quantity of aggregate output demanded

The decision to build more aircraft carriers to keep employment high is an example of

expansionary fiscal policy

If the quantity of money demanded is $100 billion and the quantity of money supplied is $200 billion, then the interest rate will

fall

Money is unique because it is the only asset that can be used as a store of value

false

Currency in circulation plus bank reserves

form the monetary base

Time lags associated with policy decision making and implementation suggest that:

increases in spending to fight a recessionary gap may occur too late

If the quantity of money demanded is $300 billion and the quantity of money supplied is $200 billion, then the interest rate will

rise

When the Fed increases the discount rate, banks are likely to increase their lending, and the money supply increases

False

In the United States, the institution that is charged with determining the size of the monetary base and with regulating the banking system is the

Federal Reserve

If the Fed sells $250 million worth of Treasury bills to commercial banks, the banks pay with their reserves

True

If the Federal Reserve increases reserve requirements, the fed funds rate will likely increase, banks will loan less, and the money supply will likely decrease

True

If the government were required to balance the budget during a recession, it would have to increase taxes and decrease government spending

True

In securitization a pool of loans is assembled and shares of that pool are sold to investors

True

In the short run, changes in the money supply change the interest rate, but in the long run, changes in the money supply have no effect on interest rates

True

Inflation targeting occurs when the central bank sets an explicit goal for the inflation rate and uses monetary policy to hit that goal

True

To close a recessionary gap, the central bank could adopt an expansionary economic policy

True

To decrease interest rates, the Fed should increase the money supply

True

The ______ multiplier is equal to _______

money; 1 divided by the required reserve ratio

The reserve requirement is 20%. Leroy receives $1,000 as a graduation present and deposits the money in his checking account. The bank does NOT want to hold excess reserves. What is the maximum possible expansion in the money supply as a result of this initial deposit?

$4,000 ($1,000/.2 - initial deposit)

If the reserve ratio is 25% (reserves are $20,000), loans are

$60,000

Holding the money supply constant, which reason might cause the equilibrium interest rate to decrease to r1 (downward right)

A recession decreases real GDP

Assume that the economy is at point c. The effect of an increase in the money supply is represented by a shift in the ______ curve to the _________

AD1; right (AD2)

Suppose that initially the economy is at long run equilibrium. If the government cuts taxes, ______will shift to the ________

AD1; right to AD2

If the economy is initially in equilibrium at E2 and the central bank chooses to sell Treasury bills _______ shift to ________ a ______ gap

AD2 will; AD1(shift left), causing; recessionary

Suppose that the economy is in equilibrium at E2. If there is a decrease in government purchases, _______ will shift to the ______, causing a _______ in the price level and a __________ in real GDP

AD2; left; decrease; decrease

Suppose the economy is in equilibrium at E2. If there is an increase in government transfers _________ will shift to the ________, causing a _________ in the price level and ________ in real GDP

AD2; right; increase; increase

As a country's public debt grows, the portion of its budget devoted to interest payments on the debt will decrease

False

Between 1929 and 1933, real GDP increased by a large amount

False

If a government has large consecutive budget deficit but its GDP is growing faster than its debt, the ratio of debt to GDP will increase

False

If the economy is at potential output and the Fed decreases the money supply, run real GDP will likely decrease in the long run

False

If the economy is at potential output and the Fed increases the money supply, real GDP will likely remain the same in the short run

False

Money is whatever the government decrees is money

False

If productivity increases, the ______ curve will shift to the _______

SRAS; right

According to the liquidity preference model, the supply and demand for money determine the interest rate

True

As the opportunity cost of holding monet changes from 5% to 3%, the quantity of money demanded increases

True

The central bank should adopt policies to move the economy to

Y4 (LRAS and AD intersect)

Which asset is the most liquid?

a $50 bill

Over the past few decades in the US, large federal budget deficits most often have been caused by

a depressed economy

Which statement is false?

a fall in the price level will reduce the demand for money, raise the interest rate and increase investment spending

Expansionary monetary policy causes _______ in interest rates in the short run and ________ in interest rates in the long run

a fall; no change

If the economy is in short run equilibrium at Y1 in panel (b), a contractionary policy to bring the economy back to potential output at Yp would attempt to shift the

aggregate demand curve to the left by decreasing aggregate demand

An increase in the money supply that will decrease interest rates causes a shift of the

aggregate demand curve to the right

Raising taxes shifts the ___ curve to the ________

aggregate demand; left

If the price level doubled and someone wanted to maintain the same level of purchasing power, the nominal quantity of money demanded must

also double

In the long run an increase in AD will result in

an increase in the aggregate price level but no change in the aggregate output level

When the Fed uses quantitive easing, it is

buying longer term government debt

Time lags make

correct use of both fiscal and monetary policy challenging

If policy makers want to increase real GDP by $100 billion and the MPC is 0.75 they should ______ taxes by __________

decrease, more than $25 billion

If the Federal Reserve wants to close an inflationary gap, it will _________ the money supply and ________ the interest rate, thus ________ investment spending and GDP. The AD curve will shift to the ________

decrease; raise; lowering; left

The introduction of ATMs

decreased the demand for cash because it reduced the cost of moving from other assets into cash.

A decrease in the supply of money shifts the aggregate ______ curve to the ________

demand; left

Which of the following is designed to prevent bank runs?

deposit insurance

The interest rate effect of the price level is reflected in the

downward slope in aggregate demand

A major reason for the end of the Great Depression was an increase in government spending

during WWII

What function is one that pertains to the Federal Reserve System?

examining and supervising commercial banks in the Fed regions

The government should ______ aggregate demand by ________ taxes to close the _________ gap

expand; cutting; recessionary

Aggregate demand will shift to the RIGHT if

government purchases increase.

If the equilibrium interest rate in the money market is 5%, then at an interest rate of 2%, the quantity of money demanded is _______ than quantity of money supplied

greater than

Producing an aggregate output level that is higher than potential output is possible only if nominal wages:

haven't fully adjusted upward

When long term interest rates are higher than short term rates, as they were in 2010, it

implies that short term interest rate are expected to rise

An increase in the prices of goods in the short run will

increase producers' profit per unit

If the economy is at potential output and the Fed increases the money supply, in the short run the likely result will be a ______ in investment and a _________ in consumption

increase; increase

Increased government spending in the short run will _______ aggregate output and _________aggregate price levels

increase; increase

If the money supply is at MS1 and the Fed conducts expansionary monetary policy, in the short run the interest rate drops to r2. In the long run the demand for monet will _______ and the interest rate will ___________

increase; increase to r1

If the marginal propensity to consume is 0.75, the multiplier for taxes and transfer payments is

less than 4

Which fiscal policy would make a budget surplus larger or a budget deficit smaller?

lower government transfers

When you or your parents pay the tuition at college, money is being used mainly as a

medium of exchange

The government budget balance equals taxes _____ purchases _______ transfers

minus; minus

If the equilibrium interest rate in the money market is 5%, then at an interest rate of 2% sellers of interest bearing financial assets _______ interest rates to find willing buyers

must offer higher

The federal funds rate is the rate

one bank would pay another bank for a loan of reserves

Traveler's checks and checkable deposits are

part of M1

To close an inflationary gap with fiscal policy, the government could

reduce budget allocations to interstate highway maintenance

If long term interest rates are 8% and short term rates are 3%, the market expects

short term rates to rise

The loanable funds model focuses on the

supply of funds from lenders and demand from borrowers

A natural disaster that destroys part of a country's infrastructure is a type of negative ______ shock and therefore shifts the ______ curve to the __________

supply; short run aggregate supply; left

An example of an automatic stabilizer is

tax receipts rising when GDP rises.

When potential output is less than actual aggregate output

the economy faces an inflationary gap

If the money supply increases by 10%, in the long run

the price level increases by 10%

When the aggregate price level rises

there will be a movement along the SRAS curve.

People forgo interest and hold money

to reduce their transaction costs

Medicare, Medicaid, and Social Security are examples of

transfer payments

Changes in short-run aggregate supply can be caused by changes in

wages

The aggregate demand curve is negatively sloped because of the

wealth effect of an aggregate price level change

The cyclically adjusted budget balance is an estimate of

what the budget balance would be if real GDP were exactly equal to potential output