Econ Midterm 3 Study Guide

Money supply and price level is a

Nominal variable

If the dollar buys fewer bananas in Guatemala than in Honduras, then traders could make a profit by

buying bananas in Honduras and selling them in Guatemala, which would raise the price of bananas in Honduras

When taxes decrease, consumption

increases as shown by a shift of the aggregate demand curve to the right.

A depreciation of the U.S. real exchange rate induces U.S. consumers to buy

more domestic goods and fewer foreign goods

When the Federal Reserve decreases the Federal Funds target rate, the lower rate is achieved through

purchases of government bonds, which reduces interest rates and causes people to hold more money.

If aggregate demand shifts left, then in the short run

the price and real GDP both fall.

The quantity of goods and services the economy can produce is a

Real variable

In the short run, an increase in the money supply causes interest rates to

decrease, and aggregate demand to shift right.

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

An increase in the MPC

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

Net Exports =

net capital outflow

Monetary policy is determined by

the Federal Reserve and involves changing the money supply.

If you are vacationing in France and the dollar depreciates relative to the euro, then

the dollar buys fewer euros. It will take more dollars to buy a good that costs 50 euros

Fiscal policy is determined by

the president and Congress and involves changing government spending and taxation.

If the multiplier is 3, then the MPC is

2/3

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

If you go to the bank and notice that a dollar buys more Japanese yen than it used to, then the dollar has

appreciated, making Americans more likely to travel to Japan

If Chileans buy more U.S. stocks and bonds and U.S. residents buy more Chilean wine, then

both US net exports and net capital outflows fall

According to liquidity preference theory, the money supply curve would shift if the Fed

engaged in open-market operations

If the U.S. real exchange rate appreciates, U.S. exports to Europe

fall, and European exports to the US rise

An Italian company builds and operates a pasta factory in the United States. This is an example of Italian

foreign direct investment that increases Italian net capital outflow

Suppose an increase in interest rates causes rising unemployment and falling output. to counter this, the federal reserve would

increase the money supply

When the Fed buys government bonds, the reserves of the banking system

increase, so the money supply increases

When the money supply decreases

interest rates rise and so aggregate demand shifts left.

If the Fed conducts open-market sales, which of the following quantities increases?

interest rates, but not investment or prices

A Chinese company exchanges yuan (Chinese currency) for dollars. It uses these dollars to purchase scrap metal from a U.S. company. As a result of these transactions, Chinese

net exports decrease, and US net capital outflow decreases

If the interest rate decreases

or if the price level increases, then people will want to hold more money.

Which of the following is not a determinant of the long-run level of real GDP?

price level

The nominal exchange rate is the

rate at which a person can trade the currency of one country for another

Which of the following Fed actions would both decrease the money supply?

sell bonds and raise the reserve requirement

People choose to hold a larger quantity of money if

the interest rate falls, which causes the opportunity cost of holding money to fall

The logic of the multiplier effect applies

to any change in spending on any component of GDP

If a country had a trade surplus of $50 billion and then its exports rose by $30 billion and its imports rose by $20 billion, its net exports would now be

$60 million

Real exchange rate=

(e x P)/P*

Which do the following shifts aggregate demand to the left?

A decrease in the money supply

An increase in the amount of capital firms wish to purchase would initially shift

Aggregate demand right

When government spends less, the initial effect is that

Aggregate demand shifts left

Suppose a stock market boom makes people feel wealthier. The increase in wealth would cause people to desire

Increased consumption, which shifts the aggregate demand curve right

The classical dichotomy is

The distinction between real and nominal variables

If speculators gained greater confidence in foreign economies so that they wanted to buy more assets of foreign countries and fewer U.S. bonds,

the dollar would depreciate which would cause aggregate demand to shift right.

A reduction in personal income taxes increases Aggregate Demand through

an increase in personal consumption