Macro Economics Ch. 11, Macro ******** to the second power, Econ Quiz 15, Econ 202 Ch. 15.4, ECO CH15, ECO2013 - Chapter 15, ECO 2013 Chapter 26 Homework, Macro econ chapter 15, 15 - Monetary Policy, Macro Final -- Practice questions, Macroeconomics...

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Disagree. Money is currency plus checking deposits. Wealth is the value of assets minus debts.

"I recently read that more than half of the money issued by the government is actually held by people in foreign countries. If that is true, then the US is less than half as wealthy as the government statistics indicate."

Income is yearly earnings and it doesn't measure wealth which is the value of personal assets less all debts

"Income is only one way of measuring wealth" Do you agree?

Disagree. Checking accounts represent something that the bank owes to the owner of the account. It is a bank liability

"assets are things of value that people own. Liabilities are debts. Therefore, a bank will always consider a cracking account deposit to bean asset and a car loan to be a liability." agree or disagree?

Suppose the reserve requirement is 5%. What is the effect on total checkable deposits in the economy if bank reserves increase by $60 billion?

$1,200 billion increase

If the marginal propensity to consume is 0.75, by how much will an increase in planned investment spending of $200 billion shift up the aggregate expenditure line? If planned investment spending increases by $200 billion, it will shift the aggregate expenditure line up by By how much will it increase equilibrium real GDP? Equilibirum real GDP will increase by

$200 bill %800 bill

A bond is being sold that will pay the owner of the bond $10,000 in one year. if the price of the bond is $9,500, what is the return on the bond?

$500

Inflation Rate=

(Current deflator value- Previous deflator value)/Previous value))*100

GDP deflator =

(Nominal GDP/Real GDP) x 100

Which of the following choices shows how data on nominal wages for 2007 to 2013 and data on the CPI for the same year can be used to calculate the real wage for these years.

(Nominal wages/Price index)*100 = real wages

How do we calculate return on investment?

(increase in price / down payment) x 100

How do we calculate the output gap?

(real GDP - potential GDP) / potential GDP, x 100

Suppose the government increases taxes by $60 billion and the marginal propensity to consume is 0.80. By how will equilibrium GDP change? The change in equilibrium GDP is: $ ____ billion.

- MPC / (1-MPC) -.8/(1-.8)=-4 -4*60=-240

How do investment banks differ from commercial banks?

- investment banks do not take deposits - investment banks generally do not lend to households

What factors brought on the 2007-9 recession?

-The end of the housing bubble -A rapid increase in the price of oil -The financial crisis

The SRAS curve slopes upward because

-in the short run, as prices final of goods and services increase, input prices react more slowly -in the short run, prices of final goods and services adjust more slowly because of menu costs -in the short run, as prices of final goods and services increase, some firms are very slow to adjust their prices, thus their sales increase

Potential GDP

-increase over time as the labor force grows -increases over time as technological change occurs

The federal funds rate is

-the interest rate that banks charge each other for overnight loans -very important for the Fed's monetary policy because the Fed uses the federal funds rate as a monetary policy target since it can control the rate through open market operations

What is true when the economy is in macroeconomic equilibrium?

-when the economy is at long-run equilibrium, total unemployment = frictional + structural unemployment -when the economy is at long-run equilibrium, SRAS=AD=LRAS -when the economy is at long-run equilibrium, actual GDP=potential GDP

Aggregate demand and aggregate supply model Aggregate demand curve Fiscal policy Long-run aggregate supply curve Menu costs Monetary policy Short-run aggregate supply curve Stagflation Supply shock

...

Multiplier

1 / 1 - MPC

What were important developments in the mortgage market that took place during the 1970s?

1) banks began to resell mortgages on the secondary market rather than holding them in their portfolios, 2) Fannie Mae and Freddie Mac began to act as intermediaries between investors and home buyers

The decline in housing prices that began in 2006 led to rising defaults among which borrowers?

1) borrowers who had made only small down payments, 2) alt-A and subprime borrowers, 3) borrowers with adjustable-rate mortgages

Why is price stability one of the Fed's monetary policy goals?

1) by achieving price stability, the Fed also promotes economic growth, 2) if inflation is low, the Fed will have flexibility to lessen the impact of recessions, 3) rising prices erode the value of money as a medium of exchange and store of value

What are the benefits the economy might gain from an explicit inflation target even if the target chosen is not a zero rate of inflation?

1) more accurate expectations of future inflation, 2) improved accountability for the Fed, 3) better communication between the Fed and the public

What are problems caused by high inflation rates?

1) reduces the real value of money, 2) reduces economic growth, 3) creates difficulties for the Fed to conduct monetary policy

What were the monetary policy responses to the economic recession of 2007-2009 ad the accompanying financial crisis?

1) the Fed expanded the eligibility for discount loans to firms other than commercial banks, 2) the Fed purchased large amounts of mortgage-backed securities, 3) the Fed provided loans directly to corporations by purchasing commercial paper

What were the Fed's objectives in using "quantitative easing" and "Operation Twist"?

1) to increase AD, 2) to keep interest rates on mortgages low, 3) to keep interest rates on 10-year Treasury notes low

Why is price stability one of the Fed's monetary policy goals?

1, By achieving price stability, the Fed also promotes economic growth 2.Rising prices erode the value of money as a medium of exchange and store of value 3, If inflation is low, The Fed will have flexibility to lessen the impact of recessions

A suitable medium of exchange (such as the U.S. dollar) meets the following criteria:

1. Acceptability 2. Standardized quality 3. Durability 4. Value relative to weight 5. Divisibility

The variables that cause the aggregate demand curve to shift are divided into three categories:

1. Changes in government policies 2. Changes in the Expectation of Households and firms 3. Changes in foreign variables

The great depression was the worst economic disaster in US history in terms of declines in in real GDP and increases in unemployment rate.... Real GDP changed by ...?

1. Convert nominal to real (Nominal / price index) x 100 1929 | (104.6 / 9.9) x100=1,056.5657 1933 | (57.2/7.4) x 100=772.973 2. Calculate change of real GDP (1933 gdp - 1929 GDP) / 1929 GDP ((772.973-1,056.5657)/1,056.5657) x 100=-26.841 -26.84 %

Anything used as money should fulfill the following functions:

1. Medium of exchange 2. Unit of account 3. Store of value 4. Standard of deferred payment

The Fed has set four monetary policy foals that are intended to promote a well functioning economy

1. Price Stability 2. High Employment 3. Economic Growth 4. Stable Financial Markets

When the economy is at long-run equilibrium

1. SRAS = AD = LRAS 2. Actual GDP = Potential GDP 3. Total Unemployment = Frictional Unemployment + Structural Unemployment

4 Key Factors of Multiplier Effect

1. The multiplier effect occurs both for an increase and a decrease in planned aggregate expenditure. 2. Because the multiplier is greater than 1, the economy is sensitive to changes in autonomous expenditure. 3. The larger the MPC, the larger the value of the multiplier. 4. Our model is somewhat simplified, omitting some real-world complications. For example, as real GDP changes, imports, inflation, interest rates, and income taxes will change.

3 ways to measure GDP

1. expenditure approach 2. income approach 3. value-added (production) approach

[Related to solved problem #5] (page 649) Suppose the average wage at Caterpillar was about $27 per hour in 2013, and that Caterpillar and the US steelworkers Union negotiated a deal to increase the average wage of workers by 2.0 percent through 2018. 2013 CPI = 233 2018 CPI = 253 The percentage change in real wage was...?

1.64% 1. Compound interest on a 2% increase for 5 years 27 ( 1 + 0.02 / 1 ) ^ 1 ( 5 ) = 29.81 2. Convert nominal wages to real wages 2013: (27/233)*100=11.588 2018: (29.81/253)*100=11.7826 3. Percentage change ((11.7826-11.588 )/11.588 )*100=1.6793

How does the price level affect aggregate expenditure in three ways?

1.Rising price levels decreases the real value of household wealth, causing consumption to fall. 2. If price levels rise in the U.S. faster than in other countries, U.S. exports fall and imports rise, causing net exports to fall. 3. When prices rise, firms and households need more money to finance buying and selling. If the supply of money doesn't change, the interest rate must rise; this will cause investment spending to fall.

Which of the following is the formula for the multiplier? Often the multiplier formula is considered to be too simple because it ignores some real world complications. Which of the following is not such a reason?

1/1-MPC The formula ignores the impact of an increase in GDP on consumption.

Real GDP: 8,000; 9,000; 10,000; 11,000; 12,000 C: 7,300; 7,900; 8,500; 9,100; 9,700 I: 1,000; 1,000; 1,000; 1,000; 1,000 G: 1,000; 1,000; 1,000; 1,000; 1,000 NE: -500; -500; -500; -500; -500 A. What is the equi level of real GDP?

10,000 because real GDP = AE

The United States is divided into ______ Federal Reserve Districts.

Use the graph to the right to answer the following questions: a. If the Fed does not take any policy action, in 2017 the level of real GDP will be $______ trillion (enter your response to one decimal place) and the price level will be _____ b. if the Fed wants to keep real GDP at its potential level in 2017, it should use ______________ policy. This means that the trading desk should be ____________ Treasury bills. c. If the Fed takes no policy action, the inflation rate in 2017 will be ______% (enter your response as a percentage rounded to one decimal place). If the Fed uses monetary policy to keep real GDP at its full-employment level, the inflation rate in 2017 will be ______%

18.3 118 a contractionary selling 3.5 1.8

According to the Taylor rule what is the federal funds target rate under the following conditions? Equilibrium real federal funds rate equals 2% Target rate of inflation equals 2% Current inflation rate equals 1% Real GDP is 1% below potential real GDP The federal funds target rate equals ______%. (Enter your response rounded to one decimal place.)

2.0

According to the Taylor rule, what is the federal funds target rate under the following conditions? ≻Equilibrium real federal funds rate equals 3% ≻Target rate of inflation equals 3% ≻Current inflation rate equals 2% ≻Real GDP is 2% below potential real GDP

3.5% The Taylor Rule is: fft = π + ff*r + ½(π gap) + ½(Y gap) where fft = federal funds target π = inflation ff*r = the real equilibrium fed funds rate π gap = inflation gap (π - π target) Y gap = output gap (actual output [e.g. GDP] − output potential) so if you plug everything in you get: fft = 2+3+0.5(2-3)+0.5(-2)=5-0.5-1=3.5%

Real GDP per capita in the United States, as mentioned in the chapter, grew from about $5,600 in 1900 to about $43,700 in 2008, which represents an annual growth rate of 1.9 percent. if the United States continues to grow at this rate, how long will it take for real GDP per capita to double?

36.84 years

[Related to solved problem #5] (page 649) In 1924, the famous novelist F. Scott Fitzgerald wrote an article for the Saturday evening post... CPI 1924 = 17 CPI 2012 = 230 The income you would have needed in 2012 to have had the same purchasing power that Fitzgerald had in 1924 is ..? (Rounded to next dollar)

36000 x (230/17)=487059 1924 Value X (CPI 2012 / CPI1924)

One of the board members is appointed to a _____ year, renewable term as the chairman.

A bond is being sold that will pay the owner of the bond $10,000 in one year. If the price of the bond is $9,500, what i the interest rate on the bond?

5.3%

If Chris pays $500 for a bond that will return $750 in one year, what is the interest rate?

50%

If the CPI was 207 in 2009 and 225 in 2013, what wage would someone who earned a $50k income in 2009 have to earn in 2013 in order to keep her purchasing power constant

54,348 50000*(225/207)=54347.8261

If the money supply is growing at a rate of 6 percent per year, real GDP (real output) is growing at a rate of 0 percent per year, and velocity is constant, what will the inflation rate be?

During the expansion and deflation of the housing bubble, new home sales rose by

60 percent between January 2000 and July 2005 and then fell by 80 percent between July 2005 and May 2010

During the expansion and deflation of the housing bubble, housing prices rose by

60% between Jan. 2000 and Jul. 2005, and then fell by 80% between Jul. 2005 and May 2010

The Federal Reserve Bank's Board of Governors consists of _____ members appointed by the president of the U.S. to 14-year, non-renewable terms.

If the money supply is growing at a rate of 6 percent per year, real GDP (real output) is growing at a rate of 0 percent per year, and velocity is growing at 1 percent per year instead of remaining constant, what will the inflation rate be?

Number of years it takes to double standard of living=

70/growth rate of gdp

7900 - 7300 / 9000 - 8000 = 0.6

Total liabilities Stockholders' equity Total assets = Sum of the above

= Sum of current and long-term liabilities = Assets minus−Liabilities Current assets Property and equipment Goodwill Other assets

Real GDP per capita

= output per person = average consumption = standard of living = Real GDP/Population

123. If the aggregate demand curve shifts in the short run moving the economy out of long-run equilibrium: A. the short-run aggregate supply curve will shift to bring it back into long-run equilibrium. B. the aggregate demand curve will eventually shift back once expectations are taken into account. C. inflation will always occur. D. None of these is true.

A rise in the overall price level means that: A. a given number of dollars won't buy as much in terms of real goods and services. B. dollar-denominated assets have lost their value. C. the cost of living has gone down. D. None of these is true.

A situation in which output decreases while prices increase is often referred to as: A. stagflation. B. inflation. C. negative economic growth. D. a recession.

A temporary decrease in the price of oil would be considered a: A. short-run supply shock. B. long-run supply shock. C. demand shock. D. The changing price of oil would not affect any of these.

A year-long drought that destroys most of the summer's crops would be considered: A. a short-run supply shock. B. a long-run supply shock. C. a short-run demand shock. D. a long-run demand shock.

An aggregate supply curve that slopes upward must be: A. a short-run curve. B. a long-run curve. C. an individual firm's supply curve. D. an individual industry's supply curve.

An asset-price bubble is caused by: A. people buying assets because they believed prices would keep going up and they'd be able to sell for a profit. B. fads that make owning a certain asset fashionable. C. severe inflation within a short period of time. D. the increase in the value of durable goods when the economy is experiencing low inflation.

An economy in which output has decreased and prices have decreased would suggest a: A. decrease in aggregate demand. B. increase in aggregate demand. C. decrease in short-run aggregate supply. D. increase in short-run aggregate supply.

Because the price level shares a negative relationship with aggregate expenditures on GDP, the aggregate demand curve is: A. downward sloping. B. upward sloping. C. perfectly elastic. D. perfectly inelastic.

Because the prices of final goods and services tend to increase more quickly than the prices of inputs, the short run aggregate supply curve is: A. upward sloping. B. downward sloping. C. perfectly elastic. D. perfectly inelastic.

Changes in expectations about future price levels: A. affect only the short-run aggregate supply curve. B. affect only the long-run aggregate supply curve. C. affect both the long-run aggregate supply curve and the short-run aggregate supply curve. D. do not affect either the long-run aggregate supply or the short-run aggregate supply curve.

Consumption spending: A. is negatively related to the overall price level. B. is positively related to the overall price level. C. is equal to the overall price level. D. is not correlated with the overall price level.

Economic stagnation coupled with high inflation is commonly called: A. stagflation. B. inflagnation. C. stagnatory growth. D. inflationary stagnation.

Falling output, in the short run, could be due to: A. a reduction in aggregate demand. B. an increase in short-run aggregate supply. C. an increase in long-run aggregate supply. D. an increase in aggregate demand.

Firms are willing to change the aggregate quantity of output supplied based on price: A. in the short run only. B. in the long run only. C. in both the short and long run. D. Price does not affect the quantity that firms supply.

Higher interest rates caused by an increase in the price level creates: A. an indirect negative relationship between the price level and investment spending. B. an indirect positive relationship between the price level and investment spending. C. the incentive for firms to invest more in new factories. D. the incentive for individuals to spend more on consumption goods.

Higher interest rates make it: A. more expensive to borrow. B. harder to get a loan typically. C. easier to get a loan typically. D. None of these is true.

Higher interest rates motivate: A. firms to invest less in new factories and working capital. B. firms to invest more in new factories and working capital. C. individuals to spend more on consumption goods. D. individuals to spend more on capital goods.

If U.S. prices increase relative to the rest of the world, we would expect: A. imports to increase and exports to fall. B. imports to decrease and exports to increase. C. imports and exports to increase. D. imports and exports to decrease.

If a change in the U.S. price level caused U.S. imports to increase, it must be true that the price level: A. increased. B. decreased. C. became elastic. D. became negative.

If a natural disaster were to cause a negative long-run supply shock to the economy, once the economy adjusts, the new equilibrium will be: A. at a higher price level and lower level of output. B. at a lower price level and higher level of output. C. at a higher price level and higher level of output. D. at a lower price level and lower level of output.

If prices increase only in the United States, then: A. U.S. goods become relatively more expensive than goods from other countries. B. U.S. goods become relatively less expensive than goods from other countries. C. the prices of foreign goods must rise. D. None of these is true.

If the economy is in a recession, and the government increases its spending to bring the economy back to its long-run equilibrium, the long-run level of output will: A. return, with higher prices. B. return, as well as original price level. C. return, with lower prices. D. increase, with higher prices.

If the economy is in a recession, in an effort to move the economy to the long-run equilibrium, the government could: A. increase spending to increase aggregate demand. B. decrease spending to decrease aggregate demand. C. increase spending to decrease aggregate demand. D. decrease spending to increase aggregate demand.

In general, changes in the price level will change: A. the real value of people's wealth and income. B. the nominal value of cash balances. C. the real value of consumption goods only. D. the nominal value of consumption goods and the real value of durable goods.

In general, it is easier to: A. adjust final prices rather than input prices. B. adjust input prices rather than final prices. C. change wage rates for employees than other input prices. D. change input prices than wage rates for employees.

In macroeconomics, the long run is determined by: A. how long it takes for prices to adjust through the whole economy. B. how long it takes for firms to vary all input quantities. C. the longest contract length of a business. D. None of these is true.

In macroeconomics, the long run refers to: A. how long it takes for prices of inputs to fully adjust to changes in economic conditions. B. the time period when sticky wages are in place. C. how long it takes for output decisions to adjust to changes in economic conditions. D. None of these is true.

In the macroeconomy, demand-side shifts change: A. only the price level in the long run, while output eventually returns to its long-run potential level. B. only the output level in the long run, while prices eventually return to its long-run potential level. C. aggregate demand only, which eventually shifts back in the long run. D. aggregate demand only, which is why the price level remains unaffected in the long run.

In the short run, the aggregate supply curve reacts to: A. price changes. B. wage warfare. C. cartels. D. price ceilings.

In the short run, the aggregate supply curve: A. slopes upward. B. slopes downward. C. is perfectly elastic. D. is perfectly inelastic.

Net exports are: A. exports minus imports. B. imports minus exports. C. imports divided by exports. D. imports plus exports.

One major difference between the aggregate supply curve and an individual supply curve is: A. the aggregate supply curve represents production in the economy as a whole rather than just one good or service. B. the aggregate supply curve represents production in an entire market rather than just one firm. C. the aggregate supply curve represents goods and services sold rather than the total actually produced by each firm. D. None of these is true.

One reason stagflation is difficult to recover from is because: A. wages are sticky downward. B. input prices increase with output prices. C. less output requires less inputs to be hired. D. prices tend to adjust more quickly downward than upward.

One reason that explains why the short-run aggregate supply curve is upward sloping is: A. sticky wages. B. cartels keeping prices artificially high. C. the lag involved with public policy making. D. All of these cause it to be upward sloping.

One way the government can boost the economy out of a recession is: A. by increasing government spending. B. with public announcements telling the public to save their money. C. by setting price ceilings on most goods so people can afford them. D. None of these will help an economy in recession.

Short-run decisions refer to the: A. hourly, daily, or weekly decisions that firms have to make. B. immediate decisions that firms have to make that affect production process, not level of output. C. immediate decisions that firms have to make that affect level of output, but not the production process. D. decisions a firm has to make immediately to prepare for either entering or exiting an industry.

Sticky prices refers to: A. the prices of some inputs taking longer to adjust to the price level than the output it creates. B. the prices of some output taking longer to adjust to the price level than the inputs used to create it. C. the price of more durable goods "sticking," and not adjusting to the price level. D. the price of consumer goods not adjusting to the price level.

Sticky wages cause: A. the short-run aggregate supply curve to slope upward. B. the short-run aggregate supply curve to slope downward. C. the long-run aggregate supply curve to slope upward. D. the long-run aggregate supply curve to slope downward.

The aggregate demand curve slopes downward can be explained in part through: A. the wealth effect. B. the negative relationship between the price level and government spending. C. the positive relationship between the price level and net exports. D. All of these are true.

The aggregate demand curve slopes downward in part due to: A. the negative relationship between the price level and net exports. B. the positive relationship between the price level and exports. C. the negative relationship between the price level and imports. D. All of these are true.

The aggregate demand curve: A. shows the relationship between the overall price level and the level of total demand. B. shows the price level on the horizontal axis and output on the vertical axis. C. is upward-sloping, which is counter to the individual demand curve. D. All of these are true.

The aggregate supply and aggregate demand model describes the interaction of which macroeconomic variables? A. Output and the price level B. Employment and immigration C. Prices and immigration D. Output and number of sellers

The aggregate supply and aggregate demand model is used to explain: A. the overall health of the economy. B. the overall effect of large markets within the economy. C. the interaction of all sellers and all buyers within a particular market. D. None of these is true.

The aggregate supply curve is: A. the relationship between the overall price level and total production by firms. B. downward-sloping. C. the sum total of the production of all the firms in the economy for every given price level. D. All of these are true.

The aggregate supply curve shows the relationship between: A. the overall price level in the economy and total production by firms. B. the unemployment rate and total production by firms. C. the overall price level in the economy and the unemployment rate. D. the inflation rate and the overall price level in the economy.

The effect of a shift in the aggregate demand curve due to an increase in consumer confidence will be: A. an increase in both prices and output in the short run. B. a decrease in prices only in the long run; output will remain the same. C. a decrease in both prices and output in the short run. D. an increase in output only in the long run; prices will remain the same.

The government might increase its spending to end a recession because: A. allowing the short-run aggregate supply to adjust back to the long-run can take a long time. B. the economy experiences lower prices at the long-run equilibrium. C. the economy enjoys a higher level of output in the long run. D. None of these justify why the government might change its spending to end a recession.

The introduction of the Internet over the last 20 years has caused: A. the long-run aggregate supply curve to shift to the right. B. the long-run aggregate supply curve to shift to the left. C. the short-run aggregate supply curve to shift to the left. D. The long-run aggregate supply is fixed and does not move.

The long run result of the government responding to a negative supply side shock with increased spending will be a: A. faster recovery, but it will cause even greater inflation. B. slower recovery, if they misjudge their own spending. C. faster recovery at a lower price level than allowing short-run aggregate supply to adjust on its own. D. slower recovery, but it will cause inflation to be lower than if they did nothing.

The long-run aggregate supply curve represents the level of output possible if the economy: A. is operating at full capacity. B. is operating at an unemployment rate of zero. C. has a zero inflation rate. D. All of these are true.

The long-run aggregate supply curve will shift to the right if: A. the potential output of the economy expands. B. the economy loses productive capacity. C. the economy experiences a supply shock. D. The long-run aggregate supply curve is fixed, and does not move.

The long-run result of government intervention in responding to a recession is: A. the same level of output at higher prices. B. higher level of output at higher prices. C. higher level of output at lower prices. D. lower level of output at the same prices.

The relationship between the price level and net exports is: A. negative. B. positive. C. perfectly correlated. D. uncorrelated.

The slope of the short-run aggregate supply curve shows that: A. as overall price levels increase, firms are willing to produce more. B. as overall price levels decrease, firms are willing to produce more. C. firms are constrained to a certain level of output in the short run, regardless of the price. D. firms are constrained to a certain price in the short run, regardless of level of output.

The wealth effect explains the: A. negative relationship that exists between consumer spending and overall price level. B. positive relationship that exists between consumer spending and overall price level. C. negative relationship that exists between consumer spending and overall asset valuation. D. positive relationship that exists between consumer spending and overall asset valuation.

The wealth effect says that if there is an increase in the price level, you will: A. experience some reduction in your level of wealth as a result. B. experience some increase in your level of wealth as a result. C. typically spend more on all goods and services as a result. D. typically shift your spending to assets from consumption goods.

The wealth effect: A. explains the downward-sloping aggregate demand curve. B. explains the upward-sloping aggregate demand curve. C. explains the downward-sloping aggregate supply curve. D. explains the upward-sloping aggregate supply curve.

The wealth effect: A. explains the downward-sloping aggregate demand curve. B. is the positive relationship between consumer spending and the overall price level. C. is not present when wages keep pace with inflation. D. All of these are true.

There is a general overall __________ relationship between the price level and ____________. A. negative; aggregate expenditures on GDP B. positive; aggregate expenditures from the government C. negative; nominal expenditures from the government D. positive; nominal expenditures from households

When a nonprice change affects any of the four components of GDP: A. the aggregate demand curve will shift left or right. B. the economy will move up or down along the aggregate demand curve. C. the aggregate demand curve will remain unaffected. D. None of these is true.

When prices rise, the interest rate: A. tends to rise. B. tends to fall. C. is usually not affected. D. will rise if the wealth effect outweighs the price effect.

When the U.S. price level decreases relative to the rest of the world: A. exports and net exports will increase. B. imports and net exports will increase. C. exports will increase and net exports will decrease. D. exports will decrease and net exports will increase.

When the U.S. price level decreases, we would expect: A. a movement down along the aggregate demand curve. B. a shift straight up of the aggregate demand curve. C. a shift to the right of the aggregate demand curve. D. None of these is true.

When the economy fluctuates around its long-run aggregate supply: A. it is called the business cycle. B. the economy is in a state of chaos. C. the value of currency becomes unstable. D. None of these is true.

When the economy is creating less output than its potential, it means: A. there are some resources that are unemployed. B. the economy is in an economic boom. C. contractionary policy needs to be enacted. D. governments are likely to reduce their spending.

When the economy is producing at a quantity greater than its long-run aggregate supply: A. it is pushing some of its resources to operate beyond capacity. B. the economy is experiencing greater economic growth. C. it causes a bubble to form in one of its major sectors. D. It is not possible to produce beyond the long-run aggregate supply curve.

When the government considers whether it should change its spending in response to a recession, it must weigh the tradeoff between ____________ and ________________. A. faster recovery time; inflation B. more output; higher prices C. more output; lower prices D. faster recovery time; lower prices

When the housing bubble popped, the effect of the negative demand side shock and the negative supply side shock were the same on: A. output, causing it to definitely decrease. B. output causing it to definitely increase. C. prices, causing them to definitely rise. D. prices, causing them to definitely fall.

When the long-run aggregate supply curve shifts right, it represents: A. economic growth. B. pushing our economy beyond normal capacity. C. an unemployment rate of zero. D. negative inflation.

When the price level increases people: A. feel less wealthy. B. feel more wealthy. C. have the same real value of assets, regardless of the change in the price level. D. experience a bubble forming in the economy overall.

When the prices of final goods and services increase more quickly than the prices of inputs, we say that: A. the prices of some inputs are sticky. B. the prices of some final goods are sticky. C. the economy must be in the long run. D. None of these is true.

Which of the following is a component of aggregate demand? A. Consumption B. Income C. Taxes D. All of these are components of aggregate demand.

Which of the following is a component of aggregate demand? A. Net exports B. Income C. Government revenues D. All of these are components of aggregate demand.

Which of the following would likely cause aggregate demand to shift to the left? A. Higher interest rates discouraging borrowing B. Higher tariffs on all imports into the United States C. Greater consumer confidence about the future D. All of these would likely cause aggregate demand to shift to the left.

inverse

A Phillips curve shows what kind of relationship between unemployment and inflation rate?

Which of the following were important developments in the mortgage market that took place during the 1970s?

A and B only.

Why did the Fed help JP Morgan Chase buy Bear Stearns? A. Failure of Bear Stearns would lead to a larger investment bank failure. B. JP Morgan Chase is an influential partner with the Fed. C. Commercial banks would be reluctant to lend to investment banks. D. All of the above. E. A and C only.

A and C only.

In a fractional reserve banking system, what is the difference between a "bank run" and a "bank panic?"

A bank run involves one bank; a bank panic involves many banks.

Fractional reserve banking system

A banking system in which banks keep less than 100 percent of deposits as reserves.

principle of a double coincidence of wants

A baseball fan with a MT baseball acrd wants to trade it for a MC baseball card, but everyone the fan knows who has a MC card doesn't want a MT card. Economists characterize this problem as a failure of the

A broader definition of the money supply: M1 plus savings account balances, small-denomination time deposits, balances in money market deposit accounts in banks, and noninstitutional money market fund shares.

Does a change in the price level cause a movement along the aggregate demand curve or a shift of the aggregate demand curve?

A change in the price level causes a movement along the aggregate demand curve.

Does a change in the price level cause a movement along the aggregate expenditure line or a shift of the aggregate expenditure line?

A change in the price level causes a shift in the aggregate expenditure line.

Stagflation

A combination of inflation and recession, usually resulting from a supply shock.

What is stagflation?

A combination of inflation and recession.

Aggregate Demand

A curve that shows the relationship between the price level and the level of planned aggregate expenditure in the economy, holding constant all other factors that affect aggregate expenditure.

Aggregate demand curve

A curve that shows the relationship between the price level and the quantity of real GDP demanded by households, firms, and the government.

Long-run aggregate supply curve

A curve that shows the relationship in the long run between the price level and the quantity of real GDP supplied.

Short-run aggregate supply curve

A curve that shows the relationship in the short run between the price level and the quantity of real GDP supplied by firms.

When the Federal Reserve increases the discount rate as a part of a contractionary monetary policy, there is:

A decrease in the money supply and an increase in the interest rate.

When the Federal Reserve increases the required reserve ratioincreases the required reserve ratio as a part of a contractionary monetary policy, there is:

A decrease in the money supply and an increase in the interest rate.

When the Federal Reserve sells bondssells bonds as a part of a contractionary monetary policy, there is:

A decrease in the money supply and an increase in the interest rate.

the fact that for a barter trade to take place between two people, each person must want what the other one has

A double coincidence of wants refers to

Commodity money

A good used as money that also has value independent of its use as money.

decreases

A higher required reserve ratio ____ the value of the simple deposit multiplier

Would a larger multiplier lead to more severe recessions or less severe recessions?

A larger multiplier means that small changes in spending lead to large changes in GDP, and thus recessions would be more severe.

Would a larger multiplier LOADING... lead to more severe recessions or less severe recessions?

A larger multiplier means that small changes in spending lead to large changes in GDP, and thus recessions would be more severe.

Aggregate Expenditure

A macroeconomic model that focuses on the short-run relationship between total spending and real GDP, assuming that the price level is constant.

Aggregate Expenditure Model

A macroeconomic model that focuses on the short-run relationship between total spending and real GDP, assuming that the price level is constant.

Expectations of future profitability

A macroeconomic model that focuses on the short-run relationship between total spending and real GDP, assuming that the price level is constant.

The double coincidence of wants

A major shortcoming of barter economies is that in order for barter to occur, each person must want what the other person has.

Income Approach

A method of computing GDP that measures the income-wages, rents, interest, and profits-received by all factors of production in producing final goods and services.

Expenditure Approach

A method of computing GDP that measures the total amount spent on all final goods and services during a given period.

Production Approach

A method of computing GDP that measures total retail value of the final goods/services produced in a nation in a given year.

Consider the following choices and determine the correct definition for the monetary rule.

A monetary rule is a plan for increasing the money supply at a constant rate regardless of the prevailing economic condition.

Bank panic

A situation in which many banks experience bank runs at the same time.

What is a banking panic?

A situation in which many banks experience runs at the same time

What is a banking panic?

A situation in which many banks experience runs at the same time.

What is a banking panic? Which of the following best explains how the Federal Reserve acts to help prevent banking panics?

A situation in which many banks experience runs at the same time. The Fed acts as a lender of last resort, making loans to banks so that they can pay off depositors.

Bank run

A situation where many depositors simultaneously decide to withdrawal money from a bank.

What is a supply shock?

A sudden increase in the price of an important natural resource, resulting in a leftward shift of the SRAS curve.

What is usually the cause of stagflation?

A supply shock as a result of an unexpected increase in the price of a natural resource

The quantity theory of money

A theory of the connection between money and prices that assumes that the velocity of money is constant.

Which of the following were important developments in the mortgage market that took place during the 1970s?

A. Fannie Mae and Freddie Mac began to act as intermediaries between investors and home buyers. B. Banks began to resell mortgages on the secondary market rather than holding them in their portfolios.

Which of the following is not one of the four categories of aggregate expenditure? General Motors buys a new machine for 20 million. This expenditure is an example of

A. Government transfer payments. B. Net exports. C. Consumption. D. Planned investment. investment

Why is price stability one of the Fed's monetary policy LOADING... goals? Which of the following is not a problem of high inflation rates?

A. If inflation is low, the Fed will have flexibility to lessen the impact of recessions. B. By achieving price stability, the Fed also promotes economic growth. C. Rising prices erode the value of money as a medium of exchange and store of value. High inflation helps to stabilize financial markets.

Why is price stability one of the Fed's monetary policy goals? Which of the following is not a problem of high inflation rates?

A. If inflation is low, the Fed will have flexibility to lessen the impact of recessions. B. Rising prices erode the value of money as a medium of exchange and store of value. C. By achieving price stability, the Fed also promotes economic growth. High inflation helps to stabilize financial markets.

While serving as the president of the Federal Reserve Bank of St. Louis, William Poole stated, "Although my own preference is for zero inflation properly managed, I believe that a central bank consensus on some other numerical goal of reasonably low inflation is more important than the exact number." Source: William Poole,"Understanding the Fed," Federal Reserve Bank of St. Louis Review, Vol. 89, No. 1, January/February 2007, p. 4. Which of the following are benefits that the economy might gain from an explicit inflation target LOADING... even if the target chosen is not a zero rate of inflation?

A. Improved accountability for the Fed B. More accurate expectations of future inflation C. Better communication between the Fed and the public

Which of the following is not a correct comparison between an expansionary monetary policy in the basic aggregate demand and aggregate supply model and in the dynamic aggregate demand and aggregate supply model?

A. In the dynamic model, expansionary policy would be used when demand does not grow sufficiently; in the basic model, expansionary policy would be used when demand falls. B. The dynamic model assumes that potential GDP is constantly growing while the basic model assumes that it is static. C. If the economy is below full employment, expansionary monetary policy will cause an increase in the price level in both models.

Indicate which of the following is correct about the multiplier effect.

A. The multiplier ignores the effect on real GDP of imports, inflation, and interest rates. B. A decrease in autonomous spending decreases real GDP by a multiple of the change. C. The larger the MPC, the more additional consumption that occurs.

If policymakers at the Fed are aware that GDP data are sometimes subject to large revisions, how might this affect their views about how best to conduct policy?

A. They would have gathered as much information as possible before designing a policy. B. They would have better understood the uncertainty of the outcome of a policy. C. They would have been more cautious about designing a policy.

Which of the following was the Fed's objective in using "quantitative easing" and "Operation Twist"?

A. To keep interest rates on 10-year Treasury notes low. .B. To increase aggregate demand. C. To keep interest rates on mortgages low.

In the aggregate expenditure model, why is it important to know the factors that determine consumption spending, investment spending, government purchases, and net exports? Because they help us understand

A. how the level of aggregate expenditure and GDP are determined in the economy. B. the relationship between aggregate expenditure and real GDP. C. how macroeconomic equilibrium is determined in the aggregate expenditure model.

We say that the economy as a whole is in macroeconomic equilibrium if

A. total spending equals GDP. B. aggregate expenditure equals total production. C. aggregate expenditure equals GDP. D. total spending equals total production.

In the graph to the right, the economy is initially in equilibrium at point A. Aggregate expenditure and real GDP both equal $13.013.0 trillion. Suppose there is an increase in investment spending of $400400 billion that increases aggregate expenditure to $13.413.4 trillion. Which of the following best describes the initial impact of the increase in investment? All of the following are true as the economy adjusts to a new equilibrium except that

A. Initially, real GDP rises by $400 billion. B. The aggregate expenditure line shifts up by $400 billion. C. The economy is no longer in equilibrium. the initial increase in income or GDP leads to a further increase in investment and aggregate expenditure.

Which of the following is a monetary policy tool used by the Federal Reserve Bank?

A. Decreasing the rate at which banks can borrow money from the Federal Reserve. B. Buying $500 million worth of government securities, such as Treasury bills. C. Increasing the reserve requirement from 10 percent to 12.5 percent. D. All of the above.

Which of the following is true with respect to hyperinflation?

A. It can be hundreds—even thousands—of percentage points per year. B. In the presence of hyperinflation, firms and households avoid holding money. C.It i s caused by central banks increasing the money supply at a rate much greater than the growth rate of real GDP. D. All of the above.

Which of the following is true with respect to Irving Fisher's quantity equation, M×V=P×Y?

A. V={ [P×Y]/M } B. P = the GDP deflator C. M = M1 definition of the money supply D. V = Average number of times a dollar is spent on goods and services E. All of the above

The use of money

A. eliminates the double coincidence of wants. B. reduces the transaction costs of exchange. C. allows for greater specialization. D. all of the above.

Suppose the economy is at point C. If investment spending decreases in the economy, where will the eventual long- run equilibrium be? A.) A B.) B C.) C D.) D

A.) A

Suppose the economy is initially in long-run equilibrium. The Fed enacts a policy to decrease the required reserve ratio. In the short-run, this expansionary monetary policy will cause: A.) A shift from AD1 to AD2 and a movement to point B, with a higher price level and higher output. B.) A shift from SRAS2 to SRAS1 and a movement to point D, with a higher price level and lower output. C.) A shift from AD2 to AD1 and a movement to point C, with a lower price level and the same output. D.) A shift from SRAS1 to SRAS2 and a movement to point B, with a lower price level and higher output.

A.) A shift from AD1 to AD2 and a movement to point B, with a higher price level and higher output.

Interest rates in the economy have risen. How will this affect aggregate demand and equilibrium in the short run? A.) Aggregate demand will fall, the equilibrium price will fall, and the equilibrium level of GDP will fall. B.) Aggregate demand will rise, the equilibrium price level will fall, and the equilibrium level of GDP will rise. C.) Aggregate demand will fall, the equilibrium price level will rise, and the equilibrium level of GDP will fall. D.) Aggregate demand will rise, the equilibrium price level will rise, and the equilibrium level of GDP will rise.

A.) Aggregate demand will fall, the equilibrium price level will fall, and the equilibrium level of GDP will fall.

Consider the figures below. Determine which combination of fiscal policies shifted AD1 to AD2 in each figure and returned the economy to long-run macroeconomic equilibrium. Example A AD1--->AD2 Example B AD2--->AD1 A.) Example (A): Expansionary fiscal policy. Example (B): Contractionary fiscal policy. B.) Example (A): Contractionary fiscal policy. Example (B): Contractionary fiscal policy. C.) Example (A): Expansionary fiscal policy. Example (B): Expansionary fiscal policy D.) Example (A): Contractionary fiscal policy. Example (B): Expansionary fiscal policy.

A.) Example (A): Expansionary fiscal policy. Example (B): Contractionary fiscal policy.

The graph to the right shows a situation in which the economy was in equilibrium at potential GDP (at point A) when the demand for housing sharply declined. What actions can Congress and the president take to move the economy back to potential GDP? A.) Increase government spending or decrease taxes. B.) Increase the money supply. C.) Decrease government spending or increase taxes. D.) Both A and B.

A.) Increase government spending or decrease taxes.

The formula for calculating the present value of a bond that will pay a coupon of $100 per year for 10 years and has a face value of $1,000 is

A.Present value =$100(1+i)+$100(1+i)^2+...+$100(1+i)^10+ $1,000(1+i)^10.

To have growth without inflation, what must be true?

AD, SRAS and LRAS must increase by the same amount

Suppose that initially, the economy is in long-run macroeconomic equilibrium at point A. If there is increased pessimism about the future of the economy, the AD curve will shift from ___________. The new short-run macroeconomic equilibrium occurs at _______. Long-run adjustment will shift the SRAS curve from ______________ as workers adjust to lower-than-expected prices. The new long-run macroeconomic equilibrium occurs at ______.

AD0 to AD1; point B; SRAS0 to SRAS1; point C

What is the Aggregate Expenditure formula?

AE= C+I+G+NX

The aggregate expenditure model can be written in terms of four spending categories. Which equation shows the relationship between aggregate expenditure and the four spending categories?

AE=C+I+G+NX

A student says the following: "I understand why the Fed uses expansionary policy but I don't understand why it would ever use contractionary policy. Why would the government ever want the economy to contract?" The government would want the economy to contract when real GDP is

Above potential GDP and the price level is rising

Which of the following is NOT a function of money?

Acceptability

(All of the above) (D)

According to many economists and policymakers, what other options does the Fed have to improve credibility? A. Follow a discretionary strategy B. Follow a rules strategy C. Follow the Taylor rule D. All of the Above

more than

According to the multiplier effect, an initial increase in government purchases increases real GDP by _____ ______ the initial increase in government purchases

nominal GDP will increase

According to the quantity theory of money, if velocity does not change, when the money supply of a country increases, what will occur?

Variables That Shift the Short-Run Aggregate Supply Curve

Adjustments of Workers and Firms to Errors in Past Expectations about the Price Level Unexpected Changes in the Price of an Important Natural Resource

Briefly explain (both verbally and graphically) why the aggregate expenditure curve is upward sloping and the aggregate demand curve is downward sloping?

Aggregate demand is a curve that shows the relationship between the price level and the level of planned aggregate expenditure in the economy, holding constant all other factors that affect aggregate expenditure. The aggregate expenditure is thus the sum total of all the expenditures undertaken.

Briefly explain why the aggregate expenditure line is upward sloping, while the aggregate demand curve is downward sloping.

Aggregate expenditure is the relationship between spending and income, while aggregate demand is the relationship between output and price level.

Briefly explain why the aggregate expenditure LOADING... line is upward sloping, while the aggregate demand LOADING... curve is downward sloping.

Aggregate expenditure is the relationship between spending and income, while aggregate demand is a relationship between output and the price level.

in the first quarter of 2011, business inventories increased by $49.1 billion. Can we tell from this information whether aggregate expenditure was higher or lower than GDP during the first quarter of 2011?

Aggregate expenditure was less than GDP in the first quarter of 2011

In the first quarter of 2011, business inventories LOADING... increased by $49.1 billion. Can we tell from this information whether aggregate expenditure LOADING... was higher or lower than GDP during the first quarter of 2011? If not, what other information do we need?

Aggregate expenditure was less than GDP in the first quarter of 2011.

In the figure to the right, when the money supply increased from MS 1 to MS 2, the equilibrium interest rate fell from 4% to 3%. Why?

All of the Above -Initially, firms hold more money than they want relative to other financial assets. -Increased demand for Treasury securities drives down their interest rate. -Increased demand for Treasury securities drives up their prices.

All of the above

All of the above are correct statements about the two models

All of the above are correct statements about the two models.

Which of the following statements is correct?

All of the above are true.

Which of the following is a monetary policy response to the economic recession of 2007dash2009 and the accompanying financial crisis?

All of the above were responses

The decline in housing prices that began in 2006 led to rising defaults among which borrowers?

All of the above.

Which of the following was the Fed's objective in using "quantitative easing" and "Operation Twist"?

All of the above.

Savings from around the world are channeled to the US

All of the following are benefits of the growth of international capital markets except A. Savings from around the world are channeled to the best available investments B. Increased Efficiency C. Savings from around the world are channeled to the US D. Firms in nearly every country are able to tap the savings of foreign households for investment

When the Fed conducts monetary policy, it uses several policy targets to indicate how effectively policy decisions are working. Which of the following makes it less likely an economic variable would be a good policy target?

An economic variable that is one of the Federal Reserve goals such as the unemployment rate or real GDP.

Autonomous Expenditure

An expenditure that does not depend on the level of GDP.

All of the following are arguments against an explicit inflation targeting rule for monetary policy except:

An explicit target is easier to understand by households and firms which makes monetary policy more transparent.

Shifts of the Aggregate Demand Curve versus Movements Along It

An important point to remember is that the aggregate demand curve tells us the relationship between the price level and the quantity of real GDP demanded, holding everything else constant.

shift right; productive capacity of the economy

An increase in labor force will ___________ the SRAS curve because this is a change in ________

In the graph of the money market shown below, what could cause the money demand curve to shift from MD1 to MD2?

An increase in price level and an increase in real GDP

decreases

An increase in the amount of excess reserves that banks keep ____ the value of the real world deposit multiplier

not change; price level

An increase in the price level will _______ the SRAS curve because it is a change in ________

shift left; expectations about future price

An increase in what the price level is expected to be in the future will ________ SRAS curve because this a change in _________

GDP is

An indicator of economic performance

Supply shock

An unexpected event that causes the short-run aggregate supply curve to shift.

shift left; price of an important natural resource

An unexpected increase in the price of an important raw material will ______ the SRAS curve because this is a change in __________

Martin Feldstein, an economist at Harvard University, has argued that QE2 led consumers to decrease saving and increase spending: "A likely reason for the fall in the saving rate and the resulting rise in consumer spending was the sharp increase in the stock market, which rose by 15% between August [2010] and the end of the year. That, of course, is what the Fed had been hoping for." Source: Martin Feldstein, "Quantitative Easing and America's Economic Rebound," www.project-syndicate.org, February 24, 2011. Why might QE2, which resulted in a decline in interest rates on long-term Treasury securities, have resulted in an increase in stock prices?

As interest rates fell, bond prices increased, asset holders started to buy more stocks instead of bonds, which in turn led to an increase in demand for stocks and stock prices increased.

Federal funds rate

As of 1993, the Fed sets targets for which of the following in order to achieve price stability and high employment? A. Federal funds rate B. M1 definition of money Supply C. M2 definition of money supply D. Discount rate

decreasing

As you actions and those of other bank managers reduced the amount of loans made, we would expect that the money supply would end up

Stock prices rose rapidly in 2005, as did housing prices in many parts of the country. By 2008, both stock prices and housing prices were declining sharply. Some economists have argued that rapid increases and decreases in the prices of assets such as shares of stock or houses can damage the economy. Currently, stabilizing asset prices is not one of the Federal Reserve's policy goals. In what ways would a goal of stabilizing asset prices be different from the four goals LOADING... listed in this chapter? Stabilizing asset prices should not be added to the list of the Fed's policy goals because they are more specific and deal mainly with individuals and firms. Each of these carry risk associated with them and the Fed should not be in the business of trying to make profit for individuals.

Asset prices deal with a specific type of wealth that carries risk associated with individual firms. True

Assets

Assets are the value of anything owned by the bank.

Money

Assets that people are generally willing to accept in exchange for goods and services or for payment of debts. Money eliminates the problems associated with barter economies and allows people to specialize by making the exchange of goods and services easier.

When on the AE = Y

At Equi

When GDP = 0 and AE = #

Autonomous Expenditure

A sudden increase in immigration would be considered a: A. short-run supply shock. B. long-run supply shock. C. interest-rate shock. D. A change in immigration would not affect any of these.

An economy in which output has decreased and prices have increased would suggest that there has been a: A. positive supply side shock. B. negative supply side shock. C. positive demand side shock. D. negative demand side shock.

If U.S. prices increase relative to the rest of the world, we would expect: A. imports and net exports to increase. B. exports and net exports to decrease. C. imports to increase and net exports to decrease. D. exports to decrease and net exports to increase.

If U.S. prices increase relative to the rest of the world, we would expect: A. net exports to increase. B. net exports to decrease. C. net exports to be unaffected. D. government spending to increase.

If a hurricane were to wipe out the majority of the eastern seaboard in the United States, it would likely be a: A. short-run supply shock. B. long-run supply shock. C. short-run demand shock. D. long-run demand shock.

If a hurricane were to wipe out the majority of the eastern seaboard in the United States: A. only the long-run aggregate supply curve would shift left. B. the long-run and short-run aggregate supply curves would both shift left. C. only the short-run aggregate supply curve would shift left. D. neither the short-run nor long-run aggregate supply curves would be affected.

If consumption increases in general: A. the aggregate demand curve will shift straight down. B. the aggregate demand curve will shift to the right. C. the economy will move down along the aggregate demand curve to a higher quantity. D. it will be cancelled out by business's reaction and the aggregate demand curve will be unaffected.

If the government does not react to a recession: A. the economy will remain out of its long-run equilibrium indefinitely. B. the economy will recover, but much more slowly. C. voters and consumers are likely to be happy with less government interference. D. None of these is true.

If the government were to decrease corporate income tax, we would predict: A. a downward movement along the aggregate demand curve. B. a shift in aggregate demand to the right. C. a shift in aggregate demand to the left. D. a shift straight down of aggregate demand.

In the long run: A. aggregate demand is fixed. B. aggregate supply is fixed. C. aggregate demand tends to shift to the right. D. aggregate supply tends to shift to the left.

Lower interest rates motivate: A. firms to invest less in new factories and working capital. B. firms to invest more in new factories and working capital. C. individuals to spend less on consumption goods. D. individuals to spend less on capital goods.

Some call the Great Recession: A. the period when the economy does not grow for four consecutive quarters. B. the recession that began in 2007 due to the decline in consumer spending when the housing bubble burst. C. the period of high inflation that took place in the early 1970s. D. the period of economic stagnation that took place in the early 1990s.

Something that would cause the long-run aggregate supply curve to shift to the right would be: A. the unemployment rate decreasing. B. discovery of a new oil reserve. C. the inflation rate decreasing. D. The long-run aggregate supply curve is fixed, and does not shift.

The aggregate demand curve slopes: A. downward, like individual supply curves. B. downward, like individual demand curves. C. upward, like individual supply curves. D. upward, like individual demand curves.

The downward-sloping aggregate demand curve is partly due to: A. the positive relationship between the price level and net exports. B. the negative relationship between the price level and net exports. C. the positive relationship between the price level and government spending. D. the negative relationship between the price level and government spending.

The relationship between the overall price level in the economy and total production by firms is shown in the: A. aggregate demand curve. B. aggregate supply curve. C. inflation rate. D. business cycle.

U.S. goods will become relatively less expensive than goods from other countries if: A. prices were to increase in the United States only. B. prices were to decrease in the United States only. C. prices were to increase in the United States and foreign countries at the same rate. D. prices were to decrease in the United States and foreign countries at the same rate.

When the U.S. price level increases, we would expect: A. a movement downward along the aggregate demand curve. B. a movement up along the aggregate demand curve. C. a shift to the right of the aggregate demand curve. D. a shift to the left of the aggregate demand curve.

Which of the following would cause aggregate demand to shift to the right? A. Increased income taxes B. Decreased corporate income taxes C. Decreased consumer confidence D. Decreased government spending

Which of the following would likely cause aggregate demand to shift to the left? A. Decreased income taxes B. Decreased consumer confidence C. Decreased government spending D. These would all cause aggregate demand to shift to the left.

Which of the following is not one of the four categories of aggregate expenditure? Cindy Ross buys a dinner in an Italian restaurant in New York City. This expenditure is an example of

B. Government transfer payments. A. Consumption. C. Net exports. D. Planned investment. Consumption

Which of the following does NOT lead to long-run economic growth A. Improved labor productivity B. Increase in average wages C. Increase in the capital stock D. Technological change

B. Increase in average wages

Which one of the following is not one of the monetary policy goals of the Fed? A. Maintain stability of financial markets and institutions B. Reduce income inequality C. Maintain high employement D. Maintain price stability

B. Reduce income inequality

Refer to the diagram to the right. Suppose the economy is in a recession and the Fed pursues an expansionary monetary policy. Using the static AD-AS model, this would be depicted as a movement from A.) A to E. B.) A to B. C.) C to D. D.) C to B. E.) B to C.

B.) A to B.

Suppose you have $2000 in currency in a shoebox in your closet. One day, you decide to deposit the money in a checking account. How will this action affect the M1 and M2 definitions of the money supply? A.) M1 will increase and M2 will decrease. B.) Both M1 and M2 will remain unchanged. C.) M1 will decrease and M2 will increase. D.) Both M1 and M2 will increase by $2,000.

B.) Both M1 and M2 will remain unchanged.

Which of the following is not a correct statement about M2? A.) M2 includes savings accounts, small-denomination time deposits, and money market mutual funds. B.) M2 is the best definition of money as a medium of exchange. C.) M2 includes all of the assets in M1. D.) M2 is a broader definition of money compared to M1 and currency. If you move $100 from your savings account to your checking account, then M1 will ______________ and M2 will _____________.

B.) M2 is the best definition of money as a medium of exchange. increase by $100; remain the same

The process of an economy adjusting from a recession back to potential GDP in the long run without any government intervention is known as A.) fiscal policy. B.) an automatic mechanism. C.) "releasing sticky prices." D.) monetary policy.

B.) an automatic mechanism

Stagflation occurs when A.) inflation falls and GDP falls. B.) inflation rises and GDP falls. C.) inflation falls and GDP rises. D.) inflation rises and GDP rises

B.) inflation rises and GDP falls.

Who borrows money and who lends money at this "target interest rate"?

Banks borrow and banks lend.

How would this affect the LRAS? The price level increases.

Because this is a change in the price level, the LRAS will not change.

How would a techological change affect the LRAS?

Because this is a change in the productive capacity of the economy, the LRAS will shift to the right.

How would an increase in the quantity of capital goods affect the LRAS?

Because this is a change in the productive capacity of the economy, the LRAS will shift to the right.

How would this affect the LRAS? The labor force increases.

Because this is a change in the productive capacity of the economy, the LRAS will shift to the right.

lost; Japanese Yen

Between 1973 and 2008, the USD _____ almost 70% of its value against the ______ ______

Suppose a bond makes $200 coupon payments at the end of the next two years, at which time the face value of $1,000 is repaid. If the interest rate is 8 percent, then what is the present value of the bond?

Bond Price = coupon/(1+i) + coupon/(1+i)^n ... + facevalue/(1+i)^n 200/(1+.08) + 200/(1+.08)^2 + 1000(1+.08)^2 =1214

Consider the figures below and determine which is the best description of what causes the shift from AD 1 to AD 2

Both A and B Example A shows a contractionary monetary policy. The price level and real GDP both fall. Example B shows an expansionary monetary policy. The price level and real GDP both rise

In the graph of the money market shown on the right, what could cause the money demand curve to shift from MD1 to MD2?

Both (a) and (c).

Changes in interest rates affect aggregate demand. Which of the following is affected by changes in interest rates and, as a result, impacts aggregate demand? (Mark all that apply.) A. Business investment projects B. Consumption of durable goods C. Government spending D. The value of the dollar

Business investment projects Consumption of durable The value of the dollar

Changes in interest rates affect aggregate demand. Which of the following is affected by changes in interest rates and, as a result, impacts aggregate demand? (Mark all that apply.)

Business investment projects Consumption of durable goods The value of the dollar

Discount Policy

By changing the rate at which banks are able to borrow money from the Fed, the Fed encourages borrowing. This increases bank reserves and increases the money supply. The reverse is also true.

fewer/decrease

By raising the discount rate, the feds leads banks to make ____ loans to household and firms, which _____ checking account deposits and the money supply.

A decrease in consumer confidence will cause: A. a downward movement along the aggregate demand curve. B. a shift in aggregate demand to the right. C. a shift in aggregate demand to the left. D. an upward movement along the aggregate demand curve.

A year-long drought that destroys most wheat crops for the season would: A. shift the aggregate demand curve only. B. shift the aggregate demand curve, and the short-run aggregate supply curve would shift in response. C. shift the short-run aggregate supply curve only. D. shift the short-run aggregate supply curve and the long-run aggregate supply curve.

An increase in the costs of production will cause the: A. short-run aggregate supply curve to shift to the right. B. aggregate demand curve to shift to the right. C. short-run aggregate supply curve to shift to the left. D. long-run aggregate supply curve to shift to the left.

An increase in the price level causes government spending to: A. increase. B. decrease. C. remain unaffected. D. increase in social welfare spending only.

As the U.S. price level increases, expenditures by which of the following will remain unaffected? A. Consumers B. Businesses C. Government D. The rest of the world

Government spending: A. tends to increase with increases in the price level. B. tends to increase with decreases in the price level. C. remains generally unaffected by changes in the price level. D. is not a component of aggregate demand.

If a positive permanent supply shock were to occur, the resulting equilibrium would be: A. a higher level of output and prices. B. a lower level of output and prices. C. a higher level of output at lower prices. D. a lower level of output at higher prices.

If the government were to increase income taxes, we would predict: A. a downward movement along the aggregate demand curve. B. a shift in aggregate demand to the right. C. a shift in aggregate demand to the left. D. a shift straight down of aggregate demand.

In the long run, if the prices of goods and services are higher than before: A. the aggregate quantity supplied will be higher. B. the aggregate quantity demanded will be lower. C. the aggregate quantity supplied will not change. D. the aggregate quantity demanded will be higher.

In the long run, if the prices of goods and services paid by consumers increase: A. the long-run aggregate supply will increase. B. the long-run aggregate supply will decrease. C. the long-run aggregate supply will stay the same. D. the long-run aggregate demand will increase.

In the macroeconomic model of aggregate supply and aggregate demand, price is: A. the measure of the value of all goods and services produced by the economy. B. represented by GDP. C. calculated as a weighted average of the prices of all goods and services. D. None of these is true.

The downward sloping aggregate demand curve can be explained in part through: A. the positive relationship between the price level and net exports. B. the positive relationship between the price level and consumption. C. the negative relationship between the price level and investment spending. D. All of these are true.

The long-run aggregate supply curve: A. is affected by the price level. B. never moves. C. shifts right when the economy experiences economic growth. D. shifts left when the economy experiences economic growth.

The quantity measure in the aggregate demand relationship is the: A. total quantity of goods and services demanded in the economy. B. total quantity of goods and services supplied in the economy. C. market value of the total quantity of goods and services demanded in the economy. D. market value of the total quantity of goods and services supplied in the economy.

There is no relationship between the price level and which component of GDP? A. C B. I C. G D. NX

When the economy experiences a permanent supply side shock that shifts the long-run aggregate supply to the right, the short run aggregate supply curve: A. will instantly shift right with the long-run aggregate supply to the new long-run equilibrium. B. will begin by shifting left initially, and then be pulled right by the long-run aggregate supply over time. C. will gradually shift right until it reaches long-run aggregate supply and the new long-run equilibrium. D. None of these is true.

Which of the following macroeconomic variables would be drawn accurately as perfectly inelastic? A. Aggregate demand B. Short-run aggregate supply C. Long-run aggregate supply D. None of these should be drawn as perfectly inelastic.

Aggregate Expenditure

C + I + G + NE = AE

Which of the following is most likely to lead to sustained economic growth: A. Increases in human capital B. Increases in labor force C. Technological change D. Increases in the capital stock

C. Technological change

The following shows the effect of the business cycle on the inflation rate and the unemployment rate: A. The unemployment rate increases and the inflation rate increases during expansion B. The unemployment rate increases and the inflation rate falls during expansions C. The unemployment rate increases and the inflation rate falls during recessions D. The unemployment rate falls and the inflation rate falls during recessions

C. The unemployment rate increases and the inflation rate falls during recessions

Which one of the following is not a function of money? A.) Store of value. B.) Medium of exchange. C.) Open market operation. D.) Unit of account. If something is to be considered as money, it has to fulfill ________________________.

C.) Open market operation all four functions

Silver is an example of a A.) representative money. B.) fiat money. C.) commodity money. D.) barter money.

C.) commodity money.

Which of the following functions of money would be violated if inflation were high? A.) medium of exchange B.) unit of account C.) store of value D.) certificate of gold

C.) store of value

Interest Rate Value Moody's Seasoned Aaa Corporate Bond Yield 4.04% Moody's Seasoned Baa Corporate Bond Yield 5.19% 3-Month Treasury Bill Secondary Market Rate 0.07% 10-Year Treasury Constant Maturity Rate 2.17% Do the magnitudes of these interest rates conform to what economic theory would predict?

C.Yes. Corporate bonds always have higher interest rates than U.S. Treasury bonds because they always have some risk of default, whereas U.S. Treasury bonds have little to no risk of default. D.Yes. Since Baa-rated corporate bonds have the highest default risk, they also have the highest interest rate.

Banks

Can choose to hold more money as reserves than the legally required amount. This action on the part of banks influences the money supply independent of the actions of the Fed.

No. Only soften magnitude of it.

Can the Fed eliminate recession?

An increase in the expected price level

Causes wages to rise and costs to rise: Decreasing aggregate supply

Fiscal policy

Changes in federal taxes and purchases that are intended to achieve macroeconomic policy objectives.

B,C,D

Changes in interest rates affect aggregate demand. Which of the following is affected by changes in interest rates and, as a result, impacts AD? A. Government Spending B. The value of the dollar C. Business Investment Projects D. Consumption of durable goods

The Long-Run Aggregate Supply Curve

Changes in the price level do not affect the level of aggregate supply in the long run. Therefore, the long-run aggregate supply curve, labeled LRAS, is a vertical line at the potential level of real GDP. For instance, the price level was 109 in 2009, and potential real GDP was $13.9 trillion. If the price level had been 119, or if it had been 99, long-run aggregate supply would still have been a constant $13.9 trillion. Each year, the long-run aggregate supply curve shifts to the right, as the number of workers in the economy increases, more machinery and equipment are accumulated, and technological change occurs.

Why did the Fed help JP Morgan Chase buy Bear Stearns?

Commercial banks would be reluctant to lend to investment banks. Failure of Bear Stearns would lead to a larger investment bank failure. A and C only

What is inflation targeting?

Committing the central bank to achieve an announced level of inflation

What is inflation targeting? A. Committing the central bank to achieve an announced level of inflation. B. A target that links the Fed's target for the federal funds rate to inflation. C. A policy that attempts to reduce inflation to zero. D. Another name for contractionary monetary policy.

Committing the central bank to achieve an announced level of inflation.

end the instability created by bank panics by acting as a lender of last resort

Congress passed legislation to create the federal reserve system in 1913 in order to

1.08 ([1.1* (102/100)])

Consider the following conditions: -The exchange rate between the USD and the British Pound is BP1.1=$1. -US price level is 100 and British price level is 102 Real exchange rate is equal to:

The four components of AD

Consumption (C), Investment (I), Government Purchases (G), and Net Exports (NX)

Which of the following describes the behavior of real consumption and real investment in the United States between 1979 and the second quarter of 2013?

Consumption increased steadily but investment fluctuated, and during the mid-to-late 90s, investment increased very strongly before declining sharply in 2001, only to rise again during the mid-2000s and decline sharply again during the 2007

What are four components of aggregate expenditure?

Consumption, Planned Investment, Government Purchases and Net Exports.

[Related to solved problem #5] (page 649) the information in the following table to determine the percentage changes in the US and French real minimum wages between 1957 and 2012 a. Calculate the percentage change in US real minimum wages: b. Calculate the percentage change in French real minimum wages: c. Based on the above calculations, we can conclude that..?

Convert real wages (US) 1957 (1.00/27)*100=3.7037 2012 (7.25/230)*100=3.1522 Calculate percentage change (US) ((3.1522-3.7037)/3.7037)*100=-14.8905 Convert real change (Fr.) ((0.19/10)*100=1.9 ((9.43/133)*100=7.0902 Calculate percentage change (Fr) ((7.0902-1.9)/1.9)*100=273.1684 although nominal minimum wages increased in the US, real minimum wages fell during this period

A basic factor of production that is used to produce output is: A. technology. B. labor. C. capital. D. All of these are considered factor inputs.

A positive temporary supply side shock will: A. increase the price level in the long run. B. decrease the price level in the long run. C. increase the level of potential output in the long run. D. have no effect in the long run.

Aggregate supply is: A. total quantity of the production of all the households in the economy. B. total quantity of goods and services demanded in the economy. C. market value of the total quantity of goods and services demanded in the economy. D. market value of the total quantity of goods and services supplied in the economy.

As prices rise, people: A. feel less wealthy. B. want to spend less. C. demand a smaller quantity of goods and services in the aggregate. D. All of these are true.

As the U.S. price level decreases, expenditures by which of the following will increase? A. Consumers B. Businesses C. The rest of the world D. All of these will increase their expenditures.

As the U.S. price level decreases, expenditures by which of the following will remain unaffected? A. Consumers B. Businesses C. The rest of the world D. All of these are true.

Assuming an economy starts in long-run equilibrium, if the aggregate demand curve were to decrease: A. prices in the economy would increase. B. output in the economy would increase. C. the short-run aggregate supply curve would shift left. D. the long-run effect would be a lower price level.

Consumption: A. is a major component of aggregate demand. B. is negatively related to the national price level. C. measures people's expenditures on real goods and services. D. All of these are true.

During the period that many call the Great Recession: A. GDP fell. B. unemployment rose. C. there was a sharp decrease in consumer spending. D. All of these are true.

Economic growth is: A. an increase in our economy's potential output. B. represented by the long-run aggregate supply curve shifting to the right. C. a result of having more natural resources, land or capital. D. All of these are true.

Fluctuations around the long-run aggregate supply curve: A. are called the business cycle. B. are experienced as expansions, recessions, and recoveries. C. are normal for an economy. D. All of these are true.

If the economy is in a recession, it means that: A. the economy is not in long-run equilibrium. B. total output is less than potential output. C. the short-run equilibrium is to the left of the long-run aggregate supply curve. D. All of these are true.

In macroeconomics, the long run refers to: A. one year. B. two years. C. ten years. D. None of these is true.

In the long run, a year-long drought that destroys most of the summer's wheat crops causes: A. permanently higher prices. B. permanently lower output. C. permanently lower prices. D. None of these is true.

In the long run, changes in prices of goods and services paid by consumers: A. have no effect on the macroeconomy. B. have no effect on aggregate supply. C. have no effect on aggregate demand. D. All of these are true.

In the macroeconomic model of aggregate supply and aggregate demand, quantity is: A. represented by GDP. B. the measure of the value of all goods and services produced by the economy. C. a measure of total output. D. All of these are true.

In the macroeconomic model of aggregate supply and aggregate demand: A. price is the overall price level. B. quantity represents GDP. C. price is calculated as a weighted average of the prices of all goods and services. D. All of these are true.

Increases in the overall price level: A. reduce people's dollar-denominated wealth. B. mean that a given number of dollars won't buy as much in terms of real goods and services. C. mean people will reduce their consumption. D. All of these are true.

Something that would cause the long-run aggregate supply curve to shift to the right would be: A. technological advance. B. discovery of a new oil reserve. C. increase in the growth rate of the labor force. D. All of these would shift the long-run aggregate supply curve to the right.

Stagflation refers to a situation in which the economy is experiencing: A. high economic growth and high inflation. B. low economic growth and low inflation. C. high economic growth and low inflation. D. low economic growth and high inflation.

Sticky wages occur because: A. employers must wait until the current contract ends to cut someone's pay. B. unions often negotiate wages for several years in advance. C. wages can only be changed at the end of contracts, as opposed to final good prices which can change anytime. D. All of these are true.

Temporary supply shocks: A. are significant events that directly affect production. B. shift the aggregate-supply curve in the short run. C. would affect the short-run equilibrium. D. All of these are true.

The aggregate demand curve: A. shows the relationship between the overall price level and the level of total demand. B. shows the price level on the vertical axis and output on the horizontal axis. C. slopes downward. D. All of these are true.

The aggregate supply and aggregate demand model is used to explain: A. how individual markets affect other markets. B. how entire markets operate, not just each individual seller within a market. C. the market price determined by all buyers and all sellers interacting in a market. D. None of these is true.

The downward sloping aggregated demand curve can be explained in part through: A. the wealth effect. B. the negative relationship between the price level and net exports. C. the negative relationship between the price level and investment spending. D. All of these are true.

The equilibrium of aggregate supply and aggregate demand represents: A. the overall state of the national economy. B. the total of all goods and services produced. C. the general price level of the economy. D. All of these are true.

The introduction of the power loom during the Industrial Revolution caused: A. economic growth. B. the long-run aggregate supply curve to shift to the right. C. an increase in the potential output of the economy. D. All of these are true.

The long-run aggregate supply curve is: A. downward sloping. B. perfectly elastic. C. perfectly inelastic. D. The long-run aggregate supply curve can be any of these.

The long-run aggregate supply curve represents: A. potential output in the economy. B. the level of output possible if the economy is operating at full capacity. C. a production function for the entire economy. D. All of these are true.

The relationship between government spending and the price level: A. explains the upward-sloping aggregate demand curve. B. explains the downward-sloping aggregate demand curve. C. explains the perfect elasticity of the aggregate demand curve. D. None of these is true.

There is a negative relationship between the price level and which components of GDP? A. C, I, and G B. I, G, and NX C. C, G, and NX D. C, I, and NX

When people buy assets simply because they believe the assets will appreciate and can be sold for a profit, it may cause: A. a recession. B. unemployment. C. inflation. D. an asset-price bubble.

When the U.S. price level increases, we predict a: A. movement down along the aggregate demand curve. B. a shift straight up of the aggregate demand curve. C. a shift to the right of the aggregate demand curve. D. None of these is true.

When the economy is operating at a point where aggregate demand equals long-run aggregate supply, it must be true that: A. aggregate demand also equals short-run aggregate supply. B. the economy is in long-run equilibrium. C. prices and expected prices are the same. D. All of these are true.

When the economy is operating at a point where aggregate demand equals short-run aggregate supply, it must be true that: A. aggregate demand also equals long-run aggregate supply. B. the short-run level of output is not the same as long-run potential output. C. prices are higher than expected prices. D. None of these must be true.

When the economy produces less than its potential output, it is: A. called a recession. B. not in long-run equilibrium. C. producing a quantity less than the long-run aggregate supply quantity. D. All of these are true.

Which of the following is a component of aggregate demand? A. Consumption B. Investment C. Net exports D. All of these are components of aggregate demand.

Which of the following would likely cause aggregate demand to shift to the right? A. Consumer confidence regarding future income increases B. A tax credit for small businesses is issued C. The government builds new highways D. All of these are likely to cause aggregate demand to shift to the right.

Which three macroeconomic variables together best describe the health of the economy? A. Output, GDP, and inflation B. Output, inflation, and prices C. GDP, unemployment, and employment D. Output, prices, and employment

Suppose there has been an increase in investment. As a result, real GDP will ________ in short run, and ________ in the long run. A.) increase; increase further B.) decrease; decrease further C.) decrease; increase to its initial level D.) increase; decrease to its initial value

D.) increase; decrease to its initial value

According to the quantity theory of money, if velocity does not change, when the money supply of a country increases, what will occur? A.) the price level will decrease B.) the nominal interest rate will decrease C.) the discount rate will increase D.) nominal GDP will increase

D.) nominal GDP will increase

A decrease in aggregate demand causes a decrease in _______ only in the short run, but causes a decrease in __________ in both the short run and the long run. A.) the price level; the price level B.) real GDP; real GDP C.) the price level; real GDP D.) real GDP; the price level

D.) real GDP; the price level

Look at chapter 12 question 4.13

DONE

Reserves

Deposits that a bank keeps as cash in its vault or on deposit with the Federal Reserve.

__________ is borrowing via financial markets , while _________is borrowing from financial intermediaries If you borrow money from a bank to buy a new car, you are using

Direct finance, indirect finance indirect finance.

What are the 5 main determinants of consumption spending? Which of these is the most important?

Disposable income, Price level, expected future income, interest rates and household wealth level. most important is current disposable income

A person's money is the currency held and the checking account balance, income is the earning and wealth is equal to value of assets minus all debts

Distinguish among money, income, and wealth.

No. The goods are not a store of value

Do the goods Mademoiselle Zelie received as payment fulfill the four functions of money?

[Related to solved problem #5] (page 649) Fill in the real value of box office receipts in the table below The movie that earned the most in real terms is...

Dollar Value X (2012CPI / Year-X CPI) 1. 760.5 *(230/215)=813.5581 2. 658.7 *(230/161)=941.0 3. 623.4 *(230/230)=623.4 4. 534.9 * (230/215)=572.2186

used to make anonymous transactions

Drug dealers might find using a virtual currency like bitcoin to be appealing because it can be

The aggregate demand curve slopes downward_____________________, and the demand curve for an individual product slopes downward_______________

Due to the wealth effect, the interest-rate effect, and the international-trade effect; due to consumers substituting the more expensive product for cheaper goods

true

During the german hyperinflation many households and firms in germany were hurt, however, people with debt actually benefitted from the hyperinflation. true or false?

the period where velocity is constant because when velocity is constant the changes in the money supply can be shown to be the main cause of inflation

During which period will the quantity theory of money be more useful in explaining changes in the inflation rate?

Consider the figures below and determine which is the best description of what causes the shift from AD1 to AD2. Example A AD2--->AD1 Example B AD1--->AD2 A.) Example A shows a contractionary monetary policy. The price level and real GDP both fall. B.) Example B shows an expansionary monetary policy. The price level and real GDP both rise. C.) Example A shows an expansionary monetary policy. The price level rises and real GDP falls. D.) Both examples show expansionary monetary policy. The price level and real GDP both rise. E.) Both A and B.

E.) Both A and B

Refer to the diagram to the right. Suppose the economy is in short run equilibrium above potential GDP, the unemployment rate is very low, and wages and prices are rising. Using the static AD-AS model, the correct Fed policy for this situation would be depicted as a movement from A.) C to D. B.) A to B. C.) A to E. D.) B to C. E.) C to B.

E.) C to B.

Barter economies

Economies where goods and services are traded directly for other goods and services.

permanent; unemployment; inflation

Economists who believed that the Phillips curve represented a structural relationship believed that the curve represented a ______________ trade-off between ______ and ______

1/[(1-MPC)+t(MPC)] = government multiplier

Equation of government multiplier

open market purchase of government securities

Equilibrium starts at A. In Second Period, reaches point B. What policy would the Fed likely pursue to move AD2 to AD2policy (point C)? A. Increase Reserve Ratio B. Increase Discount Rate C. Decrease Taxes D. Open market purchase of government securities

The figure to the right illustrates a dynamic AD-AS model. Suppose the economy is in equilibrium in the first period at point A. In the second period, the economy reaches point B. We would expect the Fed to pursue what type of policy in order to move AD 2 to AD2(policy) and reach equilibrium (point C) in the second period? If the Federal Reserve Bank's policy is successful, what is the effect on the following macroeconomic indicators?

Expansionary monetary policy Actual real GDP: increases Potential real GDP: does not change Price level: increases Unemployment: decreases

Which of the following is not a main determinant of net exports? How would an increase in the growth rate of GDP in the BRIC nations (Brazil, Russia, India, and China) affect U.S. net exports? An increase in the growth rate of GDP in the BRIC nations (Brazil, Russia, India, and China) will

Expectations of future profitability in the United States. increase U.S. net exports by increasing exports to these countries.

What are the four main determinants of investment? How would an increase in interest rates affect investment?

Expectations of future profitability, interest rates, taxes and cash flow. Real investment spending declines.

Net Exports =

Exports - Imports

During 2005, the FOMC was concerned that the inflation rate would begin to accelerate due to the continued boom in the housing market, so the Fed started decreasing the target for the federal funds rate.

False

Even though the core PCE is a better measure of the inflation rate than is the CPI, the CPI is still more widely used because the core PCE includes energy and food prices, which do not affect the cost of living of a typical consumer.

False

For the Fed to succeed in reducing the severity of business cycles, it must act precisely when a recession or an acceleration of inflation can be seen in the economic data

False

If the Fed decides to carry out an expansionary monetary policy because it believes aggregate demand will not increase enough to keep the economy at potential GDP, the inflation rate will most likely be lower than it would have been without the policy.

False

True of False: Increases in real GDP per capita mean people will have a lower portion of leisure time over the course of their lives

False

True/false: If the Fed decides to carry out an expansionary monetary policy because it believes AD will not increase enough to keep the economy at potential GDP, the inflation rate will most likely be lower than it would have been without the policy.

False

True/false: during 2005, the FOMC was concerned that the inflation rate would begin to accelerate due to the continued boom in the housing market, so the Fed started decreasing the target for the federal funds rate.

False

True/false: for the Fed to succeed in reducing the severity of business cycles, it must act precisely when a recession or an acceleration of inflation can be seen in the economic data.

False

Evaluate the following statement: Banks use deposits to make consumer loans to households and commercial loans to businesses. Banks will loan out every penny of their deposits in order to make a profit.

False. Banks must hold a fraction of their deposits as vault cash or with the Federal Reserve.

For more than 20 years, the Fed has used the federal funds rate as its monetary policy target. It has not targeted money supply at the same time because the

Fed cannot target both at the same time: It has to choose between targeting an interest rate and targeting the money supply.

Which of the following describes a liability on the Federal Reserve's balance sheet?

Federal Reserve notes

price stability, high employment, economic growth, and stability of financial markets and institutions

Federal Reserve's four goals of monetary policy are

The U.S. dollar can best be described as

Fiat money

These actions involve a number of risks, including the moral hazard problem. Which of the following best explains the moral hazard problem?

Firms may make riskier investments if they believe that the government will bail them out.

Cash Flow

Firms often pay for investments out of their own cash flow, the difference between the cash revenues received by a firm and the cash spending by the firm.

The simple deposit multiplier has two important assumptions:

First, we assume that banks keep the absolute minimum amount on reserve. In fact, banks often hold more on reserve than they are legally required to hold so that they can guard against bank runs and bank panics. Second, we assume that individuals always deposit the entire check and don't hold any in cash. When we relax these simplifying assumptions, the real-world deposit multiplier is much lower than the simple deposit multiplier. Although the story of the deposit multiplier can be complicated, the most important component of the money supply is checking account balances. When banks gain reserves, they make loans. When they make loans, checking account balances increase and the money supply increases. The entire process works in reverse: when banks lose reserves, loans decrease, checking account balances fall, and the money supply contracts.

smaller

Fiscal Policy has a _______ effect on aggregate demand in an open economy

A survey conducted by the Institute for Supply Management in June 2011 showed a significant increase in inventories in manufacturing. An analyst for the investment bank Goldman Sachs commented that the increase in inventories was "a negative for future activity." Source: Kelly Evans, "Factories Offer a Clue to Second-Half Hopes," Wall Street Journal, July 15, 2011. Why might an increase in inventories be considered bad news for future production in manufacturing?

Future demand may be met by using the accumulated inventory instead of increasing production.

Why Is the Aggregate Demand Curve Downward Sloping?

GDP has four components: consumption (C), investment (I), government purchases (G), and net exports (NX). If we let Y stand for GDP, we can write the following: Y = C + I + G + NX

Inventories

Goods that have been produced but not yet sold,.

Inventories

Goods that have been produced but not yet sold.

Into which category of aggregate expenditures LOADING... would the following transaction fall? The San Diego Public School District buys 12 new school buses

Government expenditure

when governments want to spend more than they collect in taxes, central banks increase the money supply at a rate higher than GDP growth, often resulting in hyperinflation

Governments sometimes allow hyperinflation to occur because

We rewrite M×V=P×Y in terms of the growth rates of the variables to obtain:

Growth rate of M1 + Growth rate of V = Growth rate of P + Growth rate of Y.

Inflation rate =

Growth rate of M1 - Growth rate of real GDP.

What is not a service that the financial system provides for savers and borrowers?

Guaranteeing savers high rate of return

The Fed buys and sells bonds as a part of its policy to reach all of the following objectives except: A. High unemployment. B. Price stability. C. Stability of financial markets and institutions. D. Economic growth.

High unemployment.

Taxes

Higher corporate income taxes on profits decrease the money available for reinvestment, and decreases incentives to invest by diminishing the expected profitability and investment.

The non-bank public

Households and firms decide how much money to hold as deposits in banks. The more deposits, the more loans banks can make and the greater the effect on the money supply.

In addition to the Federal Reserve Bank, what other economic actors influence the money supply?

Households, firms, and banks.

when there is an increase in checking account deposits, banks gain reserves and make new loans, and the money supply expands

How do the banks "create" money?

the quantity equation shows that if the money supply grows at a faster rate than real GDP then there will be inflation

How does the quantity theory provide an explanation about the cause of inflation?

it would have generated high inflation and therefore decreased the value of confederacy currency

How would such a large quantity of confederate dollars have affected the value of the confederate currency?

banks can make more loans

How would this action pump money into the financial system to support lending?

Explain whether you agree with the following statement: Some economists claim that the recession of 2007minus−2009 was caused by a decline in spending on residential construction. This can't be true. If there had just been a decline in spending on residential construction, the only firms hurt would have been home builders and firms selling lumber and other goods used in building houses. In fact, many firms experienced falling sales during that recession, including automobile, appliance, and furniture firms.

I disagree—the commentator ignores the additional rounds of spending that make up the multiplier process.

Fixed Exchange rate system

If South Africa enters into an agreement with other countries to keep the exchange rate among their currencies fixed, it is taking part in A. Fixed Exchange Rate System B. Floating currency exchange rate system C. Gold standard Exchange rate system D. Managed float exchange rate system

True

If coins could have been easily used to purchase goods and services in other areas, the coins would also have some intrinsic value.

Changes in Foreign Variables

If firms and households in other countries buy fewer U.S. goods or if firms and households in the United States buy more foreign goods, net exports will fall, and the aggregate demand curve will shift to the left.

increase in inflation; decrease in unemployment and a movement along the short run Philip's curve

If firms and workers have adaptive expectations, what impact will expansionary monetary policy have on inflation, unemployment, and the Phillips curve?

Changes in the Expectations of Households and Firms

If households become more optimistic about their future incomes, they are likely to increase their current consumption.

Inflation rate = growth rate of the money supply - growth rate of real output

If irving fisher was correct in his prediction about the value of velocity, then the quantity equation can be written to solve for the inflation rate as follows

3.57

If marginal propensity to consume = 0.80, the tax rate equals 0.10, what is the value of the government purchase multiplier?

decreases

If money supply is increasing and interest rate is falling, the opportunity cost of holding money __________

Many people have difficulty borrowing as much money as they would like, even if they are confident that their incomes in the future will be high enough to pay it back easily. For example, many students in medical school will earn high incomes after they graduate and become physicians. If they could, they would probably borrow now in order to live more comfortably while in medical school and pay the loans back out of their higher future income. Unfortunately, banks are usually reluctant to make loans to people who currently have low incomes, even if there is a good chance their incomes will be much higher in the future. Why would this be the case?

If people could always borrow as much as they would like, consumption would be likely to become less sensitive to changes in current income. Since current consumption is a function of future income, one would borrow against higher expected future income to smooth current consumption.

Reserve requirements

If the Fed reduces the reserve requirement, it converts required reserves into excess reserves. This increases the amount of loans a bank can offer and increases the money supply. The reverse is also true.

The hypothetical information in the following table shows what the situation will be in 2021 if the Fed does not use monetary policy.

If the Fed wants to keep real GDP at its potential level in 2021, it should use an expansionary policy. The trading desk should be buying T-bills. If the Fed's policy is successful in keeping real GDP at its potential level in 2021, state whether each of the following will be higher, lower, or the same as it would have been if the Fed had taken no action: i. Real GDP will be higher than it would have been if the Fed had taken no action. ii. Full-employment real GDP will be the same as it would have been if the Fed had taken no action. iii. The inflation rate will be higher than it would have been if the Fed had taken no action. iv. The unemployment rate will be lower than it would have been if the Fed had taken no action.

Which of the following statements does not correctly describe the effect of an increase in price on the components of aggregate expenditure?

If the price level increases, government tax receipts fall and consequently government expenditure declines.

there will not be a trade-off because they can perfectly adjust their expectations

If workers accurately predict the rate of inflation, is there a short-run trade-off between inflation and unemployment, as predicted by the Phillips curve? Why or why not?

with another reserve note of equal value

If you took a $20 to the treasury dept or federal reserve bank, with what type of lawful money is the government likely to redeem it?

vertical

If, in the long run, real GDP returns to its potential level, then in the long run, the Phillips curve will be _________

If real GDP in the US declined by more during the 2007 - 2009 recession than did real GDP in Canada, China, and other trading partners of the US then....

Imports to the US fell more than the US exports, leading to an increase in Net Exports

How can we know the eventual value of the multiplier?

In each "round", the additional income prompts households to consume some fraction (the marginal propensity to consume).

Long-Run Macroeconomic Equilibrium

In long-run macroeconomic equilibrium, the AD and SRAS curves intersect at a point on the LRAS curve. In this case, equilibrium occurs at real GDP of $14.0 trillion and a price level of 100.

Basic AD/AS Model vs. Dynamic AD/AS Model

In the dynamic AD-AS model, the economy does not experience long-run growth, whereas in the basic AD-AS model, the economy experiences both continuing inflation and growth

Point C

In the figure, at which point is the inflation rate stable? What point can we refer to the inflation rate as the non-accelerating rate of unemployment?

All of the above

In the figure, the economy experiences inflation in the second period. What would be the Fed's reaction if actual real GDP occurs at point B and potential GDP occurs at LRAS2? A. Increase interest rates B. Contractionary Policy C. Open market sale of government securities D. All of the Above

banks grant loans to households and bundle the loans into securities that are then sold to investors

In the securitization process,

The Short-Run and Long-Run Effects of a Decrease in Aggregate Demand

In the short run, a decrease in aggregate demand causes a recession. In the long run, it causes only a decrease in the price level.

Aggregate Demand and Aggregate Supply

In the short run, real GDP and the price level are determined by the intersection of the aggregate demand curve and the short-run aggregate supply curve. In the figure, real GDP is measured on the horizontal axis, and the price level is measured on the vertical axis by the GDP deflator. In this example, the equilibrium real GDP is $14.0 trillion, and the equilibrium price level is 100.

According to an article in the New York Times, an official at the Bank of Japan had the following explanation of why monetary policy LOADING... was not pulling the country out of recession: "Despite recent major increases in the money supply, he said, the money stays in banks." Source: James Brooke, "Critics Say Koizumi's Economic Medicine Is a Weak Tea," New York Times, February 27, 2002.

In the quote, when the official says "the money stays in banks," he is referring to an increase in the reserves in banks. But the real problem was that banks were not lending the reserves. The reason for this may have been a lack of borrowers .

"The economy's potential to supply goods and services is determined by such things as labour force and capital stock, as well as inflation expectations."

Incorrect since changes in the expected price level affect short run aggregate supply but not for the long run aggregate supply

Consider the following statement: "The fed has an easy job. Say it wants to increase real GDP by $200 billion. All it has to do is increase the money supply by that amount." This statement is:

Incorrect, because an increase in the money supply does not affect real GDP directly

"Saving money is not lending. How can it be? When I save my money, I put it in a back. I don't loan it out to someone else."

Incorrect. The supply of loanable funds is determined by household savings.

If the Federal Reserve purchases $140 million worth of U.S. treasury bills from the public, the money supply will _____

Increase

Variables That Shift the Short-Run Aggregate Supply Curve

Increase in Labor force and Cap stock Productivity Expected Future Price Level Workers and Firms adjusting to underestimates of Price level Expected price of natural

In the figure to the right, which of the following events is most likely to cause a shift in the money demand (MD) curve from MD 1 to MD 2 (Point A to Point C)? A. Decrease in real GDP or decrease in the price level B. Increase in real GDP or increase in the price level C. Decrease in real GDP or increase in the price level D. Increase in real GDP or decrease in the price level

Increase in real GDP or increase in the price level

In the figure to the right, which of the following events is most likely to cause a shift in the money demand (MD) curve from MD 1 to MD 2 (Point A to Point C)?

Increase in real GDP or increase in the price level

In the figure to the right, which of the following events is most likely to cause a shift in the money demand (MD) curve from MD 1MD1 to MD 2MD2 (Point A to Point C)?

Increase in real GDP or increase in the price level

n the figure to the right, which of the following events is most likely to cause a shift in the money demand (MD) curve from MD1 to MD2 (Point A to Point C)?

Increase in real GDP or increase in the price level

Variables That Shift the Short-Run Aggregate Supply Curve

Increases in the Labor Force and in the Capital Stock Technological Change Expected Changes in the Future Price Level

John Maynard Keynes is said to have remarked that using an expansionary monetary policy to pull an economy out of a deep recession can be like "pushing on a string." What is Keynes likely to have meant?

Increasing reserves and lowering interest rates may not stimulate economic activity if banks don't lend and businesses don't borrow.

As AE increases

Induced expenditure

Monetary policy target used by the Fed?

Interest Rate

Variables That Shift the Aggregate Demand Curve

Interest Rate Gp Personal Income Taxes Household exp Firms Exp Domestic growth rate Exchange Rate

Suppose Ford Motor Company issues bonds with a face value of $100,000 and an annual coupon payment of $2,000 What is the interest rate Ford is paying on the borrowed funds?

Interest rate = coupon / face value 2%

Which of the following is a monetary policy target used by the Fed?

Interest rate.

Which of the following is a monetary policy target used by the Fed? The Fed uses policy targets of interest rate and/or money supply because

Interest rate. it can affect the interest rate and the money supply directly and these in turn can affect unemployment, GDP growth, and the price level.

The Federal Reserve cannot affect the price levelthe price level directly; therefore, the Fed typically uses the following as its policy target:

Interest rates.

What if Aggregate expenditure is equal to GDP?

Inventories are unchanged and the economy is in macroeconomic equilibrium.

What is the effect on inventories, GDP, and employment when aggregate expenditure exceeds GDP?

Inventories decrease, GDP increases and employment increases

What if the aggregate expenditure is greater than GDP?

Inventories fall and the GDP and employment increase.

What if the aggregate expenditure is less than GDP?

Inventories rise and GDP and employment decrease.

What is the effect on inventories, GDP, and employment when aggregate expenditure (total spending) exceeds GDP?

Inventories decrease, GDP increases, and employment increases.

Jack Lavery, former chief economist at Merrill Lynch, made the following observation about the U.S. economy in April 2009: "I expect inventory drawdown to be even more pronounced in the second quarter, which will contribute to the fourth successive quarterly decline in real GDP." What does Lavery mean by "inventory drawdown"? What component of aggregate expenditure would be affected by an inventory drawdown? Why would this contribute to GDP decline? Source: Jack Lavery, "Real GDP Declines Far More Than Predicted," minyanville.com, April 29, 2009.

Inventory drawdowns affect the investment expenditure category of aggregate expenditure, and can reduce GDP growth by discouraging firms from increasing production .

How do investment banks differ from commercial banks? (Mark all that apply.) A. Investment banks generally do not lend to households. B. Commercial banks are financial advisors to firms issuing stocks. C. Investment banks take deposits. D. Investment banks do not take deposits. E. Commercial banks do not lend to households.

Investment banks generally do not lend to households. Investment banks do not take deposits.

Short-term nominal interest rate

Is considered the most relevant rate when conducting monetary policy

The Fed uses policy targets of interest rate and/or money supply because

It can affect the interest rate and the money supply directly and these in turn can affect unemployment, GDP growth and the price level

Where does Macroeconomic equilibrium occur?

It can occur anywhere on the 45 degree line, Ideally, we would like it to occur at the level of potential GDP.

What is the Taylor rule?

It is a rule that links the Fed's target for the federal funds rate to the current inflation rate, real equilibrium federal funds rate, inflation gap and output gap.

An article by three economists at the Federal Reserve Bank of Richmond notes that by the fall of 2011, many unemployed people in the United States had been out of work for more than six months. The economists argue that: "After a long period of unemployment, affected workers may become effectively unemployable." They conclude that: "Policy options [such as providing additional training] that increase the ability of unemployed workers to find work " may be more effective at reducing unemployment than additional monetary stimulus." Source: Andreas Hornstein, Thomas A. Lubik, and Jessie Romero,"Potential Causes and Implications of the Rise in Long-Term Unemployment," Federal Reserve Bank of Richmond, Economic Brief, September 2011. What is a policy of monetary stimulus?

It is an expansionary monetary policy which lowers interest rates.

Shifts of the Short-Run Aggregate Supply Curve versus Movements along It

It is important to remember the difference between a shift in a curve and a movement along a curve.

it is still accepted as a legal tender for transactions

It is possible for people to continue to use a currency when the government that issued it has replaced it with another currency because

What do economists mean by the demand for money?

It is the amount of money - currency and checking account deposits - that individuals hold

What do economists mean by the demand for money?

It is the amount of money-currency and checking account deposits- that individuals hold

What do economists mean by the demand for money?

It is the amount of money-currency and checking account deposits-that individuals hold

What do economists mean by the demand for money?

It is the amount of moneylong dashcurrency and checking account depositslong dashthat individuals hold.

What do economists mean by the demand for money? What is the advantage of holding money? What is the disadvantage of holding money?

It is the amount of money—currency and checking account deposits—that individuals hold. Money can be used to buy goods, services, or financial assets. Money, in the form of currency or checking account deposits, earns either no interest or a very low rate of interest.

The Taylor rule for federal funds rate targeting does which of the following?

It links the Fed's target for the federal funds rate to economic variables.

What does consumption do?

It tends to follow a relatively smooth, upward trend; its growth declines during periods of recession.

At the beginning of 2005, Robert Toll, CEO of Toll Brothers, argued that the United States was not experiencing a housing bubble. Instead, he argued that higher house prices reflected restrictions imposed by local governments on building new houses. He argued that the restrictions resulted from "NIMBY"long dash"Not in My Back Yard"long dashpolitics. Many existing homeowners are reluctant to see nearby farms and undeveloped land turned into new housing developments. As a result, according to Toll, "Towns don't want anything built." Source: Shawn Tully, "Toll Brothers: The New King of the Real Estate Boom," Fortune, April 5, 2005. Why would the factors mentioned by Robert Toll cause housing prices to rise?

It would keep the supply of housing from increasing.

At the beginning of 2005, Robert Toll, CEO of Toll Brothers, argued that the United States was not experiencing a housing bubble. Instead, he argued that higher house prices reflected restrictions imposed by local governments on building new houses. He argued that the restrictions resulted from "NIMBY"long dash—"Not in My Back Yard"long dash—politics. Many existing homeowners are reluctant to see nearby farms and undeveloped land turned into new housing developments. As a result, according to Toll, "Towns don't want anything built." Source: Shawn Tully, "Toll Brothers: The New King of the Real Estate Boom," Fortune, April 5, 2005. Why would the factors mentioned by Robert Toll cause housing prices to rise?

It would keep the supply of housing from increasing.

M1 will decrease by $100

Jill makes a deposit into her savings account at the local bank with $100 in cash. As a result of this transaction,

the productive capacity of the economy; shift right

Labor force increases. Because this is a change in ____________ the LRAS will _________

In reporting on real GDP growth in the second quarter of 2015, an article in the Wall Street Journal noted that the 2.3 precent annual growth rate "would have been stronger if it hadn't been for companies drawing down inventories. a. If companies are drawing down inventories, is AE likely to have been larger or smaller than GDP?

Larger, AE > Y

In 2008, the required reserve ratio for a bank's first $9.3 million in checking account deposits was zero. It was 3 percent on deposits between $9.3 million and $43.9 million, and 10 percent on deposits above $43.9 million. In most cases, and for simplicity, we assume that the required reserve ratio is 10 percent on all deposits. Therefore, the simple deposit multiplier is 10. Is the real-world deposit multiplier greater than, less than, or equal to the simple deposit multiplier?

Less. The simple deposit multiplier is a model with assumptions that keep it higher than the real-world multiplier.

Liabilities

Liabilities are the value of anything that the bank owes.

Recall that "securitization" is the process of turning a loan, such as a mortgage, into a bond that can be bought and sold in secondary markets. An article in the Economist notes: That securitization caused more subprime mortgages to be written is not in doubt. By offering access to a much deeper pool of capital, securitization helped to bring down the cost of mortgages and made home-ownership more affordable for borrowers with poor credit histories. Source: "Ruptured Credit," Economist, May 15, 2008. What is a "subprime mortgage," and would a subprime borrower be likely to pay a higher or a lower interest rate than a borrower with a better credit history?

Loans granted to borrowers with flawed credit histories; a higher interest rate.

Which of the following is NOT a monetary policy LOADING... goal of the Federal Reserve bank (the Fed)?

Low prices

Which one of the following is not the formula for the quantity theory of money?

M x Y = P x V

Using the following information what is the velocity of money? Money supply $1,500 Price level 1.21 Real GDP $10,000 The velocity of money is equal to: ____.

M*V=P*Y V=(P*Y)/M V=(1.21*10000)/1500 V=8.07

The Federal Reserve uses two definitions of the money supply, M1 and M2, because

M1 is a narrow definition focusing more on liquidity, whereas M2 is a broader definition of the money supply

If the Federal Reserve decided to include virtual money like Bitcoins in its measure of the money supply, what would be the effect on M1 or M2?

M1 would rise.

An article published in an econ journal found the following: "For the poorest households, the marginal propensity to consume was close to 70%. For the richest households, the MPC was only 35%." Assume that the macroecon can be divided into 3 sections. Section A consists of the poorest households and section B consists of the richest households, section C consists of all other house holds. a. Compute the value of the multiplier for section A

MPC of A = .7 plug that into multiplier 1/1-.7 = 3.3

An article published in an econ journal found the following: "For the poorest households, the marginal propensity to consume was close to 70%. For the richest households, the MPC was only 35%." Assume that the macroecon can be divided into 3 sections. Section A consists of the poorest households and section B consists of the richest households, section C consists of all other house holds. b. Compute the value of the multiplier for section B

MPC of B = .35 plug that into multiplier 1/1-.35 = 1.5

The relationship between the marginal propensity to consume (MPC) and the marginal propensity to save (MPS) can best be described as

MPC+MPS=1, MPC=1-MPS, MPS=1-MPC

Beginning in 2008, the Federal Reserve and the U.S. Treasury Department responded to the financial crisis by intervening in financial markets in unprecedented ways. Which of the following is one of the unprecedented actions of the Fed?

Making loans to primary dealers and holders of mortgage-backed securities.

Slope of AE known as MPC

Marginal Propensity to consume = Delta C / Delta Y

The SRAS curve slopes upward because of the existence of

Menu costs, slow adjustments of wages, and prices and slow adjustment of input prices

Real Business Cycle Models

Models that use factors, such as technology shocks, to explain fluctuations in real GDP instead of changes in the money supply are called A. Monetary business cycle models B. Real Business Cycle Models C. Real Technology Models D. Real Monetary Models

Why would the causes of a recession and its severity affect the accuracy of forecasts of when the economy would return to potential GDP?

Models used for forecasting are based on historical experience and the relationships in the model can change

Changes in Government Policies

Monetary policy Fiscal policy .

Store of value

Money allows value to be stored easily. What you don't use today, you can use next week. That is, money tends to be durable such that its value is not lost by spoilage.

What is the advantage of holding money?

Money can be used to buy goods, services, or financial assets

What is the advantage of holding money?

Money can be used to buy goods, services, or financial assets.

Standard of deferred payment.

Money can facilitate exchange over time by acting as a standard of deferred payment, which is useful in lending and borrowing.

What is the disadvantage of holding money?

Money in the form of currency or checking account deposits, earns either no interest or a very low rate of interest

payments agreed to today but made in the future are in terms of money

Money serves as a standard of deferred payment when

prices of goods are stated in the terms of money

Money serves as a unit of account when

What is the disadvantage of holding money?

Money, in the form of currency or checking account deposits, earns either no interest or a very low rate of interest

Fiat money

Money, such as paper currency, that is authorized by a central bank or governmental body and that does not have to be exchanged by the central bank for gold or some other commodity money.

Change in Equi. GDP =

Multiplier * Change in autonomous expenditure

Supposed NE increase by $400. What will b the new equi level of real GDP?

Multiplier = 1/ 1 - 0.6 = 2.5 .... Change in equi of GDP = Change in AE * Multiplier.... Change in GDP = 400 * 2.5 = 1,000 so New level is 10,000 + 1,000 = 11,000

Suppose the government increases expenditures by $10 billion and the marginal propensity to consume is 0.50. By how will equilibrium GDP change? The change in equilibrium GDP is: $ __ billon.

Multiplier= 1/(1-MPC) Multiplier= 1/(1-.5) GDP= change in government expenditure*multiplier GDP = 10*2 GDP=20

The quantity equation is M×V=P×Y

M = Money supply: We use M1. V = Velocity of money: The average number of times each dollar in the money supply is used to purchase goods and services included in GDP. P = Price level: Typically, the GDP deflator. Y = Real output: Typically, real GDP.

(NFI) (net foreign investment)

Net exports equals _________

In the third quarter of 2015, business inventories in the USA increased by $62 billion. Can we tell from this information, weather AE was higher or lower than GDP during the third quarter of 2015? If not, what other information do we need?

No you can't tell, uncertain. Because it needs to be unplanned change inventory for us to know. We need to know the planned change in inventory to know

Is it possible for the federal funds rate to be negative?

No, nominal interest rates have a lower bound of zero.

Consider the figure to the right. Can the Fed achieve a $900 billion money supply (MS) AND a 5% interest rate (point C)? A. Yes. The Fed can target the money supply or the interest rate. B. No. The Fed does not control the money supply. C. No. The Fed cannot target both the money supply and the interest rate simultaneously. D. Yes. Controlling the money supply sets the interest rate.

No. The Fed cannot target both the money supply and the interest rate simultaneously

Consider the figure to the right. Can the Fed achieve a $900 billion money supply (MS) AND a 5% interest rate (point C)?

No. The Fed cannot target both the money supply and the interest rate simultaneously.

Which of the following is not a correct comparison between a contractionary monetary policy in the basic aggregate demand and aggregate supply model and in the dynamic aggregate demand and aggregate supply model?

None of the above are correct statements about the two models

None of the above are correct statements about the two models.

current income

One-time tax rebates, such as those in 2001 and 2008, increase consumption spending by less than a permanent tax cut because one-time tax rebates increase A. Permanent Income B. Current Income C. Multiplier Effect D. Taxable income

Suppose the economy is in equilibrium in the first period at point A. In the second period, the economy reaches point B. What policy would the Fed likely pursue in order to move AD 2 to AD Subscript 2 comma policy and reach equilibrium (point C) in the second period? (What policy will increase the price level and increase actual real GDP?) A. Open market purchase of government securities B. Increase the reserve requirement C. Decrease taxes D. Increase the discount rate

Open market purchase of government securities

Suppose the economy is in equilibrium in the first period at point A. In the second period, the economy reaches point B. What policy would the Fed likely pursue in order to move AD 2AD2 to AD Subscript 2 comma policyAD2, policy and reach equilibrium (point C) in the second period?

Open market purchase of government securities

The figure to the right illustrates a dynamic AD-AS model Suppose the economy is in equilibrium in the first period at point A. In the second period, the economy reaches point B. What policy would the Fed likely pursue in order to move AD 2 to AD Subscript 2 comma policy and reach equilibrium (point C) in the second period? A. Decrease taxes. B. Increase the reserve requirement. C. Raise the discount rate. D. Open market purchase of government securities.

Open market purchase of government securities.

The figure to the right illustrates a dynamic AD-AS model. Suppose the economy is in equilibrium in the first period at point A. In the second period, the economy reaches point B. What policy would the Fed likely pursue in order to move AD 2 to AD2(policy) and reach equilibrium (point C) in the second period?

Open market purchase of government securities.

Present value is the value in today's dollars of funds to be paid or received in the future. If the current interest rate is 12%, then the present value of $1,000 to be received in 15 years is

PV = FV/(1+i)^n 1000/(1+.12)^15= 182.70

The Short-Run and Long-Run Effects of a Supply Shock

Panel (a) shows that a supply shock, such as a large increase in oil prices, will cause a recession and a higher price level in the short run. The recession caused by the supply shock increases unemployment and reduces output. In panel (b), rising unemployment and falling output result in workers being willing to accept lower wages and firms being willing to accept lower prices. The short-run aggregate supply curve shifts from SRAS2 to SRAS1. Equilibrium moves from point B back to potential GDP and the original price level at point A.

not valuable

Paper currency is a good medium of exchange because it is

Economic Growth =

Percent change in GDP = [(GDP(year2) - GDP(year1)) / GDP(year1)] x 100

Inflation Rate =

Percent change in price level = [(Price Level(year2) - Price Level (year1)) / Price Level (year1)] x 100

In a Federal Reserve Board publication, the following observation was made: "The impact of inventory increases on the business cycle depends upon whether the increases are planned or unplanned." Which of the following is a correct statement about planned inventory increases? Which of the following is a correct statement about unplanned inventory increases?

Planned inventory increases are likely to indicate business optimism and correspond with upturns in the business cycle. Unplanned inventory increases are likely to indicate that aggregate expenditures are low and correspond with downturns in the business cycle.

Planned Investment

Planned spending by firms on capital goods, and by households on new homes.

supply side economics

Policy that is specifically designed to affect AS and increase incentives to work, save, start a business, by reducing the tax wedge is called

What is the value net exports affected by?

Price level in U.S. vs. the price level in other countries. U.S. growth rate vs. growth rate in other countries. U.S. dollar exchange rate

You are considering purchasing stock. The stock is expected to pay a dividend of $10 per share. The consensus of investors is that these dividends will increase at a rate of 4 percent per year for the indefinite future, and the interest rate is 11 percent. The price of the stock should be

Price of stock = Dividend/ (i-growth) 10/(.11-.04)= 142.86

Market Value =

Price x Quantity

Real GDP =

Prices(base year) x Quantity(current year)

If the Federal Reserve is late to recognize a recession and implements an expansionary policy too late, the result could be an increase in inflation during the beginning of the next phase. Even though the goal had been to reduce the severity of the recession, the poor timing caused another problem: inflation. This is an example of what type of policy?

Procyclical policy

GNP counts

Production by American firms no matter where they are located. Doesn't include foreign companies on American soil

What happens if a demand for product rises?

Production will increase and so will the product price.

A bond is being sold that will pay the owner of the bond $10,000 in one year. The price of the bond is &9,500 and the Federal Reserve would like to reduce the interest rate. The Federal Reserve should

Purchase bonds, driving up the price of bonds

reserve ratio

RR is

Consider the following simplified balance sheet for a bank: Assets: Reserves $10,000 Loans $66,000 Liabilities: Deposits $70,000 Stockholders' equity $6,000 (a) If the required reserve ratio (RR) is 10 percent, this bank currently holds _____ in excess reserves. (b) The maximum amount by which the bank can expand its loans is _____. (c) Assets: Reserves ________ Loans ________ Liabilities: Deposits ________ Stockholders' equity ________

RR= rr*D RR=.10*$70,000 RR=$7,000 ER= R-RR ER=$10,000-$7,000 ER= $3,000 (a) $3,000 (b) $3,000 (c) Assets: Reserves $10,000 Loans $69,000 Liabilities: Deposits $73,000 Stockholders' equity $6,000

Suppose the Deja owns a McDonald's franchise. She decides to move her restaurant's checking account to Wells Fargo, which causes the changes show on the following T-account. Wells Fargo Assets Reserves +$100,000 Liabilities Deposits $100,000 If the required reserve ratio is 0.20, or 20 percent, and Wells Fargo currently has no excess reserves, the maximum loan Wells Fargo can make as result of this transaction is $____.

RR= rr*D RR=.20*$100,000 RR=$20,000 ER= R-RR ER=$100,000-$20,000 ER= $80,000

What is not a loanable fund?

Real Estate

Which of the following is not an issue with using active monetary policy to reduce business cycles?

Real GDP and employment changes from monetary policy actions can move in a countercyclical manner.

Which one of the following is NOT one of the monetary policy goals of the Fed?

Reduce income inequality

Which one of the following is not one of the monetary policy goals of the Fed?

Reduce income inequality.

Required reserves

Reserves that a bank is legally required to hold, based on its checking account deposits.

Excess reserves

Reserves that banks hold over and above the legal requirement.

Use the information in the following table for calendar year 2012 to prepare an income statement for this particular fast food chain. Amounts shown are in millions. Revenue from company restaurants 6,517 Revenue from franchised restaurants 6,960 Cost of operating company-owned restaurants 3,621 Income taxes 1,307 Interest expense 500 General and administrative cost 2,385 Cost of restaurant leases 1,231

Revenue $23477 Revenue from company restaurants 16,517 Revenue from franchised restaurants 6,960 Operating expenses Cost of operating company restaurants 13,621 Interest expense 500 General and administrative cost 2,385 Cost of restaurant leases 1,231 Total operating expenses $17737 Operating income $5740 Income before income taxes $5740 Income taxes 1,307 Net income (accounting profit) $4433

Profit =

Revenue-Cost

Value Added =

Sales Price - cost of intermediate goods

included only in M2

Savings account balances, small denomination time deposits, and non institutional money market fund shares are

The SRAS will ___________ if there is an increase in the expected price of an important natural resource.

Shift to the left

The SRAS will ___________ if there is an increase in expected future prices.

Shift to the left.

1/RR

Simple Deposit Multiplier=

Why would securitization give mortgage borrowers access to a deeper pool of capital?

Since banks could resell mortgages to investors, they had access to more funds than just their own deposits.

Interest Rate

Since business investment is sometimes financed by borrowing, the real interest rate is an important consideration for investing. A higher real interest rate results in less investment spending, and a lower real interest rate results in more investment spending.

Why was the Fed hoping for consumers to increase their spending in late 2010?

Since consumption spending is the largest component of GDP, an increase in consumption would have increased the growth rate of real GDP.

If you deposit $20,000 in a savings account at a bank , you might earn 3 percent interest per year. Someone who borrows $20,000 from a bank to buy a new car might have to pay an interest rate of 8 percent per year on the loan. Knowing this, why don't you just lend your money directly to the car buyer, cutting out the bank?

Since you would be loaning all of your savings to one borrower, it would be extremely risky.

Assume inventories are the only thing changing and prices are constant

So Y - AE = Unplanned change in inventories

Consumption

Spending by households on goods and services.

Government Purchases

Spending on all levels of government on goods and services.

Suppose a stock will pay a dividend annually forever. In particular, it will pay a $100 dividend in one year and the dividend will increase 1 percent per year thereafter. The interest rate is 2 percent. What is the stock's price?

Stock Price = Dividend/ (i - growth) 100/ (.02-.01) = 10,000

Stockholders' equity

Stockholders' equity is the difference between the assets and liabilities.

$50 in required reserves

Suppose American Bank has $500 in deposits and $200 in reserves and that the required reserve ratio is 10 percent. In this situation American Bank has

Open Market Purchase of Government Securities (this increases the money supply, increasing inflation rate and lowering price level)

Suppose an economy is in equilibrium above the potential GDP for the current year. What policy would the Fed likely pursue in order to move the AD to the potential GDP? A. Increase Reserve Ratio Requirement B. Raise Discount Rate C. Open Market Purchase of Government Securities D. Decrease Taxes

firms lose since they don't have the convenience of credit cards

Suppose congress changes the law to require all firms to accept paper currency in exchange for whatever they are selling all are correct except

it should not change if the economy is at full employment

Suppose that last year the unemployment rate was 5 percent and the inflation rate was 2.5 percent. If the natural rate of unemployment is 5 percent, how do you expect inflation to change?

You would have to reduce loans to make up for the necessary increase in reserves

Suppose that you are a bank manager, and the federal reserve raises the required reserve ratio from 10 percent to 12 percent. What actions would you need to take?

it would fall to an equal level with national savings

Suppose the US congress is successful in enacting tariffs large enough to eliminate the current account deficit. what would happen to the level of domestic investment?

increase in the balance of the US financial account

Suppose the majority of Share of Ford stock were sold to a Japanese firm. Assuming all else remain constant, this will

M1 remains unchanged

Suppose you decide to withdraw $100 from your checking account. What is the effect on M1?

Both M1 and M2 will remain unchanged

Suppose you have $2000 in a shoebox. One day you decide to deposit the money in a checking account. How will this action affect the M1 and M2 definitions of money supply?

S public=

T-G-TR

the productive capacity of the economy; shift right

Technological change occurs. Because this is a change in ____________ the LRAS will _________

fixed exchange rate system

The Bretton Woods system is considered a ______ _____ _____ _____

Which of the following are reasons why the federal government uses the CPI when deciding how much to increase Social Security payments to retired workers to keep the purchasing power of the payments from declining?

The CPI continues to be the most widely used measure of inflation.

Why might European governments have felt the need to support their banks in order to avoid another Lehman moment

The European governments wanted to avoid wider economic repercussions resulting from bank failures that could undermine the financial positions of other firms and lead to a further reduction in prices of financial assets.

Why might European governments have felt the need to support their banks in order to avoid another Lehman moment?

Which of the following best explains how the Fed acts to help prevent banking panics?

The Fed acts as a lender of last resort, making loans to banks so that they can pay off depositors

Which of the following best explains how the Federal Reserve acts to help prevent banking panics

The Fed acts as a lender of last resort, making loans to banks so they can pay off depositors

Which of the following best explains how the Federal Reserve acts to help prevent banking panics?

The Fed acts as a lender of last resort, making loans to banks so that they can pay off depositors

Which of the following best explains how the Federal Reserve acts to help prevent banking panics?

The Fed acts as a lender of last resort, making loans to banks so that they can pay off depositors.

High Unemployment

The Fed buys and sells bonds as a part of its policy to reach all of the following objectives except A. Price Stability B. Economic Growth C. High Unemployment D. Stability of financial markets and institutions

When the Fed conducts an open market purchase

The Fed buys securities from banks and the money supply increases. The interest rate should decrease

The Fed can only soften the magnitude of recessions, not eliminate them.

The Fed uses monetary policy to offset the effects of a recession (high unemployment and falling prices when actual real GDP falls short of potential GDP) and the effects of a rapid expansion (high prices and wages). Can the Fed, therefore, eliminate recessions? A. The Fed can, but choses not to, eliminate recessions. B. The Fed can only soften the magnitude of recessions, not eliminate them. C. The Fed is only concerned with the money supply and interest rates. D. The Fed can eliminate recessions by properly anticipating the economic events that cause them.

The Fed can only soften the magnitude of recessions, not eliminate them.

In the graph of the money market show below, what could cause the money supply curve to shift from MS1 to MS2?

The Fed decreases the money supply by deciding to sell U.S. Treasury securities

In the graph of the money market shown on the right, what could cause the money supply curve to shift from MS1 to MS2?

The Fed decreases the money supply by deciding to sell U.S. Treasury securities.

In the graph of the money market shown on the right, what could cause the money supply curve to shift from MS11 to MS22? In the graph of the money market shown on the right, what could cause the money demand curve to shift from MD11 to MD22?

The Fed decreases the money supply by deciding to sell U.S. Treasury securities. A. An increase in real GDP. C. An increase in the price level

Why would the Fed intentionally use contractionary monetary policy to reduce real GDP?

The Fed intend to reduce inflation, which occurs if real GDP is greater than potential GDP

Why would the Fed intentionally use contractionary monetary policy to reduce real GDP?

The Fed intends to reduce inflation, which occurs if real GDP is greater than potential GDP.

Which of the following statements is true about the Fed's monetary policy targets?

The Fed is forced to choose between the interest rate and the money supply as its monetary policy target.

Nobel laureate Milton Friedman and his followers belong to a school of thought known as monetarism. What do the monetarists argue the Fed should target?

The Fed should target the money supply, not the interest rate, and that it should adopt the monetary growth rule.

Nobel laureate Milton Friedman and his followers belong to a school of thought known as monetarism. What do the monetarists argue the Fed should target? A. The Fed should target BOTH the interest rate and the money supply. B. The Fed should target the interest rate, not the money supply, and that it should adopt the monetary growth rule. C. The Fed should target the money supply, not the interest rate, and that it should adopt the monetary growth rule. D. The Fed should target NEITHER the interest rate nor the money supply

The Fed should target the money supply, not the interest rate, and that it should adopt the monetary growth rule.

The Federal Reserve Bank acts as

The Federal Reserve Bank acts as a lender of last resort, provides check-clearing services, and acts as a banker's bank. The most important role of the Federal Reserve Bank (the Fed) is that of monetary policy and control of the money supply. The country is divided into 12 districts, each with its own branch of the Federal Reserve Bank. The Board of Governors of the Federal Reserve banks consists of 7 members, each appointed by the president to 14-year, non-renewable terms. One of the 7 board members is appointed to be the chairman for a 4-year, renewable term

Which of the following accurately describes expansionary monetary policy?

The Federal Reserve causes an increase in the money supply.

Which of the following accurately describes a recent change in the Federal Reserve's balance sheet?

The Federal Reserve has more loans to financial markets and institutions on the assets side of its balance sheet.

Which of the following accurately describes contractionary monetary policy?

The Federal Reserve increases interest rates.

(all of the above) checking account deposits, holding of travlers check, currency in circulation

The M1 measure of the money supply includes which of the following components?

The diagram on the right shows the relationship betwen consumption and income for the years 1979 through 2006.

The MPC during this time period was about 0.97.

How Expectations of the Future Price Level Affect the Short-Run Aggregate Supply

The SRAS curve shifts to reflect worker and firm expectations of future prices. 1. If workers and firms expect that the price level will rise by 3 percent, from 100 to 103, they will adjust their wages and prices by that amount. 2. Holding constant all other variables that affect aggregate supply, the short-run aggregate supply curve will shift to the left. If workers and firms expect that the price level will be lower in the future, the short-run aggregate supply curve will shift to the right.

shift to the right

The SRAS curve will ________ if there is a technological change

shift to the left

The SRAS curve will ________ if there is an increase in expected future price

shift to the right

The SRAS curve will ________ if there is an increase in productivity

shift to the left

The SRAS curve will ________ if there is an increase in the adjustment of workers' and firms' prior underestimation of the price level

shift to the left

The SRAS curve will ________ if there is an increase in the expected future price of an important natural resource

shift to the right

The SRAS curve will ________ if there is an increase in the labor force or capital accumulation

Monetary policy is defined as:

The actions the Fed takes to manage the money supply and interest rates

Monetary policy

The actions the Federal Reserve takes to manage the money supply and interest rates to pursue macroeconomic policy objectives.

Monetary policy is defined as:

The actions the Federal Reserve takes to manage the money supply and interest rates.

Marginal Propensity to save (MPS)

The amount by which saving changes when disposable income changes.

Velocity of money

The average number of times each dollar in the money supply is used to purchase goods and services included in GDP.

Open Market Operations

The buying and selling of Treasury securities to control the money supply. Buying treasury securities increases the money supply while selling treasury securities decreases the money supply.

the public plus their checking account balance

The central bank of a country controls the money supply, which equals the currency held by

Menu costs

The costs to firms of changing prices.

Cash Flow

The difference between the cash revenues received by a firm and the cash spending by the firm.

difficulty

The difficulty in predicting how much aggregate demand and aggregate supply will shift means that economists often have difficulty correctly predicting the beginning and end of recessions.

What is the discount rate?

The discount rate is the rate at which the Fed lends to banks.

Unemployed workers receive unemployment insurance payments from the government. Does the existence of unemployment insurance make it likely that consumption will fluctuate more or fluctuate less over the business cycle than it would in the absence of unemployment insurance? The primary explanation for this is because:

The existence of unemployment insurance makes it less likely that consumption will fluctuate over the business cycle. with unemployment insurance, current disposable income fluctuates less over the business cycle.

The federal funds rate

As the figure to the right indicates, the Fed can affect both the money supply and interest rates. However, in recent years, the Fed targets interest rates in monetary policy more often than it does the money supply. Which interest rate does the Fed target? A. The short-term real interest rate B. The federal funds rate C. The discount rate D. The long-term nominal interest rate

The federal funds rate

In 2015, one article in the Wall Street Journal discussed the possibility of "a September quarter-point increase in the Fed's range for overnight target rates," while another article noted, "the U.S. central bank's discount rate...has been set at 0.75% since February 2010." Sources: Justin Lahart, "Jobs Give Fed Green Light; Inflation Sets Speed Limit," Wall Street Journal, August 7, 2015; and Ben Leubsdorf, "Five Regional Fed Banks Asked to Raise Discount Rate," Wall Street Journal, July 14, 2015. What is the name of the "target interest rate" mentioned in this article?

The federal funds rate.

In 2013, one article in the Wall Street Journal noted that: "The Fed's Board of Governors kept the discount rate unchanged at 0.75%," while another article predicted that: "The Fed can be expected to state again that the target rate won't change until mid-2015." Sources: Michael J. Casey, "Let's Get This Over and Done With, Fed," Wall Street Journal, June 19, 2013; and Sarah Portlock and Eric Morath, "Some Fed Officials See 'Diminished' Downside Risks," Wall Street Journal, February 26, 2013. What is the name of the "target interest rate" mentioned in this article? Who borrows money and who lends money at this "target interest rate"? What is the discount rate?

The federal funds rate. Banks borrow and banks lend. The discount rate is the rate at which the Fed lends to banks.

Suppose that the equilibrium real federal funds rate is 5 percent and the target rate of inflation LOADING... is 3 percent. Use the following information and the Taylor rule LOADING... to calculate the federal funds rate target: Current inflation rate = 1 percent Potential real GDP = $14.57 trillion Real GDP = $14.27 trillion

The federal funds target rate is 3.97%.

constitutes offering discount loans to distressed banks, but the "bail out of the banks" involved the banks in exchange for ownership in the banks

The federal reserve acting as the lender of the last resort to prevent a bank panic

M1 is a narrow definition focusing more on liquidity, whereas M2 is a broader definition of the money supply

The federal reserve uses two definitions of the money supply, M1 and M2, because

more vulnerable than commercial banks to bank runs because they were more highly leveraged than commercial banks

The financial firms of the shadow banking system were

The Federal Reserve has multiple economic goals for monetary policy to achieve, However, it can be difficult to manage all of the goals at once. Which of the following is not true regarding the multiple goals of the Fed?

The goal of financial market stability means that the Fed tries to ensure that asset prices, such as stock prices, increase at a very high rate so investors can make more money.

Which one of the following is not a determinant of consumption spending? The most important determinant of consumption spending is A rise in stock prices and housing prices

The growth rate in the United States relative to the growth rates in other countries. current personal disposable income. increases household wealth which in turn increases consumption and leads to an upward shift of the consumption function.

The Wealth Effect: How a Change in the Price Level Affects Consumption

The impact of the price level on consumption is called the wealth effect.

The Interest-Rate Effect: How a Change in the Price Level Affects Investment

The impact of the price level on investment is known as the interest-rate effect.

The International-Trade Effect: How a Change in the Price Level Affects Net Exports

The impact of the price level on net exports is known as the international-trade effect.

Multiplier

The increase in equilibrium real GDP divided by the increase in autonomous expenditure leads to a larger increase in real GDP.

increase; increase; decrease

The increase in interest rates as a result of the government of Mexico running a budget deficit will: cause an ________ in the value of the peso relative to other currencies and therefore ______ imports and ______ exports

The federal funds rate is

The interest rate that banks charge each other for overnight loans

Some economists argue that one cause of the financial problems resulting from the housing crisis was the fact that lenders who grant mortgages no longer typically hold the mortgages until they are paid off. Instead, lenders usually resell their mortgages in secondary markets. How might a lender intending to resell a mortgage act differently than a lender intending to hold a mortgage?

The lender might make more risky loans.

Required reserve ratio

The minimum fraction of reserves that banks are required by law to keep as reserves.

Which of the following is not a viable monetary policy target for the Fed?

The money demand.

What ar the Fed's main monetary policy targets?

The money supply and interest rates

According to the quantity theory of money, inflation results from which of the following?

The money supply grows faster than real GDP.

The Federal Reserve carries out Open Market Operations and purchases Treasury Bonds. The following will occur:

The money supply will rise, interest rates will decrease, autonomous consumption & investment will increase, equilibrium output will increase

controlling the money supply to pursue economic objectives

The most important role of the federal reserve in todays US economy is

There are two lines on the bottom one there is a point A derectly above point a is point be on the second line. Further down the top line from point B is point C.

The movement from point A to point B shows a change in autonomous expenditure. At each level of income (real GDP), aggregate expenditure has increased. The movement from point B to point C shows a change in induced expenditure. An increase in income (real GDP) has induced (or caused) an increase in aggregate expenditure.

The narrowest definition of the money supply: The sum of currency in circulation, checking account deposits in banks, and holdings of traveler's checks.

What has contributed to the slow growth in employment in recent years?

The number of baby-boomers reaching retirement age, and the severity of the 2007-9 recession

Capital Account

The part of the balance of payments that records migrants' transfers and sales of nonproduced, nonfinancial assets is called A. Balance account B. Capital Account C. Current Account D. Financial Account

Zimbabwean currency was worthless

The people buying medical services at this hospital could not use money to pay for the medical services they were buying because the

If the interest rate is 20 percent, what is the present value of a bond that matures in two years, pays $85 one year from now, and pays $1,085 two years from now?

The present value of the bond is $824.30. 85/(1+.20) + 1085/(1+.20)^2 = 824.30

Suppose you have inherited $50,000 from your aunt. However, you will not receive this until your aunt's estate is settled, which will take one year. If the interest rate is 5 percent, then what is the present value of your inheritance?

The present value (PV) of your inheritance to be received in one year is 50,000/(1+.05) = 47,619.05

price level; not change

The price level increases. Because this is a change in ____________ the LRAS curve will _______

shift left; an adjustment of past errors in expectations of future price

The price level that is currently higher than expected will ________ the SRAS curve because this is a change in _________

Suppose you buy the bond of a large corporation at a time when the inflation rate is very low. If the inflation rate DECREASES during the time you hold the bond, what is likely to happen to the price of the bond?

The price of the bond increases

What impact would each of the following events be likely to have on the price of Google's stock? A competitor launches a search engine that is just as good as Google's. . The corporate income tax is abolished. . Google's board of directors becomes dominated by close friends and relatives of its top management. . The price of wireless Internet connections unexpectedly drops, so more and more people use the Internet. Google announces a huge profit of $1 billion, but everybody anticipated that Google would earn a huge profit of $1 billion. .

The price of Google's stock would be expected to fall The price of Google's stock would be expected to rise The price of Google's stock would be expected to fall The price of Google's stock would be expected to rise The price of Google's stock would be expected to stay the same

Multiplier Effect

The process by which an increase in autonomous expenditure leads to a larger increase in real GDP.

How does the quantity theory provide an explanation about the cause of inflation?

The quantity equation shows that if the money supply grows at a faster rate than real GDP, then there will be inflation.

In the figure in the previous question, when money supply decreased from MS1 to MS2, the equilibrium interest rate increased from 3% to 4% along MD2. Why?

The quantity of money demanded at 3% is greater than the money supply, There is excess supply of bonds, and an increased supply of bonds drives down their prices.

to explain the inflation rate in the long run

The quantity theory of money is better able

is smaller than the simple deposit multiplier because banks keep excess reserves and households hold excess cash

The real world money multiplier

Consumption Function

The relationship between consumption spending and disposable income.

a trade-off; no trade-off

The short-run Phillips curve exhibits ________ between inflation and unemployment, whereas the long-run Phillips curve shows _______ between inflation and unemployment

all of the above

The simple deposit multiplier equals

Marginal Propensity to consume (MPC)

The slope of the consumption function: The amount by which consumption spending changes when disposable income changes.

Consider the following statement: "The Fed has an easy job. Say it wants to increase real GDP by $200 billion. All it has to do is increase the money supply by that amount."

The statement is incorrect because an increase in the money supply does not affect real GDP directly.

Former president Ronald Reagan once stated that inflation "has one cause and one cause alone: government spending more than government takes in." Source: Edward Nelson, "Budget Deficits and Interest Rates," Monetary Trends, Federal Reserve Bank of St. Louis, March 2004.

The statement is correct in that such expansionary fiscal policy is likely to stimulate aggregate demand , which can cause inflation.

Explain whether you agree with this argument: If the Fed actually ever carried out a contractionary monetary policy, the price level would fall. Because the price level has not fallen in the United States over an entire year since the 1930s, we can conclude that the Fed has not carried out a contractionary policy since the 1930s.

The statement is false. A contractionary policy could result in a lower rate of inflation rather than a fall in the price level.

Is the following statement correct? "The equilibrium level of GDP is determined by the level of aggregate expenditure LOADING... . Therefore, GDP will decline only if households decide to spend less on goods and services."

The statement is wrong because household spending is only one part of aggregate expenditures.

An economics student raises the following objection: "The textbook said that a higher interest rate lowers investment, but this doesn't make sense. I know that if I can get a higher interest rate, I am certainly going to invest more in my savings account." The problem with the student's argument is which of the following?

The student is confusing saving with investment.

The Short-Run Aggregate Supply Curve

The three most common explanations as to why a short-run aggregate supply curve slopes upward include: Contracts make some wages and prices "sticky." Firms are often slow to adjust wages. Menu costs make some prices sticky.

Net Exports

The value of exports minus the value of imports.

The Variables That Shift the Aggregate Demand Curve

The variables that cause the aggregate demand curve to shift fall into three categories: • Changes in government policies • Changes in the expectations of households and firms • Changes in foreign variables

7/14 year non renewable term/4 year renewable term

There are ____ members of the Board of Governors, who the president of the US appoints to ____. one board member is appointed chairman for ______

in the long run

There is a string link between changes in the money supply and inflation

the productive capacity of the economy; shift right

There is an increase in the quantity of capital goods. Because this is a change in ____________ the LRAS will _________

Keynesian revolution

These alternative schools of thought use models that differ significantly from the standard aggregate demand and aggregate supply model. We can briefly consider each of the three major alternative models: The monetarist model The new classical model The real business cycle model

Charles Calomiris, an economist at Columbia University, was quoted as saying the following of the initiatives of the Treasury and Fed during the financial crisis of 2007minus−2009: "It has been a really headspinning range of unprecedented and bold actions... That is exactly as it should be. But I'm not saying that it's without some cost and without some risk." Source: Steven R.Weisman, "With Bold Steps, Fed Chief Quiets Some Criticism," New York Times, May 28, 2008. What was unprecedented about the Treasury and Fed's actions?

They involved an unusual degree of government involvement in financial markets, including partial ownership of firms.

Suppose that exports become more sensitive to changes in the price level in the United States. That is, when the price level in the United States rises, exports decline by more than they previously did.

This change makes the aggregate demand curve LOADING... flatter .

In response to problems in financial markets and a slowing economy, the Federal Open Market Committee (FOMC) began lowering its target for the federal funds rate from 5.25 percent in September 2007. Over the next year, the FOMC cut its federal funds rate target in a series of steps. Writing in the New York Times, economist Steven Levitt observed, "The Fed has been pouring more money into the banking system by cutting the target federal funds rate to 0 to 0.25 percent in December 2008." Source: Steven D. Levitt, "The Financial Meltdown Now and Then," New York Times, May 12, 2009. What is the relationship between the federal funds rate falling and the money supply increasing?

To decrease the federal funds rate, the Fed must increase the money supply.

To decrease the federal funds rate, the Fed must increase the money supply. To increase the money supply, the Fed buys bonds on the open market, which increases bank reserves.

buy US treasury securities

To increase the money supply, the FOMC directs the trading desk to

How does lowering the target for the federal funds rate "pour money" into the banking system?

To increase the money supply, the Fed buys bonds on the open market, which increases bank reserves.

When congress established the federal reserve in 1913, their main responsibility was

To make discount loans to banks suffering from large withdrawls by depositers

The Federal Reserve Bank (the Fed), conducts monetary policy to achieve macroeconomic policy objectives.

To manage the money supply, the Fed uses one or more of the following tools: 1. Open Market Operations. 2. Discount Policy. 3. Reserve requirements.

Central banks try to maintain price stability. This is typically assumed to refer to inflation. However, if prices are falling, this is undesirable as well because deflation also impacts price stability.

True

It would be possible to decide whether these factors or a bubble was the cause of rising housing prices by looking at the number of new home units sold. If the number of new home units sold rose noticeably over time, then the evidence supports the bubble argument.

True

The reason that the aggregate demand curve slopes downward is that when the price level is higher, people cannot afford as many goods and services.

True

True of False: increases in real GDP per capita increase life expectancy at birth

True

Two government-sponsored enterprises that stand between investors and banks that grant mortgages are the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation.

True

What if the U.S. GDP grows faster than foreign GDP?

U.S. Net Exports will decrease and U.S. demand for imports rises faster than foreign demand for our exports.

What if U.S. rises in value relative to other currencies?

U.S. Net Exports will decrease and imports are cheaper, and our exports are more expensive. Imports and exports fall.

An increase in the value of the currency would contribute to a slowdown in the growth of the U.S. economy because

U.S. exports will fall and imports from other countries will rise, reducing net exports and aggregate demand.

Suppose the U.S. experiences a long period of inflation relative to other countries. Explain why and how this will affect U.S. net exports?

U.S. net exports have been negative for the last few decades. The value typically becomes higher (less negative) during a recession, as spending on imports falls.

What happens if the U.S, price level rises faster than foreign price levels?

US Net Exports will decrease and US goods become more expensive relative to foreign goods; so imports rise and exports fall.

interaction of supply and demand for the currency

Under a floating exchange rate, the exchange rate is determined by the

borrow dollar reserves from the International Monetary Fund

Under the Bretton Woods System, if a central bank temporarily ran out of dollar reserves it could A. borrow dollar reserves from the International Monetary Fund B. borrow dollar reserves from the Federal Reserve of the US C. Temporarily suspend the practice of holding dollar reserves D. borrow dollar reserves from other non-US central banks

it is a commodity money because it has value as recycled paper

Under these circumstances, was the chinese paper currency a commodity money or a fiat money?

hyperinflation

Very high inflation rates are called

hyperinflation

Very high rates of inflation —in excess of hundreds or thousands of percentage points per year—are known as hyperinflation. It is caused by central banks increasing the money supply at a rate far in excess of the growth rate of real GDP. A high rate of inflation causes money to lose its value so quickly that households and firms avoid holding it.

true

We can say that loans are funded by deposits because deposits give banks financial capital, which can be loaned out so banks can make a profit. true or false?

Does price level change have a feedback-effect on aggregate expenditures?

We generally expect that it will: increases in the price level will cause aggregate expenditure to fall, and decreases in the price level will cause aggregate expenditures to rise.

medium of exchange, unit of account, store of value, standard of deferred payment

What are the four functions of money?

loans are the largest asset and deposits are the largest liability

What are the largest asset and the largest liability of a typical bank?

money market mutual funds, hedge funds, and other financial firms that raise money from investors and provide it to firms and households

What did Geithner mean by the non bank financial system?

the short run Phillips curve shifts up

What impact does expansionary monetary policy have on the short-run Phillips curve if consumers and firms expect the expansionary policy to increase inflation?

Many depositors simultaneously decide to withdraw their money from a bank

What is a classic type of run?

this is when banks make loans to businesses

What is commercial lending?

money that is authorized by a central bank and that does not have to be exchanged for gold or some other commodity money

What is fiat money?

an increase in the money supply that exceeds the rate of growth of GDP will increase the price level

What is meant by Spencers statement "this printing of money will keep the deflation wolf from the door"?

a fall in the price level

What is price deflation?

(A and B only) (D)

What is the Fed doing to increase credibility of its policies? A. Announcing the federal funds target rate B.Whenever a change in policy is announced, the change actually takes place C. Conducting more open market purchases of government securities D. A and B only

money

What is the most liquid asset?

financial firms that raise money from investors and provide it to borrowers

What is the shadow banking system?

Fannie Mae and Freddie Mac

What two institutions did Congress create in order to increase the availability of mortgages in a secondary market?

All of the Above

What would be the Fed's reaction if a real GDP in 2006 occurs at point B and potential GDP occurs at LRAS06? That is, how can we expect the fed to control inflation in the second period? A. Decrease Government Spending on goods and services B. Contractionary Policy C. Increase taxes on businesses D. All of the Above

An open market sale of government securities

What would the Fed's reaction be if the actual rGDP occurs at LRAS06? What step will they take to control inflation in the second period? A. Decrease Interest Rates B. Increase Taxes C. Open market sale of treasury securities D. All of the above

Unit of account

When each good has a single price quoted in terms of the medium of exchange, money serves as a unit of account. It provides a way to measure value in the economy in terms of money

William McChesney Martin, who was Federal Reserve chairman from 1951 to 1970, was once quoted as saying, "The role of the Federal Reserve is to remove the punchbowl just as the party gets going."

When he said "to remove the punchbowl," he meant to engage in contractionary policy. In terms of the economy, "just as the party gets going" refers to a situation in which real GDP is greater than potential GDP, which will result in an increase in the inflation rate.

According to an article in the Economist: Calculations by David Mackie, of J.P. Morgan, show that virtually throughout the past six years, interest rates in the euro area have been lower than a Taylor rule would have prescribed, refuting the popular wisdom that the [European Central Bank] cares less about growth than does the Fed. Source: "The European Central Bank: Haughty Indifference, or Masterly Inactivity?" Economist, July 14, 2005. Why would keeping interest rates "lower than a Taylor rule would have prescribed" be an indication that the European Central Bank cared more about growth than popular wisdom held?

When interest rates are relatively low, it tends to increase the money supply and raise aggregate demand, which pushes up short-run economic growth.

a medium of exchange

When sellers are willing to accept money in exchange for goods and services, money is acting as

Medium of exchange

When sellers of goods and services are willing to accept money in exchange for goods and services, then money serves as a medium of exchange. An economy is more efficient when a single good is recognized as a medium of exchange.

buy;increases

When the Fed conducts an open market purchase, they __________ securities, and money supply ________

the sellers of such securities deposit the funds in their banks and bank reserves increase

When the federal reserve purchases treasury securities in the open market

the buyers of these securities pay for them with checks and bank reserves fall

When the federal reserve sells treasury securities in the open market

required reserve ratio

When the peoples bank of china cut the amount of cash that banks must set aside as reserves, the monetary policy tool they used was a change in the

The article also stated that Japanese Prime Minister Shinzo Abe was pressuring the Bank of Japan, the Japanese central bank, to take steps to hit an inflation target of 2 percent. Why would the Bank of Japan, the Japanese central bank, be reluctant to raise its target for short-term interest rates if the price level is falling?

When the target rate increases, money growth slows down, and inflation should decrease.

if there is an offsetting shift in AS

When will an increase in AD not result in lower unemployment rates in the short run

expands/contracts

Whenever banks gain reserves and make new loans, the money supply ____; and whenever banks lose reserves, and reduce their loans, the money supply ____

savings account and master card

Which are not included in the M1 definition of the money supply?

the federal funds rate

Which interest rate does the fed target?

fiat money has no value except as money, whereas commodity money has value independent of its use as money

Which of the following best explains the difference between commodity money and fiat money?

(all of the above)

Which of the following conditions make a good suitable for use as a medium of exchange?

(D) (All of the Above)

Which of the following events would cause the demand curve in the foreign exchange market to shift A. Incraese in US interest rate B. Increased demand for US goods and services C. Changes in expectations of the future value of US currencies D. All of the above

Low Prices

Which of the following is NOT a monetary policy goal of the Fed? A. Low Unemployment B. Higher Standard of Living C. Stable Financial Markets D. Low Prices

low prices

Which of the following is NOT monetary policy goal of the Fed a. Low Unemployment B. Higher living standards C. Stable financial Markets D. Low Prices

money market deposit accounts in bank

Which of the following is included in M2 but not M1?

open market operation

Which of the following is not a function of money?

M*Y=P*V

Which of the following is not the formula for the quantity theory of money?

deposits

Which of the following is the largest liability of a typical bank?

the required reserve ration

Which of the following refers to the minimum fraction of deposits banks that are required by law to keep as reserves?

moral suasion

Which one of the following is not one of the policy tools the fed uses to control the money supply?

The fed conducts monetary policy principally through open market operations

Which tool is the most important

the FDIC insures deposits up to $250,000

Why do most depositors seem to be unworried that banks loan out most of the deposits they receive?

consumers delay purchases, expecting prices to fall more, and the lack of demand causes prices to fall further

Why would deflation cause shoppers to hold back, and what does evans pritchard mean when he says, "once this psychology gains a grip, it can gradually set off a self feeding spiral that is hard to stop"?

since most depositors are insured, it is less likely that panicked buyers will simultaneously withdraw funds

Why would deposit insurance provide the banking system with protection against runs?

An increase in households' expectations of their future income

Will increase the AD

A decrease in the price of an important natural resource

Will lower the cost of production, shifting SRAS to the right

the actual inflation rate is greater than the expected inflation rate; unemployment will decrease as workers have been relatively cheaper, firms will hire more people

Workers at a local mining company are paid $25.60 per hour, and they have incorporated a 3 percent annual raise in their contracts to account for expected inflation. Explain how unexpected inflation of 5 percent will affect the real wage and the unemployment rate.

GDP Formula

Y = C + I +G + NX

S private=

Y+TR-C-T

S=I=

Y-C-G

In 2015, Richard Fuld, the last CEO of Lehman Brothers, gave a talk in which according to an article in the Wall Street Journal, "He outlined what he called the 'perfect storm' of events that led to the financial crisis, saying 'it all started with the government' and policies that subsidized cheap loans for people to buy homes in order to help them chase the American dream." Source: Maureen Farrell, "Lehman's Fuld Says It Wasn't His Fault," Wall Street Journal, May 28, 2015. The events that led to the financial crisis include

a burst in a housing bubble in 2006 which led to mortgage defaults, and a disruption of the financial system resulting from the creation of complex packagings of mortgages.

The figure to the right illustrates the economy using the Dynamic Aggregate Demand and Aggregate Supply Model LOADING... If actual real GDP in 2006 occurs at point B and potential GDP occurs at LRAS 06, we would expect the Federal Reserve Bank to pursue ___________ monetary policy. If the Fed's policy is successful, what is the effect of the policy on the following macroeconomic indicators?

a contractionary Actual real GDP decreases Potential real GDP does not change Price level decreases Unemployment increases

The hypothetical information in the following table shows what the situation will be in 2017 if the Fed does not use monetary policy. Year Potential Real GDP Real GDP Price Level 2016 $17.7 trillion $17.7 trillion 110.0 2017 $18.1 trillion $18.3 trillion 115.5 If the Fed wants to keep real GDP at its potential level in 2017, it should use ___________ policy. The trading desk should be ______________ T-bills. If the Fed's policy is successful in keeping real GDP at its potential level in 2017, state whether each of the following will be higher, lower, or the same as it would have been if the Fed had taken no action: i. Real GDP will be ____________ it would have been if the Fed had taken no action. ii. Full-employment real GDP will be ____________ it would have been if the Fed had taken no action. iii. The inflation rate will be ________________ it would have been if the Fed had taken no action. iv. The unemployment rate will be _____________ it would have been if the Fed had taken no action.

a contractionary selling lower than the same as lower than higher than

The figure to the right illustrates the economy using the Dynamic Aggregate Demand and Aggregate Supply Model If actual real GDP in 2006 occurs at point B and potential GDP occurs at LRAS 06 we would expect the Federal Reserve Bank to pursue________________ monetary policy. Actual real GDP Potential real GDP Price level Unemployment

a contractionary Actual - decreases potential - does not change price level- decreases unemployment - increases

The international-trade effects refers to the fact that an increase in the price level will result in

a decrease in exports and an increase in imports

A "Lehman moment" meant

a deepening of the financial crisis brought about by bankruptcy of a major bank

In the fall of 2011, investors began to fear that some European governments, particularly Greece and Italy, might default on the bonds they had issued, making the prices of the bonds fall sharply. Many European banks owned these bonds, and some investors worried that these banks might also be in financial trouble. An article in the Economist magazine referred to the "prospect of another Lehman moment." The article noted that, "Governments are once again having to step in to support their banks." Source: "Here We Go Again," Economist, October 8, 2011. What did the article mean by a "Lehman moment"? A "Lehman moment" meant

a deepening of the financial crisis brought about by bankruptcy of a major bank.

What did the article mean by a "Lehman moment"? A "Lehman moment" meant

a deepening of the financial crisis brought about by bankruptcy of a major bank.

sold on a secondary market

a financial asset is considered a security if it can be

An insurance company

a financial intermediary because they take premiums and use them to purchase financial securities

inflation targeting

a framework for conducting monetary policy that involves the central bank announcing its target level of inflation

Which of the following is not one of the monetary policy goals of the Federal Reserve ("the Fed")?

a high foreign exchange rate of the U.S. dollar relative to other currencies

Which of the following is not one of the monetary policy goals of the Fed?

a high foreign exchange rate of the U.S. dollar relive to other currencies

Would a subprime borrower be likely to pay a higher or a lower interest rate than a borrower with a better credit history?

a higher interest rate

According to the Taylor rule, if the Fed reduces its target for the inflation rate, the result would be

a higher target federal funds rate

According to the Taylor Rule, if the Fed reduces its target for the inflation rate, the result will be

a higher target federal funds rate.

would a larger multiplier lead to more severe recessions or less severe recessions?

a larger multiplier means that small changes in spending lead to large changes in GDP, and thus recessions would be more severe.

"Price stability" means

a low and stable inflation rate

"Price stability" means

a low and stable inflation rate.

The aggregate demand curve does not slope down for

a lower price level makes imports from other countries less expenses, and US citizens buy more imports.

The AD curve does not slope downward when

a lower price level makes imports from other countries less expensive, and US citizens buy more improts

affect directly

a monetary policy target is a variable that the Fed can

A decrease in autonomous spending decrease real GDP by

a multiple of the change

If the inflation rate for 1970 is greater than the inflation rate for 1969, it is likely that the recession was caused by ______________ rather than ______________

a negative supply shock, an increase in AD

In a business cycle, the high point of economic activity is called

a peak

What is a monetary rule?

a plan for increasing the money supply at a constant rate regardless of the prevailing economic condition

In a business cycle, the period between the high point of economic activity and the following low point is called

a recession

If the economy adjusts through the automatic mechanism, then a decline in AD causes

a recession in the short run and a decline in the price level in the long run

what would cause an increase in the price level (short run inflation)

a reduction in taxes that increases aggregate demand

Taylor Rule

a rule developed by John Taylor that links the Fed's target for the federal funds rate to economic variables

What is a bank panic?

a situation in which many banks experience runs at the same time

A supply shock is

a sudden increase in the price of an important natural resource, resulting in a leftward shift of the SRAS curve

Stagflation occurs when...

a supply shock shifts SRAS to the left, increasing the price level and decreasing actual GDP

Stagflation occurs when

a supply shock shifts the SRAS to the left, increasing the price level and decreasing actual GDP

In a business cycle, the low point of economic activity is called

a trough

decrease, increase

a(n) ______ in the amount saved by households from a(n) ______ in income increases the size of the government purchase multiplier

[Related to Solved Problem #4] Use the graph to the right to answer the following questions:

a. If the Fed does not take any policy action, in 2019 the level of real GDP will be $ 18.5 trillion (enter your response to one decimal place) and the price level will be 118 (enter your response as an integer). b. If the Fed wants to keep real GDP at its potential level in 2019, it should use a contractionary policy. This means that the trading desk should be selling Treasury bills. c. If the Fed takes no policy action, the inflation rate in 2019 will be 3.5% (enter your response as a percentage rounded to one decimal place). If the Fed uses monetary policy to keep real GDP at its full-employment level, the inflation rate in 2019 will be 1.8% (enter your response as a percentage rounded to one decimal place).

A winner of the Pennsylvania Lottery was given the choice of receiving $18 million at once or $1,440,000 per year for 25 years. (This question is difficult and requires the use of a financial calculator or a spreadsheet. Hint: If you are familiar with the Excel spreadsheet program, questions b and c can be answered by using the Excel PV (Present Value function.)

a. If the winner had opted for the 25 annual payments, how much in total would she have received? The total amount received would be $36000000. (Enter your response to the nearest integer.) b. At an interest rate of 13percent, what would be the present value of the 25 payments? The present value is $10555178.37. (Enter your response rounded to the nearest penny.) c. At an interest rate of 7 percent, what would be the present value of the 25 payments? The present value is $16781159.78. (Enter your response rounded to the nearest penny.)

Before the 2013 season, the Los Angeles Angels signed outfielder Josh Hamilton to a contract that would pay him the following amounts: Season Compensation (millions) 2013 $15 2014 $15 2015 $23 2016 $30 2017 $30 The contract also specified a $10 million signing bonus and that $2 million would be given to a charity. Assume that Hamilton receives each of his five seasonal salaries as a lump-sum payment at the end of the season. a. Was the value of this contract equal to $125 million cash in hand in 2013? b.What was the present value of Hamilton's contract at the time he signed it (assuming an interest rate of 55 percent)? For simplicity, ignore the $2 million given to charity. _______ million. (Enter your response rounded to two decimal places.) c.If you use an interest rate of 3 percent, what was the present value of Hamilton's contract? _______ million.

a. No, because $125 million is the sum of payments over the years, not the present value of the payments. b.To find the present value of the bond, find the present value of each of the payments and add them together. (millions) 10 + 15/(1+.05)+..... +30/(1+.05)^5 =105.96 c. 112.28

Suppose that eLake, an online auction site, is paying a dividend of $2.00 per share. You expect this dividend to grow 4 percent per year, and the interest rate is 10 percent. What is the most you would be willing to pay for a share of stock in eLake?

a. The most you would be willing to pay for a share of eLake stock is $33.33 2/ (.10-.04)= 33.33 b. If interest rates rise, the price that you would be willing to pay for any stock is likely to fall

Dane decides to give up a job earning 100,000 per year as a corporate lawyer and converts the duplex that he owns into a UFO museum. (He had been renting out the duplex for 20,000 a year.) His direct expenses include 50,000 per year paid to his assistants and 20,000 per year for utilities. Fans flock to the museum to see his collection of extraterrestrial paraphernalia, which he easily could sell on eBay for 1,000,000. Over the course of the year the museum brings in revenues of 100,000. a. How much is Dane's economic profit for the year? b. Is he earning an accounting profit?

a. $90,000−Interest forgone on the $1,000,000 extraterrestrial gear b. Yes, he is earning an accounting profit.

"I understand why the Fed uses expansionary policy but I don't understand why it would ever use contractionary policy. Why would the government ever want the economy to contract?" The government would want the economy to contract when real GDP is

above potential GDP and the price level is rising

The government would want the economy to contract when real GDP is

above potential GDP and the price level is rising

above potential GDP and the price level is rising.

difference between aggregate expenditure and aggregate demand is that

aggregate demand shows the relationship between the price level and the jlevel of aggregat expediture when all other factors that affect aggregate expenditure are held constant; aggregate expediture is a point on the aggregate demand curve at a specific price.

The difference between aggregate expenditure and aggregate demand is that:

aggregate demand shows the relationship between the price level and the level of aggregate expenditure when all other factors that affect aggregate expenditure are held constant; aggregate expenditure is a point on the aggregate demand curve at a specific price.

The main reason for changes in GDP in the short run is the change in

aggregate expenditure.

In the figure to the right, when the money supply increased from MS 1 to MS 2 , the equilibrium interest rate fell from 4% to 3%. Why? A. Increased demand for Treasury securities drives down their interest rate. B. Initially, firms hold more money than they want relative to other financial assets. C. Increased demand for Treasury securities drives up their prices. D. All of the above.

all of the above

in the 45 degree line diagram the 45 degree line shows

all the points where aggregate expediture equals real GDP

What is the meaning of the 45° line in the 45°-line diagram? In the 45°-line diagram, the 45° line shows

all the points where aggregate expenditure equals real GDP.

The following appears in a Federal Reserve publication: "In practice, monetary policymakers do not have up-to-the-minute, reliable information about the state of the economy and prices. Information is limited because of lags in the publication of data. Also, policymakers have less-than-perfect understanding of the way the economy works, including the knowledge of when and to what extent policy actions will affect aggregate demand. The operation of the economy changes over time, and with it the response of the economy to policy measures. These limitations add to uncertainties in the policy process and make determining the appropriate setting of monetary policy...more difficult." Source: Board of Governors of the Federal Reserve System, The Federal Reserve System: Purposes and Functions, Washington, DC, 1994. If the Fed itself admits that there are many obstacles in the way of effective monetary policy, why does it still engage in active monetary policy rather than use a monetary growth rule, as suggested by Milton Friedman and his followers? Policymakers at the Fed believe that

although it is not perfect, active monetary policy is still a stabilizing force in the economy.

In a business cycle, the period between the low point of economic activity and the following high point is called

an expansion

In the quote, when the official says "the money stays in banks," he is referring to.... in the reserves in banks.

an increase

the multiplier effect is the process by which

an increase in autonomous expenditure leads to a larger increase in real GDP

The multiplier effect is the process by which: The adjacent figure shows the effect of a reduction in equilibrium GDP when government purchases decline. Which of the following is not true about the multiplier effect of such a change in government purchases ?

an increase in autonomous expenditure leads to a larger increase in real GDP. The value of the multiplier is $5bill

What would cause a decrease in real GDP and if large enough a recession?

an increase in interest rates that causes aggregate demand to fall

What scenario would lead to a reduction in real GDP and may even cause a recession

an increase in oil price that causes short-run aggregate supply to fall

Which of the following is not an example of monetary policy?

an increase in taxes

appreciate

an increase in the demand for dollars would cause the dollar to ____

By "housing bubble" President Obama referred to an increase in the price of housing caused by

an increase in the demand for housing based on the expectation that prices will continue to increase

If the economy is initially at full-employment equilibrium, then an increase in AD causes ___________ in real GDP in the short run and ________________ in the price level in the long run

an increase, an increase

What is the purpose of the Taylor rule? The Taylor rule is used to

analyze and predict how the Fed targets the federal funds rate.

The aggregate demand curve is downward sloping because

as prices rise, consumer real wealth declines, interest rates rise , and exports become more expensive

more of the activity to occur

as the tax wedge associated with a given economic activity gets smaller, we would expect

In what ways would a goal of stabilizing asset prices be different from the four goals listed in this chapter?

asset prices deal with a specific type of wealth that carries risk associated with individual firms

A __________shows the firm's overall financial position at some point in time, while an__________ shows the firm's revenues, costs, and profits at some point in time.

balance sheet, income statement

We saw in the Making the Connection that Intel hopes to increase sales of microprocessors used in tablets and smartphones. During a recession, spending on these products would be more stable than spending on computers because these products are

becoming more of a necessity and are replaced more frequently than computers.

Suppose you originally invested in a firm when it was large and profitable. Now the firm has downsized and is small and unprofitable. Would you be better off now if you had bought the firm's stock or the firm's bonds?

bonds

What is a financial securities that represent promises to repay a fixed amount of funds?

bonds

The reason for this may have been a lack of

borrowers

Your roommate argues that he can think of no better situation than living in a deflationary economy, as prices of goods and services would continuously fall. You disagree and argue that during a deflation people can be made worse off because

borrowers will have to pay increasing amounts in real terms over time.

Consider the figures below and determine which is the best description of what causes the shift from AD 1 to AD 2 A. Example A shows a contractionary monetary policy. The price level and real GDP both fall. B. Example B shows an expansionary monetary policy. The price level and real GDP both rise. C. Example A shows an expansionary monetary policy. The price level rises and real GDP falls. D. Both examples show expansionary monetary policy. The price level and real GDP both rise. E. Both A and B.

both A and B

A positive technological change occurs so LRAS and SRAS

both shift to the right

Changes in the federal funds rate usually will result in changes in

both short-term and long-term interest rates on financial assets

If the Federal Open Market Committee (FOMC) decides to increase the money supply, it orders the trading desk at the Federal Reserve Bank of New York to

buy U.S. Treasury securities

If the Federal Open Market Committee (FOMC) decides to increase the money supply, it orders the trading desk at the Federal Reserve Bank of New York to

buy U.S. Treasury securities.

Quantitative easing is involved in the Fed's

buying longer term Treasury securities that are not usually involved in open market operations

What is "quantitative easing"? Quantitative easing involved the Fed's

buying longer term Treasury securities that are not usually involved in open market operations.

When the Federal Open Market Committee (FOMC) decides to increase the money supply, it _____U.S. Treasury securities. If the FOMC wishes to decrease the money supply, it ______U.S. Treasury securities.

buys sells

When the Fed conducts an open market purchase, the Fed ..... and the money supply

buys securities from banks increases

When the Federal Open Market Committee (FOMC) decides to increase the money supply, it ____ U.S. Treasury securities. If the FOMC wishes to decrease the money supply, it _____ U.S. Treasury securities.

buys, sells

An initial decrease in a bank's reserves will decrease checkable deposits

by an amount greater than the decrease in reserves.

To earn a profit, firms must typically first raise funds to pay for operations. This often includes funds to pay for things like employees and machines. Which of the following is not a way small firms are able to raise funds? Small firms are usually unable to raise funds

by offering bonds

How does the dynamic model of AS-AD explain inflation?

by showing that if total spending in the economy grows faster than total production, prices will rise

The increase in interest rates

can be connected to the slowing rate of economic growth because it is a contractionary policy.

A weak financial system might make economic growth difficult since

capital investment, essential for rapid economic growth, is often financed by borrowed funds and an unstable financial system leads to difficulty attracting loanable funds

An increase in interest rates that causes AD to fall would

cause a decrease in real GDP, and possibly a recession

Does a change in the price level cause a movement along the aggregate expenditure line or a shift of the aggregate expenditure line? A change in the price level Does a change in the price level cause a movement along the aggregate demand curve or a shift of the aggregate demand curve? A change in the price level

causes a shift of the aggregate expenditure line. causes a movement along the aggregate demand curve.

Inventory Investment =

change in value of all firms' inventories = (Number of items produced - number of items sold) x Sales price

the long run aggregate supply curve is vertical because in the long run,

changes in the price level do not affect potential GDP, as potential GDP depends on the size of the labor force, capital stock and technology

The long-run aggregate supply curve is vertical because in the long run

changes in the price level do not affect potential GDP, as potential GDP depends on the size of the labor force, capital stock, and technology

The LRAS curve is vertical because in the long-run

changes in the price level do not affect potential GDP, as potential GDP depends on the size of the labor force, captial stock and technology

MPC

changing in consumption / change in disposable income

Stagflation is a

combination of inflation and recession

inflation targeting

committing the central bank to achieve an announced level of inflation is called

contractionary fiscal policy

congress increases income tax. This is an action of what kind of policy?

Observe the pattern from 1971 to 2014. Overall, the pattern of stock price changes that occur around recessionary periods is relatively _________ for recessionary periods.

consistent

The larger the MPC, the more additional _ that occurs

consumption

As the interest rate increases

consumption, investment, and autonomous consumption decrease; aggregate expenditure decreases

As the interest rate increases,

consumption, investment, and net exports decrease; AD decreases

As the interest rate increases,

consumption, investment, and net exports decrease; aggregate demand decreases.

The federal government increases taxes in an attempt to reduce a budget deficit. Because this is a change in __________, it will cause a _____________ the aggregate demand curve

consumption, shift to the left in

When he said "to remove the punchbowl," he meant to engage in... policy

contractionary

A "premature tightening" of the "pace of purchases" would slow down the economic recovery because this action would be

contractionary, reducing lending and economic activity.

Workers and firms still sign long -term contracts because

contracts are common in the unionized sectors of the economy, as they are seen as protection from unanticipated inflation

contractionary fiscal policy

corporate income tax rate is increased. This is part of what kind of policy?

currency in circulation, checking account deposits in banks, and holding's of traveler's checks

What is the Taylor Rule formula?

current inflation rate + equilibrium real federal funds rate + (1/2 x inflation gap) + (1/2 x output gap)

How do we calculate the inflation gap?

current inflation rate - target rate of inflation

This firm's current ratio is

current ratio =current assets / current liabilities

Suppose a major U.S. furniture manufacturer is forecasting demand for its products during the next year. How will the forecast be affected by the following? Upper A decrease in planned investment spending in the economy.A decrease in planned investment spending in the economy. Demand is expected to

decline

During the recession phase of the business cycle, production, employment and income...

decrease

The shift in supply to the right represents a ____ in the supply of loanable funds

decrease

When the Fed conducts an open market purchase, the interest rate should

decrease

during the recession phase of the business cycle, production, employment, and income ___________ increase/ decrease

decrease

The price level that is currently higher than expected will _____________ the SRAS curve because this is a change in _______________________

decrease (shift leftward), an adjustment to past error in expectations about future prices

An increase in what the price level is expected to be in the future will __________ the SRAS curve because this is a change in ____________________

decrease (shift leftward), expectations about future prices

An unexpected increase in the price of an important raw material will ___________ the SRAS curve because this is a change in _______________

decrease (shift leftward), the price of an important natural resource

In reporting on real GDP growth in the second quarter of 2015, an article in the Wall Street Journal noted that the 2.3 precent annual growth rate "would have been stronger if it hadn't been for companies drawing down inventories. b. Assume that the reduction in inventories was unplanned. What would you expect to happen to production in the future following an unplanned reduction in inventories?

decrease in inventories so AE > Y which means companies need to hire more and produce more to get back to equi

Holding all else constant, a federal government budget deficit will

decrease the supply of loanable funds and increase the equilibrium real interest rate

The widespread use of computers and the Internet has _________ menu costs

decreased

Each year, the president's Council of Economic Advisers prepares and sends to Congress The Economic Report of the President. The report published in February 2008 contained the following summary of the economic situation: "Economic growth is expected to continue in 2008. Most market forecasts suggest a slower pace in the first half of 2008, followed by strengthened growth in the second half of the year." Source: Executive Office of the President, Economic Report of the President, 2008, Washington, DC: USGPO, 2008, p. 17. During 2008, real GDP

decreased.

In the figure to the right, the opportunity cost LOADING... of holding money ___________ when moving from Point A to Point B on the money demand curve.

decreases

In the figure to the right, the opportunity cost of holding money _________________when moving from Point A to Point B on the money demand curve.

decreases

With the decrease shift in supply, the equilibrium quantity of loanable funds

decreases

With the shift in supply to the right, the equilibrium quantity of loanable funds

decreases

with the change in equilibrium quantity of loanable funds, the quantity of saving decreases and the quantity of investment

decreases.

According to an article in the Economist magazine, in 2013 the Japanese economy was experiencing falling prices "on everything from chocolate bars to salad." Source: "Waging a New War," Economist, March 9, 2013. What is the term for a falling price level?

deflation

What is the term for a falling price level?

deflation

Suppose you deposit $2,100 cash into your checking account. By how much will checking deposits in the banking system increase as a result when the required reserve ratio is 0.50? The change in checking deposits is equal to: $____

deposit * 1/rr 2,100*(1/.5)

Which of the following terms refers to a flow of funds from savers to firms through financial markets The payments by a corporation to its shareholders are called ________, and the interest payments on a bond are called ________.

direct finance dividends; coupon payments

If the government raises the amount of taxes, holding everything else constant, then

disposable income will decrease

If the government raises the amount of taxes, holding everything else constant, then

disposable income will decrease.

In the long run, changes in the price level

do not affect the level of real GDP

An increase in the money supply ____ affect real GDP directly.

does NOT

decreased; increased; fall

during a period of rising inflation, contractionary fiscal policy is put into effect, where government spending is __________ and taxes are __________. As a result, Real GDP and Price Level _______

increased; decreased; ries

during a recession, expansionary fiscal policy is put into effect, where government spending is __________ and taxes are __________. As a result, Real GDP and Price Level _______

What is the general relationship between the business cycle and unemployment and inflation?

during an expansion, unemployment falls and inflation increases.

grows; shrinks

each year that the Fed runs a deficit, the federal debt _____. Each year it runs a surplus, the federal debt ________

In the summer of 2015, many economists and policymakers expected that the Federal Reserve would increase its target for the federal funds rate by the end of the year. Some economists argued, though, that it would be better for the Fed to leave its target unchanged. At the time, the unemployment rate was 5.3 percent, close to full employment, but the inflation rate was below the Fed's target of 2 percent. Source: Min Zeng,"Inflation Expectations Fall, Making Rate Hike 'More Difficult to Justify,'" Wall Street Journal, August 6, 2015. If it did not increase its target for the federal funds rate, the policy goal the Fed would be promoting is

economic growth, because maintaining lower interest rates would stimulate the economy and raise the price level.

The Fed expects that controlling the federal funds rate would allow it to meet its goals for inflation and unemployment because lower short-term interest rates

encourage lending and stimulate economic activity

The Fed expects that controlling that one interest rate would allow it to meet its goals for inflation and unemployment because lower short-term interest rates

encourage lending and stimulate economic activity.

The Fed's strategy of increasing the money supply and lowering interest rates in order to increase real GDP is called

expansionary monetary policy

The figure to the right illustrates a dynamic AD-AS model Suppose the economy is in equilibrium in the first period at point A. In the second period, the economy reaches point B. We would expect the Fed to pursue what type of policy in order to move AD 2 to AD Subscript 2 comma policy and reach equilibrium (point C) in the second period? Actual real GDP: Potential real GDP: Price level: Unemployment:

expansionary monetary policy Actual real GDP: increase Potential real GDP:does notchange Price level: increase Unemployment: decrease

The Fed's strategy of increasing the money supply and lowering interest rates in order to increase real GDP is called

expansionary monetary policy.

suppose the economy is currently in a recession and that economic forecasts indicate that the economy will soon enter an expansion. As a result

expected profitability of new investment in plant and equipment increases and the demand for loanable funds rises.

Economic profit is equal to a firm's revenues minus its costs, both __________. Accounting profit is _________ than economic profit.

explicit and implicit, larger

Why are the limits on political freedom likely to become an obstacle to china's continued economic growth?

failure to establish the rule of law, entrepreneurs will feel secure enough to bring together the factors of production, lack of consistent enforcement of property rights.

If the interest rate rises, the present value of payments that you will receive in the future will

fall

True of False: Increases in real GDP per capita do not increase the amount of goods and services available to a country's citizens

false

If the Fed would no longer have a specific target for the money supply, it would be targeting the

federal funds rate

To affect economic variables such as real GDP or the price level, the monetary policy target the Federal Reserve has generally focused on is the

federal funds rate

An article in the New York Times in 1993 stated the following about Fed Chairman Alan Greenspan's decision to no longer announce targets for the money: "Since the late 1970's, the Federal Reserve has made many of its most important decisions by setting a specific target for growth in the money supply ... and often adjusted interest rates to meet them." Source: Steven Greenhouse, "Fed Abandons Policy Tied to Money Supply," New York Times, July 23, 1993. If the Fed would no longer have a specific target for the money supply, it would be targeting the

federal funds rate.

An article in the Wall Street Journal notes that before the financial crisis of 2007minus2009, the Fed "managed just one short-term interest rate and expected that to be enough to meet its goals for inflation and unemployment" Source: Jon Hilsenrath, "Easy-Money Era a Long Game for Fed," March 17, 2013 The short-term interest rate the article is referring to is the

federal funds rate.

If the Fed would no longer have a specific target for the money supply, it would be targeting the

federal funds rate.

The interest rate that banks charge each other for overnight loans is called the

federal funds rate.

To affect economic variables such as real GDP or the price level, the monetary policy target the Federal Reserve has generally focused on is the

federal funds rate.

Total value of US treasury bonds outstanding

federal government debt is equal to

According to the U.S. Treasury

firms do not have to accept cash as payment for goods and services

businesses demand loanable funds because

firms need to borrow funds for new projects such as building new factories or carrying out new research projects.

Businesses demand loanable funds because

firms need to borrow funds for new projects, such as building new factories, or carrying out new research projects

Suppose exports become more sensitive to changes in price levels in the US. That is, when the price level in the US rises, exports decline by more than they previously did. This change makes the aggregate demand curve _____

flatter. Explanation: The aggregate demand curve shows the relationship between the price level on the vertical axis and the level of planned aggregate expenditure in the economy on the horizontal axis. If exports become more sensitive to a change in the price level, it implies that aggregate demand has become relatively more elastic, and like the market demand from microeconomics, the aggregate demand curve becomes flatter.

Inventories refer to

goods that have been produced but have not yet been sold. Usually at the beginning of a recession, inventories rise , but at the beginning of an expansion, inventories fall .

automatic stabilizers

government spending and taxes that automatically increase or decrease along with the business cycle

Crowding out occurs when

governments must borrow funds which causes interest rates to rise and thus private investment is reduced

inflation rate.

growth rate of P

This statement is true because the Chairman of the Fed

has the ability to influence interest rates for the world's top reserve currency.

What can we expect from the Federal Reserve Bank if it seeks to move the economy in the direction of long-run macroeconomic equilibrium? If the Fed's policy is successful, what is the effect on the following indicators?

he Fed will pursue a contractionary monetary policy. Actual real GDP: decreases Potential real GDP: does not change Price level: decreases Unemployment: increases

The Chairman of the Fed is the nation's top economic position because

he/she has the ability to influence interest rates for the world's top reserve currency

The interest rate effect refers to the fact that a higher price level results in

higher interest rates and lower investment

Spending on housing is likely more than spending by households on consumer durables, such as automobiles or furniture, or spending by firms on plant and equipment because

housing is very sensitive to interest rate changes, which are cyclical

the exchange rate will decrease

how would a decrease in the US budget deficit affect the exchange rate for in the market for dollars?

fixed

if a country's currency is "pegged" to the dollar, its exchange rate is

vertical

if firms and workers have rational expectations, including knowledge of the policy being used by the Federal Reserve, the short-run Philips curve will be

If the marginal propensity to consume is .90 by how much will an increase in planned investment spending of $200 billion shift up the aggregate expediture line?

if planned investment spending increases by $200 billion, it will shift the aggregate expenditure line up by $200 billion

all four functions

if something is to be considered as money it has to fulfill ______

In an interview, Paul Volcker, Chairman of the Federal Reserve's Board of Governors from 1979 to 1987, was asked about the Fed's use of monetary policy to reduce the rate of inflation. Volcker replied: The Federal Reserve had been attempting to deal with ... inflation for some time. ... By the time I became chairman ... we adopted an approach of ... saying, We'll take the emphasis off of interest rates and put the emphasis on the growth in the money supply, which is at the root cause of inflation ... we will stop the money supply from increasing as rapidly as it was ... and interest rates went up a lot. ...We said ... we'll take whatever consequences that means for the interest rate because that will enable us to get inflation under control. Source: "Paul Volcker Interview," http://www.pbs.org/fmc/interviews/volcker.htm. While Paul Volcker was chairman, the Fed did not target both the rate of inflation and interest rates because

if the Fed targets interest rates, they have to accept that inflation will fluctuate significantly, and Volker's goal was to reduce inflation.

increase

if the government finances an increase in government purchases with an increase in taxes, the exchange rate will ______

According to an article in the Wall Street Journal, "Brazil's economy grew just 2.3% in 2013, compared with 7.5% in 2010. The country also has struggled with persistently high inflation, which has forced its central bank to raise interest rates." Source: Emily Glazer and Luciana Magalhaes, "Brazil's Debt-Laden Firms Try to Stay Afloat," Wall Street Journal, March 18, 2014. The Brazilian central bank would have been "forced" to raise interest rates because of rising inflation

if this was the only policy tool that could be used to reduce aggregate demand and the inflation rate.

The multiplier ignore the effect on Real GDP of

imports, inflation, and interest rates

actual wage is less than expected real wage: unemployment falls

in actual inflation is higher than expected inflation, the A. actual wage is greater than expected real wage: unemployment falls B. actual wage is less than expected real wage: unemployment falls C. actual real wage is greater than expected real wage: unemployment rises D. actual real wage is less than the expected real wage: unemployment rises

What is the key idea in the aggregate expenditure macroeconomic model? The key idea in the aggregate expenditure model is that

in any particular year, the level of GDP is determined mainly by the level of aggregate expenditure.

complete crowding out

in the long run, increases in government purchases can lead to A. partial crowding out B. Absence of crowding out C. Complete Crowding out D. None of the Above

Credit cards are

included in neither the M1 definition of the money supply nor in the M2 definition.

The Federal Reserve releases transcripts of its Federal Open Market Committee (FOMC) meetings only after a five-year lag in order to preserve the confidentiality of the discussions. When the transcripts of the FOMC's 2008 meetings were released, one member of the Board of Governors was quoted as saying in an April 2008 meeting, "I think it is very possible that we will look back and say, particularly after the Bear Stearns episode, that we have turned the corner in terms of the financial disruption." Source: Jon Hilsenrath, "New View into Fed's Response to Crisis," Wall Street Journal, February 21, 2014. This member's analysis turned out to be

incorrect. The economic situation worsened throughout 2008.

During the expansion of the business cycle, production, employment and income...

increase

During the expansion phase of the business cycle, production, employment, and income ________ increase / decrease

increase

If the Federal Reserve purchases $170170 million worth of U.S. Treasury bills from the public, the money supply will

increase

If the Federal Reserve purchases $180180 million worth of U.S. Treasury bills from the public, the money supply will

increase

The shift in supply to the left represents a ___ in the supply of loanable funds

increase

An increase in the labor force will ___________ the SRAS curve because this is a change in _____________________-

increase (shift rightward), the productive capacity of the economy

According to an article in the Wall Street Journal, the Reserve Bank of India lowered its key policy interest rate in 2015, "citing weakness in parts of the economy as well as favorable inflation figures." The article notes that the central bank lists constraints to further interest rate cuts, including the "risk that inflation could flare again." Source: Gabriele Parussini, "India Cuts Key Interest Rate for Second Time This Year," Wall Street Journal, March 4, 2015.

increase aggregate demand sufficiently to increase the price level.

by how much will it increase equilibrium real GDP?

increase by $2000 billion

What is most likely to lead to sustained long-run growth?

increase in human capital

What events would most likely cause a shift to the right of the money demand curve?

increase in real GDP or increase in the price level

The SRAS curve will shift to the left if there is an _________________

increase in the expected price of an important natural resource, an increase in the adjustment of workers' and firms' prior underestimation of the price level,OR an increase in expected future prices

The SRAS curve will shift to the right if there is a _______________

increase in the labor force or capital accumulation, an increase in productivity, OR a technological change

With an expansionary monetary policy, investment, consumption, and net exports all ____, which results in the AD curve shifting to the ____, increasing real GDP and the price level.

increase; right

With an expansionary monetary policy, investment, consumption, and net exports all ________, which results in the aggregate demand curve shifting to the ________, increasing real GDP and the price level.

increase; right

With the shift in supply to the left, the equilibrium quantity of loanable funds

increases

Writing about the state of the British economy in early 2009, an article in the Economist argued: "Spending will be hit . . . by weak stock markets and shrinking housing wealth." Source: "Combating the Recession," Economist, January 8, 2009. Calomiris comma Longhofer comma and MilesCalomiris, Longhofer, and Miles would argue that

increases in housing prices have no independent effect on consumption

In the short run, an increase in aggregate demand ____________, whereas in the long run an automatic mechanism brings ____________.

increases in the price level and actual GDP beyond potential GDP; the economy back to potential GDP but the price level remains higher.

Potential GDP...

increases over time as the labor force grows, and increases over time as technological change occurs

In the short run, an increase in aggregate demand _______________ whereas in the long run, an automatic mechanism brings __________________

increases the price level and actual GDP beyond potential GDP, the economy back to potential GDP but the price level remains higher

An article in the Wall Street Journal discussing the Federal Reserve's monetary policy included the following observation: "Fed officials have been signaling since last year that they expected to raise rates in 2015 ... pushing up the value of the currency and contributing to the economic slowdown officials now confront." Source: Jon Hilsenrath, "Fed's Rate Decisions Hang on Dollar, Growth Concerns," Wall Street Journal, April 22, 2015. "Pushing up the value of the currency" means

increasing the exchange rate between the dollar and other currencies.

GDP Deflator

indicates the average price level on all goods and services

expansionary fiscal policy

individual income tax is decreased. this is part of what kind of policy?

In the dynamic AD-AS model, if AD increases faster than potential real GDP, there will be...

inflation

In the dynamic aggregate demand and aggregate supply model, if aggregate demand increases faster than potential real GDP there will be

inflation

When the central bank commits to conducting policy in a manner that achieves the goal of holding inflation to a publicly announced level, it is using

inflation targeting

When the central bank commits to conducting policy in a manner that achieves the goal of holding inflation to a publicly announced level, it is using

inflation targeting.

If the Fed is too slow to react to a recession and applies an expansionary monetary policy only after the economy begins to recover, then

inflation will be higher than if the Fed had not acted

If the Fed is too slow to react to a recession and applies an expansionary monetary policy only after the economy begins to recover, then

inflation will be higher than if the Fed had not acted

If the Fed is too slow to react to a recession and applies an expansionary monetary policy only after the economy begins to recover, then

inflation will be higher than if the Fed had not acted.

In the dynamic aggregate demand and aggregate supply model, if aggregate demand increases FASTER than potential real GDP, there will be

inflation`

Households supply loanable funds because of the

interest income received from the borrowers

households supply loanable funds because of the

interest income recieved from the borrowers

What are the monetary policy targets used by the Fed?

interest rate and money supply

An article in the New York Times in March 2002 reported that the housing market had been surprisingly strong during the previous year. According to the article, "In trying to explain the resilience of the housing market in the face of rising unemployment, shrinking stock portfolios and a soft economy, economists start with the Federal Reserve." Source: Daniel Altman, "Economy's Rock: Homes, Homes, Homes," New York Times, March 30, 2002. Economists normally expect that during a recession the housing market does badly because of rising unemployment and falling incomes. However, during 2001, the housing market did well despite the recession because

interest rates were low.

By increasing U.S. interest rates, the Fed would cause the value of the currency to increase because

international investors will demand more U.S. dollars to buy U.S. financial assets that now pay higher interest rates.

Where should you put money into the econ?

into group a the poorest because with more money they will spend more helping econ grow

What are the 4 main determinants of investment? How would a change in interest rates affect investment?

intrest rates, cash flows, expected future income and business taxes

If AE = Y

inventories are unchanged and the econ is in equilibrium

when aggregate expenditure is equal to GDP

inventories are unchanged, and the economy is in macroeconomic equilibrium

if AE > Y

inventories decrease, companies want to produce more so hire more ppl so GDP and employment increase so it goes back to equi

If AE > Y

inventories fall, GDP and employment increase

If AE < Y

inventories rise, GDP and employment falls

When aggregate expenditure is less than GDP

inventories rise, and GDP and employment decrease

Firms become more optimistic and increase their spending on machinery and equipment. Becuase this is a change in __________, it will cause a ___________ the aggregate demand curve

investment, shift to the right in

The Price Level

is a measure of the average price in an economy and is measured at a point in time

Interest rate

is a monetary policy target used by the Fed

An investment blog said about Fed Chair Janet Yellen, "She is arguably the world's most powerful woman, and perhaps the most powerful person in the world. Can you name anybody with more might"? Source: Barbara Friedberg, "Fed Chief Janet Yellen: The Most Powerful Woman in the World," log.personalcapital.com, September 17, 2014. This assessment

is generally accepted by economists because of the influence the Fed chair has on monetary policy and the effect monetary policy has on inflation, employment, and financial stability.

In terms of the economy, "just as the party gets going" refers to a situation in which real GDP....... potential GDP, which will result in .... the inflation rate

is greater than an increase in

The prime rate

is the basis of the interest rate on many other types of loans

The Inflation Rate

is the rate of change of the price level over time.

The federal funds rate

is the rate that banks charge each other for short-term loans of excess reserves.

The federal funds rate A. is set by the Federal Reserve Bank. B. is the rate that banks charge each other for short-term loans of excess reserves. C. only matters to banks and has very little impact on individual consumers. D. equals the discount rate.

is the rate that banks charge each other for short-term loans of excess reserves.

A countercyclical policy is one that

is used to attempt to stabilize the economy

A countercyclical policy is one that

is used to attempt to stabilize the economy.

The Fed uses policy targets of interest rate and/or money supply because

it can affect the interest rate and the money supply directly and these in turn can affect unemployment, GDP growth, and the price level

The Fed uses policy targets of interest rate and/or money supply because

it can affect the interest rate and the money supply directly and these in turn can affect unemployment, GDP growth, and the price level.

The Taylor rule for federal funds rate does which of the following?

it links the Fed's target for the federal funds rate to economic variables

The government bailout was controversial because

it was expensive and other companies suffered through bankruptcy and failure

The federal government bailed out AIG because

it was the largest insurance company in the nation and the government feared the repercussions of a failure of AIG

In late 2012, the U.S. Treasury sold the last of the stock it purchased in the insurance company AIG. The Treasury earned a profit on the $22.7 billion it had invested in AIG in 2008. An article in Wall Street Journal noted that: "This step in AIG's turnaround, which essentially closes the book on one of the most controversial bailouts of the financial crisis, seemed nearly unattainable in 2008, when the insurer's imminent collapse sent shockwaves through the global economy." . Source: Jeffrey Sparshott and Erik Holm, "End of a Bailout: U.S. Sells Last AIG Shares," New York Times, December 11, 2012. The federal government bailed out AIG because

it was the largest insurance company in the nation and the government feared the repercussions of a failure of AIG.

The government bailout was controversial because

it was expensive, and other companies suffered through bankruptcy and failure

If the economy moves into recession, monetarists argue that the Fed should

keep the money supply growing at a constant rate

If the economy moves into recession, monetarists argue that the Fed should

keep the money supply growing at a constant rate.

When the value of the multiplier increases, all else equal, a change in expenditure will raise aggregate expenditure by a _ amount

larger

Milton Friedman

leader of the monetarist school and major proponent of a monetary growth rule

Increases in the interest rate will cause the aggregate demand curve to shift to the

left

an increase in interest rates will cause a what in the aggregate demand curve.

leftward shift

an increase instate income taxes will cause a what in the aggregate demand curve.

leftward shift

An increase in interest rates will cause a __________ the aggregate demand curve

leftward shift of

An increase in interest rates will cause a __________ the aggregate demand curve.

leftward shift of

An increase in state income taxes will cause a ______ the aggregate demand curve.

leftward shift of

An increase in state income taxes will cause a _______________ the aggregate demand curve

leftward shift of

When the Federal Reserve provides liquidity to banks by lending to them, it is acting as a

lender of last resort

But the real problem was that banks were not...the reserves.

lending

Money that you receive at some future date is worth _________than the money that you receive today.

less

Banks can make additional loans when required reserves are

less than total reserves

What is a "subprime mortgage"?

loans granted to borrowers with flawed credit histories

The article also notes that after the financial crisis, "the Fed is working through a broader spectrum of interest rates." The reference to "a broader spectrum of interest rates" means that the Fed began to focus on

longer term Treasury rates and mortgage rates.

Which of the following is NOT a monetary policy goal of the Federal Reserve bank (the Fed)? A. Low prices B. Higher living standards C. Stable financial markets D. Low unemployment

low prices

When interest rates on Treasury bills and other financial assets are low, the opportunity cost of holding money is ____, so the quantity of money will be ____.

low; high

When interest rates on Treasury bills and other financial assets are low, the opportunity cost of holding money is ______, so the quantity of money demanded will be ______.

low; high

If the Taylor rule was changed to have a higher coefficient on the output gap, then during a recession the federal funds rate would be

lower, because more weight would be given to the output gap

What are the main monetary policy goals of the Fed?

maintain price stability, maintain high employment, maintain stability of financial markets and institutions, promote economic growth

The Fed is said to have a "dual mandate" because

maintaining price stability and high employment are the two most important goals of the Fed that are explicitly mentioned in the Employment Act of 1946

Why is the Fed sometimes said to have a "dual mandate"? The Fed is said to have a" dual mandate" because

maintaining price stability and high employment are the two most important goals of the Fed that are explicitly mentioned in the Employment Act of 1946.

The Fed is said to have a "dual mandate" because

maintaining price stability and high employment are the two most important goals of the Fed that are explicitly mentioned in the employment act of 1946

The Federal Reserve may try to lower the federal funds rate to

make people more willing to borrow

What unprecedented act did the Fed make in the beginning of 2008?

making loans to primary dealers and holders of mortgage-backed securities

What was the source of the problems encountered by many financial firms during the crisis of 2007−2009? During the crisis of 2007−2009,

many borrowers began to default on their mortgages.

Money's most narrow definition is based on its function as a

medium of exchange.

What is the advantage of holding money?

money can be used to buy goods, services, or financial assets

Milton Friedman would have liked the Fed to follow a monetary rule where the

money supply is increased every year by a percentage rate equal to the long-run growth rate of real GDP

Milton Friedman would have liked the Fed to follow a monetary rule where the

money supply is increased every year by a percentage rate equal to the long-run growth rate of real GDP.

What is the disadvantage of holding money?

money, in the form of currency or checking account deposits, earns either no interest or a very low rate of interest

Technological change is _____________ for economic growth than additional capital

more important

As interest rates decline, stocks become a ____ attractive investment relative to bonds, which causes the demand for stocks and their prices to ____.

more; rise

As interest rates decline, stocks become a __________ attractive investment relative to bonds, which causes the demand for stocks and their prices to __________.

more; rise

Problems of credit availability would affect a homebuilder such as Hovnanian Enterprises because

most potential homebuyers need mortgages to buy homes

Problems of credit availability would affect a homebuilder such as Hovnanian Enterprises because

most potential homeowners need mortgages to buy homes.

A change in the price level will cause the LRAS curve to

move along a stationary LRAS curve

An increase in the price level will cause a ____________ the aggregate demand curve

movement up along

An increase in the price level will cause a ______________ the aggregate demand curve.

movement up along

an increase in the price level will cause a what in the aggregate demand curve.

movement up along

Disposable income is equal to

national income minus net taxes

Suppose we drop the assumption that net exports do not depend on real GDP

negative slope because as domestic GDP or income increases, imports increase while exports remain the same leading to a reduction in net exports

The difference between a nominal and a real variable is that...?

nominal variables are calculated in current year prices and the real variable are measured in dollars of the base year for the price index to correct the effects of inflation

An increase in the price level will ___________ the SRAS curve because this is a change in ________________

not change, the price level

Even though the federal government earned a profit on its investment in AIG, economists and policymakers who opposed the bailout were

not necessarily wrong because it was an expensive and risky solution

Even though the federal government earned a profit on its investment in AIG, economists and policymakers who opposed the bailout were

not necessarily wrong, because it was an expensive and risky solution.

Economists and policymakers might disagree over the best rule to guide monetary policy because

of differing views about the significance of inflation and unemployment

Economists and policymakers might disagree over the best rule to guide monetary policy because

of differing views about the significance of inflation and unemployment.

The choice of the price index the Federal Reserve uses to measure inflation can affect monetary policy because

one goal of monetary policy is price stability and, if the price index used to measure inflation is consistently wrong, monetary policies based on that information will be wrong.

An article in BusinessWeek in 2013 reported that Fed Chairman Ben Bernanke testified to Congress that: "If we see continued improvement and we have confidence that that is going to be sustained, then we couldlong dashin the next few meetingslong dashwe could take a step down in our pace of purchases." According to the article, Bernanke also told Congress that "'premature tightening' could 'carry a substantial risk of slowing or ending the economic recovery.'" Source: Nick Summers, "Confusion about the Fed Slowing Its $85 Billion in Monthly Bond Buying Is Roiling the Markets," Bloomberg BusinessWeek, June 10-16, 2013. The purchases Fed Chairman Bernanke is referring to are

open market purchases of government securities.

"Credit availability" means the ability of

people to obtain credit

When the article refers to "credit availability," it means the ability of

people to obtain credit.

correct statement about planned inventory increases

planned inventory increases are likely to indicate business optimism and correspond with upturns in the businesss cycle

aggragate demand curve does not shift because of the

price level change

The shares of stock issued as a result of Facebook's Initial Public Offering (IPO) were sold in a ______market. The IPO is an example of _________finance.

primary direct

In order to increase the money supply, the Fed

purchases U.S. Treasury securities

From 1990 through 2010, just BEFORE a recession, stock prices have tended to From 1990 through 2010, DURING a recession, stock prices have tended to

reach a peak decrease

Which of the following is the best measure of the standard of living of the typical person in a country?

real GDP per person

What is a lonable fund?

real estate

On the graph of the consumption function, the horizontal axis measures _______, while the vertical axis measures _______.

real national income or real GDP; real consumption spending

In the dynamic AD-AS model, if AD increases slower than potential real GDP, there will be ...

recession

In the dynamic aggregate demand and aggregate supply model, if aggregate demand increases SLOWER than potential real GDP, there will be

recession

In the dynamic aggregate demand and aggregate supply model, if aggregate demand increases slower than potential real GDP there will be

recession

Consider the table on the right, which shows the change in inventories for each quarter from 2007:I to 2010:IV measured in billions of 2009 dollars. Provide a macroeconomic explanation for this pattern. (Hint: When did the recession during this period begin and end?) The negative growth of invenories indicates a period of

recession because demand was met by drawing down past inventories and production did not increase.

The end of the housing bubble can bring a recession because

reduced demand for housing lowers investment, which in turn lowers aggregate demand and income

Sales personnel, whether selling life-insurance, automobiles, or pharmaceuticals, typically get paid on commission instead of a straight hourly wage. The principal-agent problem between the owner of the business and its sales force is

reduced when workers are paid on commission because it gives them an incentive to work harder.

The difference between what was expected and what actually occurred illustrates that the formulation of economic policy

relies on economic forecasting that is subject to frequent revisions and errors.

A faster income growth in other countries will cause a __________ of the US aggregate demand curve

rightward shift

A faster income growth in other countries will cause what in the US aggregate demand curve.

rightward shift

an increase in government purchases will cause a what in the aggregate demand curve.

rightward shift

A faster income growth in other countries will cause a ________ the US aggregate demand curve

rightward shift of

An increase in government purchases will cause a _________ the aggregate demand curve.

rightward shift of

An increase in government purchases will cause a _____________ the aggregate demand curve

rightward shift of

How would a rise in stock prices or housing prices affect consumption spending?

rising stock/housing prices increase consumption

Suppose that when the Fed decreases the money supply, households and firms initially hold less money than they want to, relative to other financial assets. As a result, households and firms will ____. Treasury bills and other financial assets, thereby ____ their prices, and ____ their interest rates.

sell; decreasing; increasing

In order to decrease the money supply, the Fed

sells U.S. Treasury securities

Limited liability means that The government grants limited liability to the owners of corporations

shareholders in a corporation cannot lose more than their investment in the firm. to limit shareholder risk and thus encourage investment in corporations.

The SRAS will __________ if there is an increase in the labor force or capital accumulation

shift the to right

The SRAS will ___________ if there is an increase in the adjustment of workers' and firms' prior underestimation of the price level.

shift to the left

Workers and firms adjust to having previously underestimated the price level makes SRAS

shift to the left

A decrease in the expected future price level make SRAS

shift to the right

A technological change will cause the LRAS curve to

shift to the right

An increase in the working age population will cause the LRAS curve to

shift to the right

An increase in the working population will cause the long-run aggregate supply curve to ....

shift to the right

The SRAS will ___________ if there is a technological change.

shift to the right

The SRAS will ___________ if there is an increase in productivity.

shift to the right

When technological change occurs the LRAS will

shift to the right

An increase in interest rates affects aggregate demand by

shifting the AD curve to the left, reducing real GDP and lowering the price level

An increase in interest rates affects aggregate demand by

shifting the aggregate demand curve to the left, reducing real GDP and lowering the price level

An increase in interest rates affects aggregate demand by

shifting the aggregate demand curve to the left, reducing real GDP and lowering the price level.

An increase in interest rates affects the aggregate expenditure curve by

shifting the aggregate expenditure curve down, reducing real GDP and increasing price level

If the price level decreases, the money demand curve

shifts to the left

If real GDP increases, the money demand curve

shifts to the right

The _________________ is considered the most relevant interest rate when conducting monetary policy.

short-term nominal interest rate

The ______________________________ is considered the most relevant interest rate when conducting monetary policy. long-term real interest rate short-term nominal interest rate

short-term nominal interest rate

When the Fed conducts monetary policy, the most relevant interest rate is the

short-term nominal interest rate

Why would securitization give the mortgage borrowers access to a deeper pool of capital?

since banks could resell mortgages to investors, they had access to more funds than just their own deposits

The effect of a change in the federal funds rate on long-term interest rates is usually ____ than it is on short-term interest rates.

smaller

The argument "the objectives of price stability and low long-term interest rates are essentially the same objective" is true because

stable prices make it easier to plan for the future, so expectations can be stable, which makes it less costly to make loans

A former Federal Reserve official argued that at the Fed, "the objectives of price stability and low long-term interest rates are essentially the same objective." Source:William Poole, "Understanding the Fed," Federal Reserve Bank of St. Louis Review, Vol. 89,No. 1, January/February 2007, p. 4. This is true because

stable prices make it easier to plan for the future, so expectations can be stable, which makes it less costly to make loans.

Suppose that a firm in which you have invested is making a lot of moneymaking a lot of money. Would you rather own the firm's stock or the firm's bonds ?

stock

Congress broadened the Fed's responsibility are

the 1930s as a result of the Great Depression

Congress broadened the Fed's responsibility since

the 1930s as a result of the Great Depression

Congress broadened the Fed's responsibility since

the 1930s as a result of the Great Depression.

Why might European governments have felt the need to support their banks in order to avoid another Lehman moment?

the European governments wanted to avoid wider economic repercussions resulting from bank failures that could undermine the financial positions of other firms and lead to a further reduction in prices of financial assets

Which of the following best explains how the Federal Reserve acts to help prevent banking panics?

the Fed acts as a lender of last resort, making loans to banks so that they can pay off depositors

What is true about the Fed's monetary policy targets?

the Fed is forced to choose between the interest rate and the money supply as its monetary policy target

A majority of economists support the Fed's choice of the interest rate as its monetary policy target, but some economists believe

the Fed should concentrate on the money supply instead

Support for a monetary rule of the kind advocated by Friedman declined since 1980 because

the Fed's performance since 1980 has been excellent even without a formal inflation target

"Operation Twist" refers to

the Fed's program to purchase $400 billion in long-term Treasury securities while selling an equal amount of shorter-term Treasury securities

expansionary monetary policy

the Federal Reserve's policy of decreasing interest rates to increase real GDP

contractionary monetary policy

the Federal Reserve's policy of increasing interest rates to reduce inflation

If workers and firms could always predict next year's price level with perfect accuracy

the SRAS curve and LRAS curve would be one in the same

When comparing US economic growth with the economic growth that occurred in the soviet union during the 1900s, a possible explanation for the US growing at significantly higher rates is

the US experienced a greater level of technological progress than the soviet union.

What factores would cause a US labor productivity to be nearly six times higher than russian labor productivity?

the US has more capital available per worker and higher levels of technology

Monetary policy is defined as

the actions the Federal Reserve takes to manage the money supply and interest rates

monetary policy

the actions the Federal Reserve takes to manage the money supply and interest rates to achieve macroeconomic policy goals

What do economists mean by the demand for money

the amount of money (currency and checking account deposits) that individuals hold

Aggregate expenditure represents

the amount of spending that occurs in an economy.

current, capital, fianancial

the balance of payments includes which three accounts

Which of the following does the aggregate expenditure macroeconomic model seek to explain?

the business cycle

When the Federal Reserve sells Treasury securities in the open market,

the buyers of these securities pay for them with checks and bank reserves fall

Budget deficits can cause inflation if

the central bank buys the bonds used to finance the deficits

In addition, budget deficits can cause inflation if

the central bank buys the bonds used to finance the deficits.

What event was an important cause of the 2007-2009 recession?

the collapse of a housing bubble

Which of the following events was an important cause of the 2007dash2009 recession?

the collapse of a housing bubble

August 2017 was the sixty-fourth consecutive month that the rate of inflation as measured by the core personal consumption expenditures (PCE) price index was below the Federal Reserve's target of 2 percent. The consumer price index (CPI) might yield a rate of inflation different from that found using the core PCE price index because

the core PCE does not measure food and energy prices, which are measured by the CPI.

Menu costs are

the costs to firms of changing prices

Government policies that could have been said to have been subsidizing cheap loans included

the creation of a secondary mortgage market through Fannie Mae and Freddie Mac, and the low interest rates following the 2001 recession

Philips Curve

the curve showing the short run relationship between unemployment rate and the inflation rate is called

The federal government reduces the tax on corporate profits

the demand for real interest rates and loanable funds shifts to the right

A decrease in the real interest rate results in a substantial increase in spending on investment projects by businesses

the demand line decreases as real interest rates decrease and loanable funds increase

An article in a Federal Reserve publication observes that "20 or 30 years ago, local financial institutions were the only option for some borrowers. Today, borrowers have access to national (and even international) sources of mortgage finance." Source: Daniel J.McDonald and Daniel L. Thornton, "A Primer on the Mortgage Market and Mortgage Finance," Federal Reserve Bank of St. Louis Review, January/February 2008. What caused this change in the sources of mortgage finance? What would be the likely consequence of this change for the interest rates borrowers have to pay on mortgages? The primary reason for this change in the sources of mortgage finance was _____; the consequence of this change was also _____ in mortgage rates.

the development of a secondary mortgage market; a decrease

The primary reason for this change in the sources of mortgage finance was _____; the consequence of this change was also _____ in mortgage rates.

the development of a secondary mortgage market; a decrease

Hovnanian Enterprises was suffering losses because

the economy was slowing down and about to head into a severe recession

A newspaper article in the fall of 2007 reported stated that: "The luxury-home builder Hovnanian Enterprises reported its fourth consecutive quarterly loss on Thursday, citing continuing problems of credit availability and high inventory." Source: "New Loss for Home Builder," Associated Press, September 7, 2007. Hovnanian was suffering losses because

the economy was slowing down and about to head into a severe recession.

The 2007-2009 recession was a clear example of

the effect that a decrease in AD can have on the economy

When there is an increase in the general price of goods and services, the following occur:

the equilibrium rate will increase, causing a decrease in AE

When we say that the Federal Reserve has lowered the interest rate, we mean that it has lowered its target for

the federal funds rate

According to the quantity theory of money the inflation rate equals

the growth rate of the money supply minus the growth rate of real output

An article in the Wall Street Journal in 2015 reported that the interest rate on five-year German government bonds had become negative: "The negative yield means investors are effectively paying the German state for holding its debt." The article quoted an investment analyst as saying: "The negative yield is not scaring investors away." Source: Emese Bartha and Ben Edwards, "Germany Sells Five-Year Debt at Negative Yield for First Time on Record," Wall Street Journal, February 25, 2015. The interest rate on German government bonds became negative when

the inflation rate exceeded the nominal interest rate.

federal funds rate

the interest rate banks charge each other for overnight loans

The federal funds rate is

the interest rate that banks charge each other for overnight loans

The federal funds rate is

the interest rate that banks charge each other for overnight loans.

The federal funds rate is Additionally, the federal funds rate is

the interest rate that banks charge each other for overnight loans. very important for the Fed's monetary policy because the Fed uses the federal funds rate as a monetary policy target since it can control the rate through open market operations.

In determining whether to borrow funds, firms compare the rate of return they expect to make on an investment with

the interest rate they must pay to borrow the necessary funds

Potential real GDP is

the level of GDP attained when all firms are producing at capacity

Two economists at the Federal Reserve Bank of Cleveland note that "estimates of potential GDP are very fluid, [which] suggests there is considerable error in our current measure." They conclude that "this lack of precision should be recognized when policy recommendations are made using a Taylor-type rule." Source: Charles Carlstrom and Timothy Stehulak, "Mutable Economic Laws and Calculating Unemployment and Output Gaps-An Application to Taylor Rules," Federal Reserve Bank of Cleveland, June 5, 2015. The Federal Reserve Bank of Cleveland economists made this argument based on

the likelihood that potential output or the natural rate of unemployment cannot be accurately measured.

If the price level decreases

the money demand curve shifts to the left

If the price level decreases,

the money demand curve shifts to the left.

If real GDP increases

the money demand curve shifts to the right

If real GDP increases,

the money demand curve shifts to the right.

Which of these variables are the main monetary policy targets of the Fed?

the money supply and the interest rate

If the FOMC orders the trading desk to sell Treasury securities,

the money supply curve will shift to the left, and the equilibrium interest rate will rise

If the FOMC orders the trading desk to sell Treasury securities,

the money supply curve will shift to the left, and the equilibrium interest rate will rise.

current account

the part of the balance of payments that records a country's net exports, net investment income, and net transfers is called A. current account B. balance account C. financial account D. capital account

The aggregate demand curve shows the relationship between

the price level and the quantity of real GDP demanded by households, firms, and the government

The short run aggregate supply curve shows the relationship in the short run between

the price level and the quantity of real GDP supplied by firms

TheUS economy experience 4 percent inflation. Because this is a change in ________, it will cause a ______________ the aggregated demand curve

the price level, movement along

When the price levels are below 100

the price levels are less compared to the price level in the base year

the two key factors that cause labor productivity to increase over time are:

the quantity of capital per hour worked and the level of technology

What is the discount rate?

the rate at which the Fed lends to banks

One of the goals of the Federal Reserve is price stability. For the Fed to achieve this goal,

the rate of inflation should be low, such as 1% to 3%, and should be fairly consistent

One of the goals of the Federal Reserve is price stability. For the Fed to achieve this goal,

the rate of inflation should be low, such as 1% to 3%, and should be fairly consistent

One of the goals of the Federal Reserve is price stability. For the Fed to achieve this goal,

the rate of inflation should be low, such as 1% to 3%, and should be fairly consistent.

The Fed gave up targeting the money supply because

the relationship between monetary aggregates and other economic variables was becoming unreliable.

The Fed gave up targeting the money supply because

the relationship between money aggregates and other economic variables was becoming unreliable

(D) (All of the Above)

the saving and investment equation A. tells us that a savings will be invested domestically or overseas B. shows that a country with negative NFI must be saving less than it is investing domestically C. Can be written as S=I + NFI D. All of the Above

When the Federal Reserve purchases Treasury securities in the open market,

the sellers of such securities deposit the funds in their banks and bank reserves increase

The slope of the aggregate expenditure line equals

the slope of the consumption function.

In the Expenditure Approach Real GDP equals

the sum of Consumption, Investment, Government Spending, and Net Exports: Y = C + I + G + NX

Aggregate expenditure is:

the sum total of consumption, planned investment, government purchases, and net exports.

The federal government eliminates 401(k) retirement accounts

the supply for real interest rates and loanable funds shift to the left

An increase in the real interest rate results in little increase in private savings by households

the supply line increases as real interest rates and loanable funds increase

The value of the multiplier is larger when

the value of the MPC is larger

the average number of times each dollar is used to purchase goods and services

the velocity of money is

What factors determines the supply of loanable funds?

the willingness of households and governments to save

When examining economic growth rates throughout history

the world experienced little to no growth until the industrial revolution, after which some economies began to experience growth.

Potential GDP increased but actual GDP did not so.....

there is unemployment

The member's prediction may have seemed reasonable at the time because

there was a crisis atmosphere in April 2008, and once the crisis was resolved, it was reasonable to expect things to improve.

If the price level increase, then

there will be a movement up along a stationary aggregate demand curve

Investors were willing to buy bonds with a negative interest rate because

they believed there was no chance that the government would default.

Investment banks can be subject to liquidity problems because

they often borrow short-term, sometimes as short as overnight, and invest the funds in longer-term investments

How can investment banks be subject to liquidity problems? Investment banks can be subject to liquidity problems because

they often borrow short term, sometimes as short as overnight, and invest the funds in longer-term investments.

Support for a monetary rule of the kind advocated by Friedman declined since 1980 because

the Fed's performance since 1980 has been excellent even without a formal inflation target.

What is "Operation Twist"? "Operation Twist" refers to

the Fed's program to purchase $400 billion in long-term Treasury securities while selling an equal amount of shorter-term Treasury securities.

Assume a large corporation is experiencing the principal-agent problem.What could the corporation do to minimize this problem? The company could

tie the salaries of top managers to the price of the firm's stock.

What is the relationship between the federal funds rate falling and the money supply increasing?

to decrease the federal funds rate, the Fed must increase the money supply

What is the relationship between the federal funds rate falling and the money supply increasing?

to decrease the federal funds rate, the Fed must increase the money supply.

purchases Treasury securities

to increase money supply, the Federal Reserve

How does lowering the target for the federal funds rate "pour money" into the banking systems?

to increase the money supply, the Fed buys bonds on the open market, which increases bank reserves

When Congress established the Fed in 1913, its main responsibility was

to make discount loans to banks suffering from large withdrawals by depositors

When Congress established the Federal Reserve in 1913, its main responsibility was

to make discount loans to banks suffering from large withdrawals by depositors.

When Congress established the Federal Reserve in 1913, its main responsibility was Congress broadened the Fed's responsibility since

to make discount loans to banks suffering from large withdrawals by depositors. the 1930s as a result of the Great Depression.

When Congress established the Federal Reserve in 1913, its main responsibility was

to make discount loans to banks suffering from large withdrawals to depositors

Increases in the value of the dollar to foreign currencies will make the aggregate demand curve shift

to the left

The multiplier means the

total amount of additional increases in consumption spending induced by an initial change in aggregate expenditure.

Evaluate the following statement: "The reason that the aggregate demand LOADING... curve slopes downward is that when the price level is higher, people cannot afford to buy as many goods and services." This statement is:

true

True/false: stabilizing asset prices should NOT be added to the list of the Fed's policy goals because they are more specific and deal mainly with individuals and firms and the Fed should not be in the business of trying to make profit for individuals.

true

True/false: two government-sponsored enterprises that stand between investors and banks that grant mortgages are the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation

true

In addition to the Fed and its three monetary policy tools,

two other actors—the nonbank public and banks—influence the money supply.

unemployment includes frictional and structural unemployment

An article in the Wall Street Journal quoted a Federal Reserve economist as referring to "the Fed's existing dual mandate to achieve maximum sustainable employment in the context of price stability." Source: Pedro Nicolaci Da Costa, "Fed Should Make Bond Buys a Regular Policy Tool, A Boston Fed Paper Finds," Wall Street Journal, April 23, 2015. "Maximum sustainable employment" means the economy is producing at its potential where

unemployment includes frictional and structural unemployment.

Y producing below equi

unplanned decrease in inventories

Y producing above equi

unplanned increase in inventories, companies want to produce less so fire ppl so GDP and employment decreases so it goes back to equi

correct statement about unplanned inventory increases

unplanned inventory increase are likely to indicate that aggregate expenditures are low and correspond with downturns in the business cycle

Employers are hesitant to cut workers' salaries because wage cuts

upset workers and lower their productivity

If menu costs were eliminated, the SRAS curve will be _____________ because of _______________________

upward sloping, wage price stickiness and slow wage adjustment by firms

If the Fed believes the inflation rate is about to increase, it should

use a contractionary monetary policy to increase the interest rate and shift AD to the left

If the Fed believes the inflation rate is about to increase, it should

use a contractionary monetary policy to increase the interest rate and shift AD to the left.

If the Fed believes the economy is about to fall into recession, it should

use an expansionary monetary policy to lower the interest rate and shift AD to the right

If the Fed believes the economy is about to fall into recession, it should

use an expansionary monetary policy to lower the interest rate and shift AD to the right.

Additionally, the federal funds rate is

very important for the Fed's monetary policy because the Fed uses the federal funds rate as a monetary policy target since it can control the rate through open market operations

The federal funds rate is

very important for the Fed's monetary policy because the Fed uses the federal funds rate as a monetary policy target since it can control the rate through open market operations

Additionally, the federal funds rate is

very important for the Fed's monetary policy because the Fed uses the federal funds rate as a monetary policy target since it can control the rate through open market operations.

money supply and interest rates

what are the feds main monetary policy targets? A. Money supply and interest rates B. high employment and economic growth C. Price stability and economic growth D. taxes and government spending

it has no effect

what impact does monetary policy have on the long run Phillips curve?

interest rate

what is the most important factor in explaining exchange rate fluctuations in the short run?

The economy experiences a recession

when actual GDP is below potential GDP at the LRAS

The federal funds rate is the interest rate charged

when one bank lends money to another bank

Which of the following is NOT true when the economy is in macroeconomic equilibrium?

when the economy is at long-run economic equilibrium, firms will have excess capacity

The wealth effect refers to the fact that

when the price level falls, the real value of household wealth rises, and so will consumption

The economy experiences short-term inflation

when the price level rises above the level associated with the LRAS

Why would the Bank of Japan be reluctant to raise its target for short-term interest rates if the price level is falling?

when the target rate increases, money growth slows down, and inflation should decrease

The economy experiences stagflation

when there is a combination of inflation and recession

A decrease in firms' expectations of the future profitability of investment

will lower AD

When the price level increases the LRAS...

will not change

When the labor force increases the LRAS....

will shift to the right

When there is an increase in the quantity of capital goods the LRAS....

will shift to the right

Suppose that workers and firms could always predict next years price level with perfect accuracy. Under these circumstances, the SRAS curve

would be the same as the LRAS

What two institutions did Congress create in order to increase the availability of mortgages in a secondary market?

"Fannie Mae" and "Freddie Mac"

What two institutions did Congress create in order to increase the availability of mortgages in a secondary market? A. The Bank Oversight Committee and the Department of the Interior B. The National Bureau of Economic Research (NBER) and the Bureau of Labor Statistics (BLS) C. The Federal Open Market Committee (FOMC) and the Federal Deposit Insurance Corporation (FDIC) D. "Fannie Mae" and "Freddie Mac"

"Fannie Mae" and "Freddie Mac"

Suppose the reserve requirement is 15%. What is the effect on total checkable deposits in the economy if bank reserves increase by $50 billion?

$333 billion increase

If many unemployed people have been out of work for a long time, why might policies that increase their ability to find jobs be more effective in reducing unemployment than a policy of monetary stimulus?

Long-term unemployment is due to the mis-match between the skills that are in demand and the skills that unemployed workers have. Policies such as additional training can mitigate such unemployment by making workers better skilled.

The M2 definition of the money supply includes

M1, savings accounts, small time deposits, and money markets.

What is the disadvantage of holding money?

Money, in the form of currency or checking account deposits, earns either no interest or a very low rate of interest.

In a column in the Wall Street Journal, two economists at the Council on Foreign Relations argue: "Simply put, the Fed must choose between managing the level of reserves and managing rates. It cannot do both." Source: Benn Steil and Paul Swartz, "Bye-Bye to the Fed-Funds Rate,"Wall Street Journal, August 19, 2010. Do you agree?

No, because it is by managing reserves that the Fed manages interest rates.

As the interest rate increases,

consumption, investment, and net exports decrease; aggregate demand decreases.

When interest rates on Treasury bills and other financial assets are low, the opportunity cost of holding money is _________, so the quantity of money demanded will be _________.

low; high

In discussing the Taylor rule, John Taylor wrote: "I realize that there are differences of opinion about what is the best rule to guide policy and that some at the Fed (including Janet Yellen) now prefer a rule with a higher coefficient [on the output gap]." Source: John Taylor, "Cross Checking 'Checking in on the Taylor Rule'," www.economicsone.com, July 16, 2013. If the Taylor rule was changed to have a higher coefficient on the output gap, then during a recession the federal funds rate would be

lower, because more weight would be given to the output gap.

Suppose that when the Fed decreases the money supply, households and firms initially hold less money than they want to, relative to other financial assets. As a result, households and firms will _________ Treasury bills and other financial assets, thereby _________ their prices, and _________ their interest rates.

sell; decreasing; increasing

When the Fed conducts monetary policy, the most relevant interest rate is the

short-term nominal interest rate.

The difficulty in predicting how much aggregate demand and aggregate supply will shift means that economists often have difficulty correctly predicting the beginning and end of recessions.

• Potential real GDP increases continually, shifting the long-run aggregate supply curve to the right. • During most years, the aggregate demand curve shifts to the right. • Except during periods when workers and firms expect high rates of inflation, the short-run aggregate supply curve will be shifting to the right.

The recession began in December 2007,with the end of the economic expansion that had begun in November 2001. Several factors contributed to bring on the recession:

• The end of the housing "bubble." • The financial crisis • The rapid increase in oil prices during 2008.

Simple deposit multiplier

∆D = (1/rr) × ∆R, where ∆D = change in deposits; ∆R = change in reserves; rr = required reserve ratio.

If the reserve requirement ratio (rr) is 0.20, what does the FED have to do to *increase* the money supply in the economy by $200 million? A.) sell $40 million in government bonds. B.) buy $40 million in government bonds. C.) buy $200 million in government bonds. D.) sell $200 million in government bonds.

∆M=m*∆R ∆M=200 m=1\rr = 1/.20 = 5 200/5=∆R ∆R=40 B.) buy $40 million in government bonds.

Suppose the reserve requirement ratio (rr) is 0.05. What happens to the money supply, if the FED *sells* $10 billion worth of government bonds? A.) money supply goes down by $20 billion. B.) money supply goes down by $10 billion. C.) money supply goes down by $200 billion. D.) money supply goes up by $10 billion.

∆M=m*∆R ∆R=10 m=1/rr = 1/.05 = 20 ∆M=20*10 ∆M=200 C.) money supply goes down by $200 billion.

Macro Economics Ch. 11, Macro ******** to the second power, Econ Quiz 15, Econ 202 Ch. 15.4, ECO CH15, ECO2013 - Chapter 15, ECO 2013 Chapter 26 Homework, Macro econ chapter 15, 15 - Monetary Policy, Macro Final -- Practice questions, Macroeconomics...

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