Macro Exam (14,15,16,17)

In the figure to the right, expected inflation is initially at​ 1.5%. When expected inflation increases to​ 4.5%, which of the following will​ occur?

all of the above

In the figure to the​ right, when the money supply increased from MS 1MS1 to MS 2MS2​, the equilibrium interest rate fell from​ 4% to​ 3%. Why?

all of the above

Credit cards are

included in neither the M1 definition of the money supply nor in the M2 definition

The United States is divided into _______ Federal Reserve Districts. 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. One of the board members is appointed to a ________ ​year, renewable term as the chairman.

12, 7, 4

​Similarly, explain why a decrease in the marginal propensity to import would increase the size of the government purchases multiplier. The value of the government purchases multiplier would decrease because in the formula for the multiplier the denominator is

1− ​[MPC×​(1−​t)− ​MPI]

Imagine that Kristy deposits​ $10,000 of currency into her checking account deposit at Bank A and that the required reserve ratio is​ 20%. Refer to the scenario above. As a result of​ Kristy's deposit, Bank A can make a maximum loan of

8,000

What is the Fed doing to increase the credibility of its policies?

A and B only

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

A and C only

Consider the figures below and determine which is the best description of what causes the shift from AD 1AD1 to AD 2AD2.

Both A and B

The figure to the right shows a breakdown of the M1 definition of the money supply in 2015. Which area corresponds to the amount of checking account​ deposits?

C

What is inflation targeting?

Committing the central bank to achieve an announced level of inflation

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.)

Consumption of durable goods, the value of the dollar, and business investment projects

Indicate the two main objections to the idea that the​ short-run Phillips curve is vertical.

Contracts with workers keep wages sticky, workers and firms might not have rational expectations

The multiplier effect is only a consideration for increases in government purchases.

False

The Fed buys and sells bondsbuys and sells bonds as a part of its policy to reach all of the following objectives​ except:

High unemployment

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

Households, firms, and banks

Why doesn't the Phillips curve represent a permanent trade-off between unemployment and inflation in the long run?

In the long run, aggregate supply is vertical

The figure to the right illustrates the 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 federal government likely pursue in order to move AD2 to AD Subscript 2 comma policyAD2, policy and reach equilibrium​ (point C) in the second​ period?

Increase government spending

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

The Phillips curve was developed by A.W. Phillips in 1957 and shows the relationship between unemployment and inflation. The​ curve, shown at the​ right, indicates what type of relationship between the two​ variables?

Inverse relationship

How do investment banks differ from commercial​ banks? ​(Mark all that​ apply.)

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

Consider the figure to the right. An increase in government spending shifted the aggregate demand curve from AD1 to AD2. As a​ result, both price level and real GDP increased. What can be​ said, however, about the increase in real​ GDP?

It increases by less than indicated by a multiplier with a constant price level

When SRAS 1 shifts to SRAS2​, the price level increases and the level of real GDP falls. What happens to the​ short-run Phillips curve when the​ short-run aggregate supply curve shifts​ (a supply​ shock)?

It shifts up such that a given level of unemployment occurs at a higher price level

When SRAS 1SRAS1 shifts to SRAS 2SRAS2​, the price level increases and the level of real GDP falls. What happens to the​ short-run Phillips curve when the​ short-run aggregate supply curve shifts​ (a supply​ shock)?

It shifts up such that a given level of unemployment occurs at a higher price level.

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

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

After September​ 11, 2001, the federal government increased military spending on wars in Iraq and Afghanistan. Is this increase in spending considered fiscal policy?

No. The increase in defense spending after that date was designed to achieve homeland security objectives.

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? ​ (What policy will increase the price level and increase actual real​ GDP?)

Open market purchase of government securities

The figure to the right illustrates a dynamic AD-AS mode. 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

In the figure to the​ right, at what point is the inflation rate​ stable? That​ is, at what point can we refer to the inflation rate as the nonaccelerating inflation rate of unemployment?

Point C

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?

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

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.

What can we expect from the Federal Reserve Bank if it seeks to move the economy in the direction of​ long-run macroeconomic​ equilibrium?

The Fed will pursue an expansionary monetary policy. Increase, does not change, increase, and decreases

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?

The Federal funds rate

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

The money supply grows faster than the real GDP

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. If the​ Fed's policy is​ successful, what is the effect of the policy on the following macroeconomic​ indicators?

a contractionary, decrease, does not change, decrease, increase

Economists who believed that the Phillips curve represented a structural relationship believed that the curve represented

a permanent trade-off between unemployment and inflation

Which of the following is NOT a function of money?

acceptability

An initial increase in a bank's reserves will increase checkable deposits

by an amount greater than the increase in reserves

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 government to pursue​ a(n) _______________ fiscal policy. If the​ government's policy is​ successful, what is the effect of the policy on the following macroeconomic​ indicators?

contractionary, decrease, does not change, decreases, increases

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

current income

Complete the following table for a static​ AD-AS model: (UP) Gov't spending or ______________. Real GDP and price level ___________. ______________ or (UP) Taxes. Real GDP and price level ___________.

decrease taxes, rise Decrease gov't spending, fall

The figure to the right illustrates the 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 federal government to pursue what type of policy in order to move AD2 to AD Subscript 2 comma policyAD2, policy and reach equilibrium​ (point C) in the second​ period? __________________ If the federal​ government's policy is​ successful, what is the effect on the following macroeconomic​ indicators?

expansionary fiscal policy, increases, does not change, increases, decreases

There is a different short-run Phillips curve for every level of the​ ___________ inflation rate. The inflation rate at which the​ short-run Phillips curve intersects the​ long-run Phillips curve equals the​ ___________ inflation rate.

expected; expected

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

low prices

The _____________________ is considered the most relevant interest rate when conducting monetary policy.

short-term nominal interest rate

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

supply-side economics

From an understanding of the multiplier​ process, explain why an increase in the tax rate would decrease the size of the government purchases multiplier. The value of the government purchases multiplier would decrease because in the formula for the multiplier

the MPC is multiplied by​ (1− ​t).

If, in the long run, real GDP returns to its potential level, then in the long run

the Phillips curve is vertical

The Federal Reserve's two main monetary policy targets are

the money supply and interest rates

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?

Pro cyclical policy

If actual inflation is higher than unexpected inflation, the

actual real wage is less than the expected real wage: unemployment falls

If actual inflation is higher than expected​ inflation, the

actual real wage is less than the expected real wage; unemployment falls

Alan Greenspan

agreed with Paul Volcker about the importance of keeping inflation low.

According to many economists and​ policymakers, what other options does the Fed have to improve its credibility with​ workers, firms, and investors?

all of the above

How does a budget deficit act as an automatic stabilizer and reduce the severity of a​ recession?

all of the above

Increased government debt can lead to higher interest rates​ and, as a​ result, crowding out of private investment spending. In terms of borrowing​ (debt-spending), what will offset the effect of crowding out in the long run so that government debt poses less of a problem to the​ economy?

all of the above

What are the gains to be had from simplifying the tax code?

all of the above

What are the gains to be had from simplifying the tax​ code?

all of the above

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

all of the above

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

all of the above

Which of the following is true with respect to hyperinflation?

all of the above

The use of money

all the above

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

What two institutions did Congress create in order to increase the availability of mortgages in a secondary​ market?

"Fannie Mae" and "Freddie Mac"

Suppose the reserve requirement is 55​%. What is the effect on total checkable deposits in the economy if bank reserves increase by ​$5050 ​billion?

1,000 billion increase

What effect does expansionary monetary policy have on equilibrium if consumers have rational expectations?

A movement from point A to point C

Assuming a fixed amount of taxes and a closed economy and that the marginal propensity to consume equals 0.90​, calculate the value of the following multipliers. Be sure to use a negative sign​ (-) to show if a multiplier has a negative value.

10, -9, 1

Paul Volcker is credited largely with which of the​ following?

A and B 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

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): Expansionary fiscal policy. Example​ (B): Contractionary fiscal 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 AD2 to AD2 Subscript 2 comma policyAD2, 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, increase, does not change, increase, decrease

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.

As of​ 1993, the Fed sets targets for which of the following in order to achieve price stability and high​ employment?

Federal funds rate

What is the difference between federal government purchases​ (spending) and federal government​ expenditures?

Government purchases are included in government expenditures..

Does government spending ever reduce private spending?

Yes, due to crowding out

The most liquid measure of money supply is

M1

The M2 measure of the money supply equals

M1 plus savings account balances plus smallminus−denomination time deposits plus noninstitutional money market fund shares.

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

The M2 definition of the money supply includes

M1, savings accounts, small deposits, and money markets

According to the Taylor rule, what is the federal funds target rate under the following​ conditions? follows ≻Equilibrium real federal funds rate equals 22% ≻Target rate of inflation equals 22​% ≻Current inflation rate equals 11​% ≻Real GDP is 11​% below potential real GDP

The federal target rate equals 2.0%

If the marginal propensity to consume equals 0.60​, the tax rate equals 0.25​, and the marginal propensity to import equals 0.05​, what is the value of the government purchases​ multiplier?

The government purchases multiplier is equal to 1.67

Even if expectations of inflation are​ rational, sluggish adjustment of wages and prices will still create a​ short-run trade-off between inflation and unemployment.

True

When is it considered​ "good policy" for the government to run a budget​ deficit?

When borrowing is used for long-lived capital goods

If the Federal Reserve chooses to fight high inflation with contractionary monetary policy and firms and consumers expect this policy to reduce​ inflation, which of the following would you expect to​ see?

a downward shift of the short- run Phillips curve

Economies where goods and services are traded directly for other goods and services are called​ ________ economies.

barter

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 decreasedecrease in a​ bank's reserves will decreasedecrease checkable deposits

by an amount greater than the decrease in reserves

Silver is an example of a

commodity money

The simple multiplier effect shows the resulting change in real GDP due to an increase in government purchases or a decrease in taxes assuming that the price level is ______________. In​ reality, the SRAS is _______________. As a​ result, when AD shifts to the​ right, in reality the change in real GDP will be _____________ it would be if the price level were constant.

constant, upward sloping, less than

The U.S. dollar can best be described as

flat money

An increase in the interest rate should​ ____________ the demand for dollars and the value of the​ dollar, and net exports should​ __________.

increase; decrease

The federal funds rate

is the rate that banks charge each other for short-term loans of excess reserves

As a result of crowding out in the short​ run, the effect on real GDP of an increase in government spending is often

less than the increase in government spending

According to the shortminus−run Phillips​ curve, the unemployment rate and the inflation rate are

negatively related

The tiger the tax rate, the _________ the multiplier effect.

smaller

Models that use​ factors, such as technology​ shocks, to explain fluctuations in real GDP instead of changes in the money supply are called

real business cycle models

What should the Federal Reserve do if it wants to move from point A to point B in the shortminus−run Phillips curve depicted in the diagram to the​ right?

sell treasury bills