EC 309 Exam 2 Practice Questions

According to the Fisher effect, the nominal interest rate moves one-for-one with changes in the

expected inflation rate

If the demand for money increases, but the Fed keeps the money supply the same, then in the short run output will

fall and in the long run prices will remain unchanged

As the relative demand for unskilled workers falls, wages for unskilled workers _____, and unemployment compensation becomes a _____ attractive option.

fall; more

The banking system creates

Liquidity

High-powered money is another name for

Monetary Base

All of these are causes of structural unemployment EXCEPT: a. minimum-wage laws b. the monopoly power of unions c. unemployment insurance d. efficiency wages

c

All of the following are costs of fully expected inflation except that expected inflation

causes lower real wages

Inflation _____ the variability of relative prices and _____ allocative efficiency

increases; decreases

The unemployment insurance system may be desirable because unemployment insurance

induces workers to reject unattractive job offers

Business cycles are

irregular and unpredictable

Over the business cycle, consumption spending _____ investment spending.

is less volatile

When the Fed increases the discount rate, it

is likely to decrease the monetary base

Sectoral shifts

make frictional employment inevitable

The money supply will increase if the

monetary base increases

If the Federal Reserve increases the interest rate paid on reserves, banks will tend to hold ______ excess reserves, while will ______ the money multiplier.

more; decrease

When insiders have a much greater impact on the wage bargaining process than do outsiders, the negotiated wage is likely to be ______ the equilibrium wage.

much greater than

When there is structural unemployment, the real wage is

rigid at a level above the market-clearing level

Along an aggregate demand curve, which of the following are held constant?

the money supply and velocity

Excess reserves are reserves that banks keep

above the legally required amount

Stabilization policy

aims at keeping output and employment at their natural rates

A favorable supply shock occurs when

an oil cartel breaks up and oil prices fall

To increase the monetary base, the Fed can

conduct open-market purchases

Starting from long-run equilibrium, without policy intervention, the long-run impact of an adverse supply shock is that prices will

return to the old level, but output will be permanently lower

If the ratio of currency to deposits (cr) increases, while the ratio of reserves to deposits (rr) is constant and the monetary base (B) is constant, then

the money supply decreases

If the ratio of reserves to deposits (rr) increases, while the ratio of currency to deposits (cr) is constant and the monetary base (B) is constant, then

the money supply decreases

In the below graph, assume that the economy stats at point A and there is a favorable supply shock that does not last forever. In this situation, point ______ represents short-run equilibrium and point ______ represents long-run equilibrium.

B; A

The more funds that the Federal Reserve makes available for banks to borrow through the Term Auction Facility, the ______ the monetary base and the ______ the money supply. a. smaller; smaller b. smaller; greater c. greater; greater d. greater; smaller

C

Maria lives in an economy with hyperinflation. Each day after being paid, she runs to the store as quickly as possible so she can spend her money before it loses value. Select the cost of inflation that best describes this scenario. a. Menu costs b. Shoeleather costs c. Cost of unexpected inflation d. Inconvenience of a changing price level

b

If the rate of separation is .02 and the rate of job finding is .08 but the current unemployment rate is .10, then the current unemployment rate is ______ the equilibrium rate, and in the next period it will move ______ the equilibrium rate.

below; toward

If an aggregate demand curve is drawn with real GDP (Y) along the horizontal axis and the price level (P) along the vertical axis, using the quantity theory of money as a theory of aggregate demand, this curve slopes ______ to the right and gets ______ as it moves.

downward; flatter

If the Fed accommodates an adverse supply shock, output falls _____, and prices rise _____.

falls; more

Unemployment caused by the time it takes workers to search for a job is called ______ unemployment

frictional

When the Federal Reserve increases the money supply, at a given price level the amount of output demanded is _____ and the aggregate demand curve shifts ______.

greater; outward

A spell of unemployment begins when a person leaves their job or

has been without a job for at least four weeks

Empirical data shows that countries with high money growth tend to have ______ inflation

high

For a fixed money supply, the aggregate demand curve slopes downward because at a lower price level real money balances are _____ generating a ______ quantity of output demanded.

higher; greater

For a fixed money supply, the aggregate demand curve slopes downward because at a lower price level, real money balances are ______, generating a ______ quantity of output demanded.

higher; greater

According to the quantity of money, if output is higher, ______ real balances are required, and for fixed M this means ______ P.

higher; lower

If the short-run aggregate supply curve is horizontal, an increase in union aggressiveness that pushes wages and prices up will result in ______ and ______ output in the short run.

higher; lower

According to the classical theory of money, inflation does not make workers poorer because wages increase

in proportion to the increase in the overall price level

If a short-run equilibrium occurs at a level of output below the natural rate, then in the transition to the long run prices will _____ and output will ______.

increase; decrease

Assume that the economy is initially at point A with aggregate demand given by AD2. A shift in the aggregate demand curve to AD0 could be the result of either a(n) ______ in the money supply or a(n) ________ in the velocity.

increase; increase

Since the Covid-19 health crisis caused many businesses to temporarily shut down and lay off their workers, there was a(n) ________ in the natural rate of unemployment and the long-run aggregate supply (LRAS) curve shifted _______.

increase; left

When the Fed increases the interest rate paid on reserves, it

increases the reserve-deposit ratio

In the United States, the money supply is determined

jointly by the Fed and by the behavior of individuals who hold money and of banks in which money is held

Assets of banks include

loans to customers

A difference between the economic long run and the short run is that

monetary and fiscal policy affect output only in the long run

Open-market operations change the _____; changes in interest rate paid on reserves change the _____; and changes in the discount rate change the ______.

monetary base; money multiplier; monetary base

Looking at the aggregate demand at the aggregate demand curve alone, one can tell

neither the quantity of output nor the price level

The real interest rate is equal to the

nominal interest rate minus the inflation rate

If the short-run aggregate supply curve is horizontal, then a change in the money supply will change ______ in the short run and change ______ in the long run.

only output; only prices

If the short-run aggregate supply curve is horizontal and the Fed increases the money supply, then

output and employment will increase in the short run

The rate of inflation is the

percentage change in the level of prices

Wage rigidity

prevents labor demand and labor supply from reaching the equilibrium level

Aggregate supply is the relationship between the quantity of goods and services supplied and the

price level

The definition of the transactions velocity of money is

prices multiplied by transactions divided by money

In the short run, a favorable supply shock causes

prices to fall and output to rise

A short run aggregate supply curve showed ______, and a long run aggregate supply curve shows fixed ______.

prices; output

The one-to-one reaction between the inflation rate and the nominal interest rate, the Fisher effect, assumes that the

real interest rate is constant

Stabilization policy refers to policy actions aimed at

reducing the severity of short-run economic fluctuations

Economists call the changes in the composition of demand among industries and regions

sectoral shifts

To reduce the money supply, the Federal Reserve

sells government bonds

Unemployment insurance increases the amount of frictional unemployment by

softening the economic hardship of unemployment

Starting from long run equilibrium, if the velocity of money increases (due to, for example, the invention of automatic teller machines), the Fed might be able to stabilize output by ______ the rate of growth of the money supply.

temporarily decreasing

The costs of unexpected inflation, but not expected inflation are

the arbitrary redistribution of wealth between debtors and creditors

The natural level of output is

the level of output at which the unemployment rate is at its natural level

If you hear in the news that the Federal Reserve conducted open-market purchases, then you should expect ______ to increase

the money supply

If the monetary base fell and the currency-deposit ratio rose but the reserve deposit ratio remained the same, then

the money supply would fall, but not by as much as it would have fallen if the reserve-deposit ratio had risen

Efficiency-wage theory implies that firms pay high wages because

the more a firm pays its workers, the greater their incentive to stay with the firm

The short-run aggregate supply curve is horizontal at

a fixed price level

If the steady-state rate of unemployment equals .125 and the fraction of unemployed workers who find jobs each month (the rate of job finds) is .56, then the fraction of employed workers who lose their jobs each month (the rate of job separations) must be

.08

If the quantity of real money balances is kY, where k is constant, then velocity is

1/k

Based on the below balance sheet, what is the reserve-deposit ratio at the bank? Reserves $10,000 Deposits $100,000 Loans $100,000 Debt $20,000 Securities $40,000 Equity $30,000

10 percent

An economy produces 50 widgets, which sell for $4 each, and has a money supply of $100. What is the velocity of money

2

An economy with constant velocity of money has real GDP growth of 3%, money growth of 7%, and a real interest rate of 2%. The nominal interest rate is

6%

If the real return on government bonds is 3 percent and the expected rate of inflation is 4 percent, then the cost of holding money is ______ percent

7

Assume that the economy is at point B. With no further shocks or policy moves, the economy in the long run will be at point

A

Assume that the economy is at point E. With no further shocks or policy moves, the economy in the long run will be at point

A

Economists use the term money to refer to

Assets used for transactions

Unions contribute to structural unemployment when collective bargaining results in wages

above the equilibrium level

Payment is deferred by using _______, but immediate access to funds occurs when using ______.

credit cards; debit cards

The money supply will decrease if the

currency-deposit ratio increases

The version of Okun's law studied in Chapter 11 assumes that with no change in unemployment, real gross domestic product normally grows by 3 percent over a year. If the unemployment rate rose by 2 percentage points over a year, Okun's law predicts that real GDP would

decrease by 1 percent

When the Fed makes an open-market sale, it

decreases the monetary base

When the Fed decreases the interest rate paid on reserves, it

decreases the reserve-deposit ratio

The assumption of constant velocity in the quantity equation is the equivalent of the assumption of a constant

demand for real balances per unit of output

In a steady state

the number of people finding jobs equals the number of people losing jobs

Frictional unemployment is unemployment caused by

the time it takes workers to search for a job

The macroeconomic problem that affects individuals most directly and severely is

unemployment

A variable rate of inflation is undesirable because

variable inflation leads to greater uncertainty and risk than under constant inflation

All of the following are considered major functions of money except as a

way to display wealth

A policy that increases the job-finding rate _____ the natural rate of unemployment

will decrease

The relationship between the quantity of goods and services supplied and the price level is called

aggregate supply

Liabilities of banks include

Demand Deposits

The quality of money in the United States is essentially controlled by the

Federal Reserve

Which of the following would most likely be called a hyperinflation? a. Price increases averaged 300 percent per year b. The inflation rate was 10 percent per year c. Real GDP grew at a rate of 12 percent over a year d. A stock market index rose by 1,000 points over a year

a

Measures of average workweeks and building permits for new housing units are included in the index of leading indicators, because shorter workweeks tend to indicate ______ future economic activity and increased permits for new units tend to indicate _______ future economic activity.

weaker; stronger