ECN 390 Final
If the nominal interest rate is 6 percent and the inflation rate is 3 percent, the real interest rate is
3 percent
Which of the following statements regarding taxes is correct
A permanent change in taxes has a greater effect on aggregate demand than a temporary change in taxes
Which of the following statements about economic fluctuations is true
A variety of spending, income, and output measures can be used to measure economic fluctuations because most macroeconomic quantities tend to fluctuate together.
Which of the following statements about a bank's balance sheet is true?
Assets minus liabilities equals owner's equity or capital.
Which of the following statements about inflation is not true
Inflation reduces people's real purchasing power because it raises the cost of the things people buy
Which of the following statements about stabilization policy is true?
Many economists prefer automatic stabilizers because they affect the economy with a shorter lag than activist stabilization policy.
Velocity is
the annual rate of turnover of the money supply
The discount rate is
the interest rate the Fed charges on loans to banks.
If the Fed engages in an open-market purchase, and at the same time, it raises reserve requirements
we cannot be certain what will happen to the money supply
Suppose the Fed purchases a $1,000 government bond from you. If you deposit the entire $1,000 in your bank, what is the total potential change in the money supply as a result of the Fed's action if reserve requirements are 20 percent?
$5,000
Suppose Joe changes his $1,000 demand deposit from Bank A to Bank B. If the reserve requirement is 10 percent, what is the potential change in demand deposits as a result of Joe's action?
0
An inflation tax is
a tax on people who hold money
Suppose the nominal interest rate is 7 percent while the money supply is growing at a rate of 5 percent per year. Assuming real output remains fixed, if the government increases the growth rate of the money supply from 5 percent to 9 percent, the Fisher effect suggests that, in the long run, the nominal interest rate should become
11 percent
If the real interest rate is 4 percent, the inflation rate is 6 percent, and the tax rate is 20 percent, what is the after-tax real interest rate?
2 %
If the marginal propensity to consume (MPC) is 0.75, the value of the multiplier is
4
If the reserve ratio is 25 percent, the value of the money multiplier is
4
Suppose the economy is initially in long-run equilibrium. Then suppose there is a drought that destroys much of the wheat crop. If policymakers allow the economy to adjust to long-run equilibrium on its own, according to the model of aggregate demand and aggregate supply, what happens to prices and output in the long run?
Output and the price level are unchanged from their initial values.
Suppose the economy is initially in long-run equilibrium. Then suppose there is a reduction in military spending. According to the model of aggregate demand and aggregate supply, what happens to prices and output in the short run?
Prices fall; output falls.
Suppose the economy is initially in long-run equilibrium. Then suppose there is a reduction in military spending. According to the model of aggregate demand and aggregate supply, what happens to prices and output in the long run?
Prices fall; output is unchanged from its initial value.
Suppose the economy is initially in long-run equilibrium. Then suppose there is a drought that destroys much of the wheat crop. According to the model of aggregate demand and aggregate supply, what happens to prices and output in the short run?
Prices rise; output falls
Which of the following is not a function of money
Protection against inflation
Which of the following best describes how an increase in the money supply shifts aggregate demand
The money supply shifts right, the interest rate falls, investment increases, and aggregate demand shifts right.
If money is neutral
a change in the money supply only affects nominal variables such as prices and dollar wages
Which of the following events shifts the short-run aggregate-supply curve to the right?
a drop in oil prices
The quantity theory of money concludes that an increase in the money supply causes
a proportional increase in prices.
The initial impact of an increase in government spending is to shift
aggregate demand to the right
Which of the following would not cause a shift in the long-run aggregate-supply curve?
an increase in price expectations
Which of the following costs of inflation does not occur when inflation is constant and predictable?
arbitrary redistributions of wealth
Which of the following policy combinations would consistently work to increase the money supply?
buy government bonds, decrease reserve requirements, decrease the discount rate
The M1 money supply is composed of
currency, demand deposits, traveler's checks, and other checkable accounts.
Suppose a wave of investor and consumer optimism has increased spending so that the current level of output exceeds the long-run natural rate. If policymakers choose to engage in activist stabilization policy, they should
decrease government spending, which shifts aggregate demand to the left
The initial effect of an increase in the money supply is to
decrease the interest rate
When money demand is expressed in a graph with the interest rate on the vertical axis and the quantity of money on the horizontal axis, an increase in the interest rate
decreases the quantity demanded of money
Required reserves of banks are a fixed percentage of their
deposits
Countries that employ an inflation tax do so because
government expenditures are high and the government has inadequate tax collections and difficulty borrowing
In the long run, inflation is caused by
governments that print too much money.
Commodity money
has intrinsic value
When prices rise at an extraordinarily high rate, it is called
hyperinflation
Suppose a wave of investor and consumer pessimism causes a reduction in spending. If the Federal Reserve chooses to engage in activist stabilization policy, it should
increase the money supply and decrease interest rates
The long-run effect of an increase in the money supply is to
increase the price level
Which of the following statements is true regarding the long-run aggregate-supply curve? The long-run aggregate-supply curve
is vertical because an equal change in all prices and wages leaves output unaffected
If the money supply grows 5 percent, and real output grows 2 percent, prices should rise by
less than 5 percent
According to the wealth effect, aggregate demand slopes downward (negatively) because
lower prices increase the value of money holdings and consumer spending increases.
According to the interest-rate effect, aggregate demand slopes downward (negatively) because
lower prices reduce money holdings, increase lending, interest rates fall, and investment spending increases
Suppose that, because of inflation, a business in Russia must calculate, print, and mail a new price list to its customers each month. This is an example of
menu costs
Suppose the price level falls but suppliers only notice that the price of their particular product has fallen. Thinking there has been a fall in the relative price of their product, they cut back on production. This is a demonstration of the
misperceptions theory of the short-run aggregate-supply curve
The quantity equation states that
money x velocity = price level x real output
The Fed's tools of monetary control are
open-market operations, lending to banks, reserve requirements, and paying interest on reserves.
An example of fiat money is
paper dollars
Suppose the economy is operating in a recession such as point B in Exhibit 4. If policymakers allow the economy to adjust to the long-run natural level on its own,
people will reduce their price expectations and the short-run aggregate supply will shift right.
Check My Work According to the model of aggregate supply and aggregate demand, in the long run, an increase in the money supply should cause
prices to rise and output to remain unchanged.
An increase in the marginal propensity to consume (MPC)
raises the value of the multiplier
Which of the following policy actions by the Fed is likely to increase the money supply
reducing reserve requirements
Policymakers are said to "accommodate" an adverse supply shock if they
respond to the adverse supply shock by increasing aggregate demand, which further raises prices.
Stagflation occurs when the economy experiences
rising prices and falling output
In the model of aggregate demand and aggregate supply, the initial impact of an increase in consumer optimism is to
shift aggregate demand to the right
In the market for real output, the initial effect of an increase in the money supply is to
shift aggregate demand to the right.
Suppose the economy is operating in a recession such as point B in Exhibit 4. If policymakers wished to move output to its long-run natural level, they should attempt to
shift aggregate demand to the right.
When the supply and demand for money are expressed in a graph with the interest rate on the vertical axis and the quantity of money on the horizontal axis, an increase in the price level
shifts money demand to the right and increases the interest rate.
Suppose that, because of inflation, people in Brazil economize on currency and go to the bank each day to withdraw their daily currency needs. This is an example of
shoeleather costs
Suppose the price level falls. Because of fixed nominal wage contracts, firms become less profitable and they cut back on production. This is a demonstration of the
sticky-wage theory of the short-run aggregate-supply curve.
To insulate the Federal Reserve from political pressure,
the Board of Governors are appointed to fourteen-year terms
Suppose the government increases its purchases by $16 billion. If the multiplier effect exceeds the crowding-out effect, then
the aggregate-demand curve shifts to the right by more than $16 billion
Which of the following is not a reason why the aggregate-demand curve slopes downward?
the classical dichotomy/monetary neutrality effects
When an increase in government purchases raises incomes, shifts money demand to the right, raises the interest rate, and lowers investment, we have seen a demonstration of
the crowding-out effect.
For the United States, the most important source of the downward slope of the aggregate-demand curve is
the interest-rate effect
When an increase in government purchases causes firms to purchase additional plant and equipment, we have seen a demonstration of
the investment accelerator
In the long run, the demand for money is most dependent upon
the level of prices
If banks increase their holdings of excess reserves
the money multiplier and the money supply decrease.
decrease in the reserve requirement causes
the money multiplier to rise
When the Fed sells bonds
the money supply decreases.
Suppose all banks maintain a 100 percent reserve ratio. If an individual deposits $1,000 of currency in a bank
the money supply is unaffected
When an increase in government purchases increases the income of some people, and those people spend some of that increase in income on additional consumer goods, we have seen a demonstration of
the multiplier effect
An example of a real variable is
the ratio of the value of wages to the price of soda
Keynes's liquidity preference theory of the interest rate suggests that the interest rate is determined by
the supply and demand for money
If the price level doubles,
the value of money has been cut by half.
Which of the following is an automatic stabilizer?
unemployment benefits
The Board of Governors of the Federal Reserve System consists of
up to seven members appointed by the president
If actual inflation turns out to be greater than people had expected, then
wealth was redistributed to borrowers from lenders.
The natural level of output is the amount of real GDP produced
when the economy is at the natural rate of unemployment
