ECO exam 2

Which of the following characterizes the Fed's ability to prevent recessions?

The Fed is able to keep a recession shorter and milder than it would otherwise be

The recession of 2007-2009 made many consumers pessimistic about their future incomes. How does this increased pessimism affect the aggregate demand curve?

This will shift the aggregate demand curve to the left

Which of the following will shift the aggregate demand curve to the right?

an increase in foreign real GDP

n the basic aggregate demand - aggregate supply model, an increase in the price of oil will in the short run lead to ____________ in the UNEMPLOYMENT RATE and ____________ in the price level.

an increase; an increase

in econimcs, money is defined as

any asset people generally accept in exchange for goods and services.

M2 includes (ignoring traveler's checks)

currency in circulations, checking account deposits, and savings-type account deposits.

A bank is legally required to hold a fraction of its ____________ as ____________.

deposits, required reserves

The quantity theory of money seeks to explain the connection between money and

inflation

As a lender of last resort, a central bank like the Federal Reserve makes loans to "banks" that have

liquidity problems

If whole tomatoes were money, which of the following functions of money would be the hardest for tomatoes to satisfy?

store of value

We accept dollar bills (paper currency) as the medium of exchange because

we have confidence that the dollar bills will be accepted by others.

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

$8000

Expansionary fiscal policy will

Shift the aggregate demand curve to the right

If the bank of Waterloo receives a $20,000 deposit, and the reserve requirement is 20 percent, how much can the bank loan out? (Assume that before the deposit this bank is just meeting its legal reserve requirement.)

$16000 Work: 0.20 x 20000 = 4000 20000-4000 = 16000

Using the quantity equation expressed in growth rates, if the velocity of money grows at 3 percent, the money supply grows at 5 percent, and real GDP grows at 5 percent, then the inflation rate will be

3%

The formula for aggregate expenditure is

AE=C+I+G+NX

To combat inflation, the government should

Decrease government spending

If the Fed decreases the reserve requirement, then this

Encourages banks to make more loans, and increases the money supply.

Expansionary monetary policy refers to the ________ to increase real GDP.

Federal Reserve's increasing the money supply and decreasing interest rates

The interest rate that banks charge other banks for loans is the

Federal funds rate

Congress and the president carry out fiscal policy through changes in

Government purchases and taxes

According to the quantity theory of money, (holding velocity constant) inflation will occur if the

Money supply grows at a faster rate than real GDP.

The Federal Reserve System's four monetary policy goals are

Price stability, high employment, economic growth, and stability of financial markets and institutions.

To decrease the money supply, the Federal Reserve could

conduct an open market sale of Treasury securities

Investment spending ___________ during an recession and ___________ during an expansion

declines; increases

An increase in government purchases of $200 billion will shift the aggregate demand curve to the right by

more than $200 billon

The three traditional monetary policy tools used by the Federal Reserve to manage the money supply are

open market operations, discount lending ratio, and reserve requirements.