Econ 152 Final

How will each of the following changes in demand and/or supply affect equilibrium price and equilibrium quantity in a competitive market? a. Supply decreases and demand is constant. b. Demand decreases and supply is constant. c. Supply increases and demand is constant. d. Demand increases and supply increases. e. Demand increases and supply is constant. f. Supply increases and demand decreases. g. Demand increases and supply decreases. h. Demand decreases and supply decreases.

(a) Price up; quantity down; (b) Price down; quantity down; (c) Price down; quantity up; (d) Price indeterminate; quantity up; (e) Price up; quantity up; (f) Price down; quantity indeterminate; (g) Price up, quantity indeterminate; (h) Price indeterminate and quantity down.

Why do economists include only final goods and services in measuring GDP for a particular year?

- Because the dollar value of final goods includes the dollar value of intermediate goods. - If intermediate goods were counted, then multiple counting would occur.

Why an economy's output also its income?

- Everything that is produced is sold. - The same amount of money paid out by the buyers of the economy's output is received by the sellers

Explain Short-run Phillips Curve in relation to expansionary fiscal and monetary policies to try to achieve a lower unemployment rate.

- In the short-run there is probably a tradeoff between unemployment and inflation - Government's expansionary policy should *reduce unemployment* as *aggregate demand increases*.

Why is planned investment called an injection?

- Because it is spending on capital goods that businesses plan to make regardless of their current level of income.

aggregate demand

- The amount of goods and services in the economy that will be purchased. - Shifted by consumption, investments, monetary/fiscal policies, and net exports

Why is saving called a leakage?

- The flow of aggregate consumption expenditures -Because saving represents income not spent.

How do economists distinguish between the absolute and relative sizes of the public debt?

- absolute dollar size - relative size as a percentage of GDP.

monetary policy

-affects interest rates. -maintained by increasing the interest rate, or changing the amount of money banks need to keep in the vault If the money supply grows too fast, the rate of inflation will increase; if the growth of the money supply is slowed too much, then economic growth may also slow.

What effect will each of the following have on the demand for small automobiles? a. Small automobiles become more fashionable. b. The price of large automobiles rises (with the price of small autos remaining the same). c. Income declines and small autos are an inferior good. d. Consumers anticipate that the price of small autos will greatly come down in the near future. e. The price of gasoline substantially drops.

A) Inc B) Inc C) Inc D) Dec E) Either

Nominal GDP

Current value of goods and services

Fiscal Policy

Government policy that attempts to manage the economy by controlling taxing and spending.

How would a decrease in the reserve requirement affect the extent to which the system could expand the money supply through the creation of checkable deposits via loans?

Increase in the potential money creation through the fractional reserve banking system.

Short-run aggregate supply curves

Nominal wages & input prices *do not change*. (Sticky) Price level & Profits Can Change -No line shift

What are excess reserves?

Reserves are assets of commercial banks because these funds are cash belonging to them

Who in the United States is responsible for maintaining money's purchasing power?

The Feds

What is the determinant of the transactions demand?

The level of nominal GDP. The higher this level, the greater the amount of money demanded for transactions

How does the purchasing power of money relate to the price level?

The purchasing power of money is inversely related to the price level.

Explain the shape of the short-run aggregate supply curve...

The shape of the short-run supply curve is upsloping.

What "backs" the money supply in the United States?

There is no concrete backing to the money supply in the United States. Paper money, has no intrinsic value, but has value only because people are willing to accept it in exchange for goods and services.

What is the role of deposit insurance in a fractional reserve system?

To avoid the potential of bank runs deposit insurance removes the incentive to try to withdraw one's deposit before anyone else can.

Why is the short-run curve relatively flat to the left of the full-employment output and relatively steep to the right?

To the left of full-employment output the curve is relatively flat because of the large amounts of unused capacity and idle human resources. To the right of full-employment output the curve is relatively steep because most resources are already employed

aggregate supply

Total amount of goods and services in the economy available at all possible price levels.

A change in the nation's money supply?

Will cause an opposite change in the interest rate

How would a decrease in the reserve requirement affect the size of the money multiplier?

Because each bank will need to hold less reserves, therefore can make more loans.

Why is the banking system in the United States referred to as a fractional reserve bank system?

Because the banks do not hold enough cash or reserves on hand to pay every depositor on demand at the same time.

Why is the long-run aggregate supply curve vertical?

Because the economy's potential output is determined by the availability and productivity of real resources, not by the price level.

What assumptions cause the *immediate-short-run* aggregate supply curve to be horizontal?

Contractual agreements. Prices do not change along the immediate short-run aggregate supply curve.

What do economists mean when they say monetary policy can exhibit cyclical asymmetry?

Expansionary monetary policy is weak at stimulating an economy and Cyclical asymmetry contracts economic activity. Monetary policy can effectively fight inflation, but may not be as successful in bringing an economy out of a recession.

T or F? The long-run aggregate supply curve assumes that nominal wages are fixed?

False, nominal wages in the long run are fully responsive to changes in the price level.

T or F? Short-run aggregate supply curves reflect an inverse relationship between the price level and the level of real output?

False, short run aggregate supply curves reflect a direct relationship between the price level and the level of real output.

The economy is experiencing a sharp rise in the inflation rate...What change in the Federal funds rate would you recommend?

Federal funds rate should be raised, typically done through selling bonds This could also be achieved with an increase in the reserve ratio or discount rate.

Is the value of the stocks and bonds bought and sold included in the GDP?

No - This value is not included in GDP because such sales and purchases simply transfer the ownership of existing assets;

Long-run aggregate supply curve

Nominal wages change. - Line Shift

Why does the Federal Reserve require commercial banks to have reserves?

Reserves provide the Fed a means of controlling the money supply.

How would a decrease in the reserve requirement affect the amount of excess reserves in the banking system?

The bank will see an increase in excess reserves after the fall in the required reserve ratio

What is the determinant of the asset demand for money?

The interest rate. The higher the interest rate, the smaller the amount of money demanded as an asset.

T or F? In the long run, an increase in the price level will result in an increase in nominal wages?

True

A reduction in the money supply?

Will make funds increase drive up the interest rate.

A rise in interest rate will cause?

Will make some investments (capital spending projects) unprofitable, so spending on those will decline.

A decline in spending (AD) ?

Will reduce inflationary pressure (and will reduce prices.