Econ 202 Final
Suppose that lenders want to receive a real rate of interest of 5% and that they expect inflation to remain steady at 2% in the coming years. Based on this, lenders should charge a nominal interest rate of
7%
Which of the following increases the real interest rate
A decrease in the inflation rate, holding the nominal interest rate constant
A stock is
A financial asset that represents partial ownership of a company
The process of deciding on and passing fiscal policy legislation creates:
A formulation lag
Consider the following two events: Event I. Because interest rates fall from 5% to 4%, the local bakery decides to borrow more money and buy a new oven Event II. Because a local bike shop is optimistic about the future of the economy, the shop decides to borrow money and build a new store In the loanable funds market, Event I is ________ and Event II is _________
A movement along the demand for loanable funds curve; a shift of the demand for loanable funds curve
Which of the following is consistent with the graph depicted above?
A recession decreases the profitability of new investment spending
Assuming the economy is represented by the graph shown, if the government were to enact a partially successful expansionary fiscal policy, it would be most likely to move from equilibrium
A to B
Suppose the economy is in short-run equilibrium below potential GDP and Congress and the president lower taxes to move the economy back to long-run equilibrium. Using the AD-AS model in the figure above, this would be depicted as a movement from
A to B
Suppose the economy is in short-run equilibrium below potential GDP and no fiscal or monetary policy is pursued. Using the static AD-AS model in the figure above, this would be depicted as a movement from
A to E
Which of the following actions is considered as "saving" from a macroeconomic perspective
All of the above ( depositing money in the bank, buying stock, buying a bond)
which of the following would increase public saving (other things equal)
All of the above would increase public saving ( Increase in taxes; decrease in government purchases; decrease in government transfer payments)
Keynesian Policy:
All of these are true (refers to policies that actively shift aggregate demand in an effort to reach full employment. Promotes spending more and taxing less to boost economic activity to potential GDP. Refers to fiscal policy)
Refer to figure 16-4 In the graph above, suppose the economy is initially at point A. The movement of the economy to point B as shown in the graph illustrates the effect of which of the following policy actions by Congress and the president
An increase in income taxes
Which of the following would increase public saving (other things equal)
An increase in taxes
Suppose a transaction changes a bank's balance sheet as indicated in the following T-account, and the reserve ratio os 10%
$1800
With a reserve ratio of 50%, an increase in reserves of $10,000 could lead to a maximum increase in checking account deposits in the entire banking system of
$20,000
If table 12.2 represents all of the investments available to the economy, the interest rate is 6%, what will be the level of investment in the economy
$200
Suppose you have $100 to invest for a year and the nominal interest rate is 7% if the inflation rate during the year is 4% at the end of the year your real gain from the investment is approximately
$3
If table 12.2 represents all the investments available to the economy, the interest rate is 4.5% what will be the level of investment in the economy
$300
Gabriela deposits $1,000 in a saving account that pays an annual interest rate of 6%. Over the course of a year the inflation rate is 2%. at the end of the year Gabriela has
$40 more in her account, and her purchasing power has increased about $40
First Union has no excess reserves when a new deposit of $20,000 is made. The reserve ratio is 5%. how much can the banking system create in checking account balances
$400,000
If in a closed economy real GDP is $30 billion, consumption is $20 billion, and government purchases are $5 billion, what is the total savings in the economy
$5 billion
With a reserve ratio of 20% an increase in reserves of $10,000 could lead to a maximum increase in checking account deposits in the entire banking system of
$50,000
Suppose you have $100 to invest for a year and the nominal interest rate is 7%. If the inflation rate during the year is 4%, at the end of the year your nominal gain from the investment is
$7
Mary has $1,000 and is considering purchasing a $1,000 bond that pays 7% interest per year. Mary decided not to buy the bond and holds the $1,000 as cash. If the inflation rate is 4%, the opportunity cost of holding the $10,000 as money is
$70
Most economists agree that the best rate of inflation for a stable economy would be around
2 - 3 %
Consider an economy where the growth rate of real GDP is 6% and the growth rate of money supply is 8% if the quantity theory of money holds, the inflation rate in the economy will be
2%
Ms bankson has saved $100000 for her retirement. She earned 6% interest on that money during the year 2001. If the rate of inflation was 4% in 2001. What was Ms. Banksons real interest rate
2%
Suppose the potential GDP grows by 3% a year and the money growth is 5% a year. In the long run, what will be the inflation rate
2%
sticky wages reduce the ability of free market forces to help the economy recover from a recession. Which of the following inflation rates would make real wages less sticky, and thus allow for a quicker adjustment process
2%
Assume that deposits in a bank equals $200,00 the bank has issued loans equal to $140,000 its actual reserves are $60,000 and of the $60,000 of actual reserves, $20,000 are excess reserves. What is the required reserve ratio
20%
According to the quantity theory of money, if the money supply grows at 6%, real GDP grows at 2% and the velocity of money is constant, then the inflation rate will be
4%
Bank of America charges a 9.5% interest rate on all new car loans. If the inflation rate is 4%, Bank of America receives a real interest rate of
5.5%
Suppose the economy is at point D. Which of the following is a possible fiscal policy stabilization option? (That is, the policy option must be fiscal and must be stabilizing)
Decrease government spending
Increasing the amount of consumption spending and reducing the amount of savings ____ investment expenditures, and _____ long-run economic growth in the economy
Decreases; decreases
If technological change increases the profitability of new investment for firms, then the ______ curve for loanable funds will shift to the _____ and the equilibrium real interest rate will ______
Demand; right; rise
Suppose the economy is at point B. Which of the following is a possible fiscal policy stabilization option? (That is, the policy option must be fiscal and must be stabilizing.)
Increase government spending
Consider the following actions and determine whether each is a source of "saving", "consumption", or "investment" from a macroeconomic perspective I. Google issues new bonds II. Janet buys a new bond issued by Google III. Janey buys a new computer
I is investment, II is savings, III is consumption
consider the movement from point A to point B in the money market. Which of the following is true
If the Ged is effectively employing stabilization policy in this graph, then it must have believed that there was an inflationary gap in the macroeconomy
If the government changed the tax code in a way that simultaneously increased the profitability of investment spending and reduce the incentive to save, then which of the following will happen with certainty
Increase in the real interest rate
Suppose the economy is at point D. Which of the following is a possible fiscal policy stabilization option? (That is, the policy option must be fiscal and must be stabilizing.)
Increase taxes
Refer to Figure 12-1 Suppose the economy is at point B. If the Fed engages in open market purchases, we would expect to see output____, prices_____, and unemployment ______
Increase; Increase; Decrease
An increase in government spending causes interest rates to _____ which causes investment spending to _____ this is known as "Crowding out"
Increase;decrease
Keynes argued that the economy could get stuck at a point like point A in the above graph. What did Keynes advocate in order to get the economy "unstuck"?
Increases in government spending
in the short run, expansionary fiscal policy _____ the price level and _____ equilibrium real GDP
Increases; increases
Which of the following would definitely increase public savings in the economy
a combination of higher taxes and lower government spending
Which of the following would you expect to increase the equilibrium interest rate
a decrease in the percentage of income that households save
a decrease in taxes should be applied in a situation with
a recessionary gap
What is a benefit of giving the government freedom to spend more than they receive in taxes and run a deficit
It allows the government to be flexible if something unexpected happens
You buy a bond issued by General Mills Corporation. You are the _____ and General Mills is the ______
Lender; Borrower
If rob deposits $300 in currency into his savings account at Bank of America
M1 decreases
In the figure above, the movement from point A to point B in the money market could be caused by
More than one of the above is correct
Good current economic conditions incent people to save _____ and a good outlook on future economic conditions incent people to save______
More; less
The demand for loanable funds has a _____ slope because the lower the interest rate, the ______ number of investment projects are profitable, and the ______ the quantity of loanable funds demanded
Negative; greater; greater
According to money neutrality, if the money supply increases, then (in the long run)
Nominal GDP will increase
The ideas that if governments cut taxes but not spending, people will not change their behavior, and expansionary policy will have little expansionary effects is known as
Ricardian equivalence
If banks do not loan out all their excess reserves then the real-world money multiplier is (R is the reserve ratio)
Smaller than 1/R
The loanable funds market is in equilibrium, as shown in the figure above. Suppose that there is a cultural change in society and people begin to be more frugal than before and thus increase their desire to save money. The _______ loanable funds will ______ thereby _______ the equilibrium interest rate and ______ the equilibrium quantity of loanable funds.
Supply of; rise; decreasing; increasing
During a recession, what automatically (due to "automatic stabilizers") happens to the government's budget situation
Tax revenues fall, government spending increases, and the budget deficit gets larger
how does the Federal Reserve increase the Federal Funds Rate
The Fed engages in open market sales which makes reserves more scarce, thus causing the Federal Funds Rate to rise
The velocity of money is
The average number of times a dollar of money is used in a year to by goods and services in GDP
It is estimated that the tornadoes in Alabama earlier this year caused $645 million of damage in Jefferson County, Alabama alone. Suppose that Ben Gleck, a news analyst on the Coyote News Network, argues that the tornado, while tragic, will have a positive impact on the U.S. economy as it will create jobs for those involved in the clean-up and reconstruction, and thus increase the amount of employment in the U.S.. Mr. Gleckʹs argument is an example of
The broken window fallacy
Consider a technological advance which makes capital more productive. In the loanable funds framework, this ill lead to an increase in the equilibrium quantity of savings. Which of the following best explains this increase
The demand for loanable funds shift to the right, putting upward pressure on the real interest rate. This higher real interest rate causes the quantity of loanable funds supplied to increase
How does the Federal Reserve increase the Federal Funds Rate
The fed engages in open market sales which makes reserves more scarce, thus causing the Federal Funds Rate to rise
Which of the following is correct
The federal reserve has 12 regional banks. The board of Governors has 7 members who serve 14 year terms
A period when overall inflation rates are positive but falling is called
disinflation
When a central bank aggressively tries to contain inflation via contractionary monetary policy, which condition is most likely to occur
disinflation
The fact that there are fewer and fewer potential investments that will generate returns high enough to make the cost of paying back a loan worthwhile is reflected in the
downward-slope of the demand curve in the market for loanable funds
An economy is a short-run equilibrium is illustrated in the figure (AS is our SRS curve) An appropriate fiscal policy option to move the economy to full employment is to increase
government spending and move the economy to a full employment equilibrium at point B
other things equal, which of the following would increase the size of the real world money multiplier
banks choose to hold less excess reserves than before
if inflation is higher than expected, then lenders will ______ and borrowers will ______
be harmed ; benefit
Assume that a bank's initial balance sheet is as above and that the reserve ratio is 10%. If someone deposits $100,000 into this bank it ill
be in a position to make a maximum of $150,000 of new loans
When real rates of interest are negative, borrowers
benefit, because the value of their debt declines
If income is equal to total spending, then in a closed economy, it is equal to
consumption plus investment spending
Oil prices increased significantly in 2008. According to the Keynesian model. this increase in oil prices should have caused which of the following to occur
cost-push inflation
If households in the economy decide to take money out of checking account deposits and put this money into savings accounts this will
decrease M1 and not change M2
If the government reduces expenditures by $30 billion, aggregate demand will
decrease and real GDP will decrease
When an economy faces an inflationary gap, an appropriate policy would be to
decrease government purchases
In the short run, contractionary monetary policy on the part of the Fed results in
decrease in the money supply, an increase in interest rates, and a decrease in GDP
which of the following would you expect to decrease the equilibrium interest rate
decrease in the profitability of investment projects firms are considering
If expectations about the future don't change at all, then an economic downturn will generally
decrease savings at a given interest rate and shift the supply curve for loanable funds to the left
The nation of Hyperbole is in a recession, and the government decides to increase taxes and reduce government spending to reduce the growing deficit. This will ________ aggregate demand and will likely ________ real GDP and employment.
decrease; decrease
An economic expansion tends to cause the federal budget deficit to ______ because tax revenues _____ and government spending on transfer payments _______
decrease;rise;falls
In the nineteenth century when there were often bank runs caused by crop failures, banks would make relatively fewer loans and hold relatively more excess reserves. by itself, these actions by the banks should have
decreased both the money multiplier and the money supply
Which of the following can cause inflation
decreases in short-run aggregate supply
The opportunity cost of holding money
decreases when the interest rate decreases, so people desire to hold more of it
An increase in individual income taxes______ disposable income, which _____
decreases; decreases
Decreasing government spending______ the price level and ______ equilibrium real GDP in the short run
decreases;decreases
Which of the following is not one of the key services provided by the financial system
decreasing taxes
The loanable funds market is in equilibrium, as shown in the figure above. If the government begins to run a budget deficit, the _____ loanable funds will ______ thereby _______ the equilibrium interest rate
demand for; rise; increasing
Inflation is caused by an increase in aggregate demand which is not matched by an increase in aggregate supply is called
demand-pull inflation
if the government's budget deficit increases, then the ______ curve for loanable funds will shift to the _____ and the equilibrium interest rate will ____
demand; right; rise
A fractional reserve banking system is one in which banks gold less than 100% of ______ in reserves
deposits
fiat money
has no or very little value expect as money
Assume that a bank's initial balance sheet is as above, and that the reserve ratio is 10%, if someone deposits $100,000 into this bank it will
have $120,000 in excess reserves
Unpredictable inflation can cause businesses to
have a hard time planning future production
In financial markets, sellers are people who
have cash on hand and are willing to let others use it, for a price
When the economy experiences inflation, people demand a
higher quantity of money, shifting the money demand curve rightward
A net capital inflow occurs in open economics where investment is
higher than national savings
expansionary fiscal policy to prevent real GDP from falling below potential real GDP would cause the inflation rate to be _____ and real GDP to be______
higher; higher
If the Fed buys US treasury bonds, then this
increases reserves, encourages banks to make more loans, and increases the money supply
The opportunity cost of holding money
increases when the interest rate increases, so people desire to hold less of it
A decrease in individual income taxes______ disposable income, which _______ consumption spending
increases; decreases
the idea that aggregate price levels do not affect real outcomes in the economy is called the
neutrality of money
Suppose the nominal interest rate is 7% annually, and you deposit $1000. Inflation in the economy throughout the year is 7%. At the end of the year you have earned:
no increase in your purchasing power
Tax distortion happen because tax laws take into consideration only
nominal income
Which of the following is likely to occur if there is 10% inflation over the next year and it is perfectly anticipated
nominal wages will increase by 10%
If households in the economy decide to take money out of savings accounts and put this money into checking accounts this will
non of the above is correct
The national debt is the amount
of debt outstanding that arises from past budget deficits
Adverse selection refers to when
one party to a transaction has more information than the other and transactions occur less frequently due to the information asymmetry
automatic stabilizers are defined as
policy that stabilizers without the need for action by the government
In the early 1920s, Germany experienced hyperinflation because Germany's
quantity of money was growing too rapidly
in the figure above, if the economy is at point A, the appropriate stabilizing monetary policy by the Federal Reserve would be to
raise interset rates
Which of the following is an appropriate policy for the Federal Reserve to pursue if it wants to decrease the money supply
raise the reserve requirment
public savings in the economy can be increase by
raising taxes
Government budget deficits are most likely to increase during economic______
recessions
The goal of expansionary monetary policy is to
reduce interest rates to stimulate the economy
If the Fed raises the interest rate, this will ______ prices and ______ real GDP in the short run
reduce; lower
in the market for loanable funds the law of supply
reflects that more people will choose to save the higher is the interest rate
During recessions, government expenditure automatically
rises, because of programs such as unemployment insurance and Medicaid
When real rates of interest are positive, it is better to be a
saver than a borrower, because the value of savings and debts are increasing
The market for loanable funds is a market in which
savers supply funds to those who want to borrow for their investment spending needs
The US government generally finances its debt by
selling US securities
Saving is like
selling the right to use your money for a time
Expansionary fiscal policy will
shift the aggregate demand curve to the right
The larger is the reserve ration the:
smaller is the money multiplier, and the less money will be created in the economy
If the government uses fiscal policy to close a recessionary gap, government
spending can be increased by less than the gap because of the government expenditure multiplier
A Farm worker gets paid today in money, but plans to spend the money next week. This illustrates which function of money
store of value
If the Fed buys Treasury bills, this will shift the money __________, which causes interest rates to ________
supply curve to the right; decrease
The fact that US citizens expect to receive retirements benefits through social security and medicare pushes their
supply of loanable funds further left than it would otherwise be
Which of the following policies/events results in an increase in the equilibrium quantity of loanable funds
technological progress makes capital more productive
Which of the following best describes how monetary policy affects the macroeconomy
the Fed changes the money supply which affects interest rates which shifts the AD curve which changes the price level and real GDP
Which of the following policies/ events result in an increase in the equilibrium quantity of savings
the economy enters an expansion making firms more likely to expand their operations
Assume the inflation rate falls from 4% to 2%. This means that
the economy is experiencing disinflation
As we move from the initial equilibrium to the final equilibrium, which of the following occurs
the equilibrium level of investment spending falls
Which of the following is not a tool the Federal Reserve can use to manage the money supply
Changing tax rates
Refer to the diagrams which represent short-run equilibrium changes. The AS curve is our SRS curve. Suppose the government undertakes a fiscal policy designed to increase aggregate demand from AD1 to AD2 and thereby increase GDP from X to Z. In terms of graph B, which of the following might explain why GDP increases to Y rather than Z?
Crowing-out effect
In 2010, the city of Canfield Collected $500,000 on taxes and spent $450,000. In 2010, the city of Canfield had a
Budget Surplus of $50,000
Suppose the economy is in short-run equilibrium above potential GDP and automatic stabilizers move the economy back to long-run equilibrium. Using the static AD-AS model in the figure above, this would be depicted as a movement from
C to B
Which of the following would you expect to decrease the equilibrium interest rate
an increase in the percentage of income that households save
in the figure above, the movement from point A to point B in the money market would be caused by
an increase in the price level
A lack of understanding regarding the current state of the economy creates:
an information lag
In the figure above suppose the economy is initially at point A. The movement of the economy to point B as shown in the graph illustrates the effect of which of the following policy actions by the Federal Reserve
an open market purchase of treasury bonds
In the figure above, the movement from point A to point B in the money market would be caused by
an open market sale of treasury bonds by the Federal Reserve
Unexpectedly high inflation causes of the following
lenders receive a lower real interest rate than they expected
Which model shows us the interaction of savers and borrowers
loanable funds model
The quantity theory of money predicts that in the ______ a 10% increase in the quantity of money leads to a 10% increase in ______
long run; price level
The quantity theory of money addresses the
long-run effect the quantity of money has on the price level
A bank will charge a higher interest rate the
longer is the length of the loan, and the higher the risk of repayment
Sarah is able to take out a loan for $5000 for one year at an annual interest rate of 10 percent. After calculating her return to be $450, Sarah will:
lose $50 on net, and should not take out the loan
In the figure above, if the economy is at point A, the appropriate stabilizing monetary policy by the Federal Reserve would be to
lower interest rates
The money demand curve has a negative slope because
lower interest rates cause households and firms to switch from financial assets (bonds) to money
In a closed economy, national savings will be
lower than private savings if the government runs a deficit
an economy is in a recession, discretionary fiscal policy would call for ______, and the automatic stabilizers would______.
lowering tax rates; lower tax revenues
When a grocery store accepts your $5 bill as payment for bread and milk, the $5 bill serves as a
medium exchange
When LL bean decides to increase its price due to general inflation, it must reprint millions of catalogs they produce and distribute. The costs associated with doing so in response to inflation are called
menu costs
A capital outflow occurs when
money saved domestically is invested in another country
if there are multiplier effects, then an increase in government purchases of $200 billion will shift the aggregate demand curve to the right by
more than $200 billion
As we move from the initial equilibrium to the final equilibrium, which of the following occurs
more than one of the above
bonds are a _____ liquid asset than other loans because they _____
more; are standardized
In general stocks are ____ risky than bonds and have a ____ rate of return
more; higher
The demand for loanable funds has a ____ slope because the lower the interest rate, the ____ number of investment projects are profitable, and the _____ the quantity of loanable funds demanded
negative; greater; greater
Unexpected high inflation redistributes wealth from
those who save to those who borrow
the "shoe-leather costs" of inflation are the costs from
time spent trying to spend money quickly
The primary function of a nation's financial system is
to channel the funds saved by savers to those who wish to borrow those funds
The statement "This Dell laptop costs $2500" illustrates which function of money
unit of account
Hyperinflation is defined as
very high inflation rates
If the real interest rate is 4%, then savings is equal to $ _____ million, investment is equal to $_____, and the equilibrium quantity of loanable funds is equal to $______ million
120; 120; 120
If the real interest rate is 4%, then savings is equal to $_____ million, investment is equal to $_____, and the equilibrium quantity of loanable funds is equal to $______ million
120; 120; 120
You want to make a 10% real return on a loan that you are planning to make, and the expected inflation rate during the period of the loan is 4%. You should charge a nominal interest rate of
14%
Assume you have a credit card balance of $2000 at 15% and the inflation rate is 3% what are the nominal and real interest rates
15% nominal and 12% real
Consider an economy where the growth rate of money supply is 2% and the inflation rate is 2%. if the quantity theory of money holds, the growth rate of real GDP in the economy will be
0%
you borrow $10,000 from a bank for one year at a nominal interest rate of 5%. the CPI over that year rises from 200 to 210. What is the real interest rate you are paying
0%
Suppose the money growth rate is 3%, velocity is constant, and the real GDP is growing at 2%. What is the inflation rate
1%
you borrow $10,000 from a bank for one year at a nominal interest rate of 5%. The CPI over that year rises from 150 to 155. What is the approximate real interest rate you are paying
1.67%
If the real interest rate is 6% and the inflation rate if 4%, then the nominal interest rate is
10%
According to the quantity theory of money, if the money supply grows at 10%, real GDP grows at 2%, and the velocity of money is constant, then the inflation rate will be
8%
Suppose that for a given year money growth is 12% real GDP growth is 4% and velocity is constant. According to the growth version of the quantity equation, the inflation rate would
8%
Suppose the economy is at point B. The automatic mechanism will take the economy to point ____, while expansionary policy (either monetary of fiscal) will take the economy to point ____
A; C
Fiscal policy most directly affects the economy by increasing or decreasing
Aggregate demand
Unexpectedly low inflation causes which of the following
Borrowers pay a higher real interest rate than they expected
Suppose that this economy begins at E1 and the central bank engages in expansionary monetary policy. According to the classical theory of inflation, in the long run, the economy will move to ______ and price level will be _____
E3; P3
Suppose you deposit $2000 into Bank of America and that the reserve ratio is 10%. How does this affect the banks balance sheet
Excess reserves rise by $1800
An example of automatic fiscal policy is
Expenditures for unemployment compensation increasing as economic growth slows
In the figure above, if the economy is at point A and the Fed engages in the appropriate stabilizing monetary policy, real GDP will _____ and the price level will _____
Fall; Fall
In class we maintained that the biggest problem with inflation in the long run is that it means that the paychecks of typical people will have less buying power, and thus people become poorer in real terms.
False
An example of a buyer in a financial marker would be
Families buying new houses
Monetary policy refers to the actions the
Federal reserve takes to manage the money supply and interest rates to pursue its macroeconomic policy objectives
The level of savings comes from _____ curve. The level of investment spending comes from _____ curve
The supply; the demand
Which of the following policies/events results in a decrease in the equilibrium quantity of savings?
The uncertainty of savers about the future decreases
The board of Governors of the Federal Reserve is
a seven member board, each one serving a 14 year term
Eliza wants to borrow $100 from Sandy. Sandy wants to make 4% real return on his money, so they both agree on a 4% interest rate paid next year. Eliza and Sandy did not anticipate any inflation, yet the actual inflation turned out to be -5% next year. In this case,
all of the above ( Sandy is better off ; Eliza will pay a 4% nominal interest rate; Eliza will pay an 9% real interest rate)
in a closed economy, national savings is
all of these are true ( The sum of the public savings plus private savings; equal to national investment; the sum of the savings of individuals and corporations plus the savings of the government)
Most economists agree that modest inflation is desirable over zero inflation because
all of these statements are true ( It allows a margin of error for those deciding on the money supply; it helps firms to more easily adjust real wages; it allows the Fed to more easily engage in expansionary monetary policy)
The issuer of a bond is a ______ and the purchaser of a bond is a _____
borrower; lender
the amount by which government expenditures exceed revenues during a particular year is the
budget deficit
To evaluate the size of the federal budget deficit or surplus over time, it would be best to look at the
budget deficit or surplus as a percentage of GDP
in comparison to a government that runs a balanced budget, when the government runs a budget deficit,
business investment will fall
Which of the following is an appropriate policy for the Federal Reserve to pursue if it wants to increase the money supply
buy US treasury bonds
The primary tool the Federal Reserve uses to increase the money supply is
buying Treasury securities
The primary toll the Federal reserve uses to increase the money supply is
buying treasury securities
One reason the government enacts fiscal policy instead of waiting for the economy to correct itself is the automatic adjustment
can take a very long time
If money demand is extremely sensitive to changes in the interest rate, the money demand curve becomes almost horizontal. If the Fed expands the money supply under these circumstances, then the interest rate will
change very little and investment and consumer spending will change very little
By making exchanges_____ money allows for _____ and higher______
easier; specialization; productivity
To stop hyperinflation, a nation must
eliminate the budget deficit
Suppose that today the actual Federal Funds rate is 0.40% and the Federal Reserve Bank's target for the Federal Funds rate is 0.25%. What is the Federal Reserve Bank likely to do
engage in open market purchases, which will increase the amount of reserves in the banking system and put downward pressure on the Federal Funds Rate
In the absence of inflation, the nominal interest rate is
equal to the real interest rate
Increased government spending is an example of
expansionary fiscal policy
The stimulus strategy behind tax cuts will only be effective if Ricardian equivalence:
fails to hold, and people increase their spending
during hyperinflation the value of money
falls rapidly
If inflation is completely anticipated
firms lose because they incur menu costs
The reduction in aggregate demand caused by deflation
further reduces prices, causing a deflationary spiral
A financial market is where people trade
future claims on funds or goods
If the federal government has a budget deficit, then
government expenditures exceed tax receipts
Which of the following is the best explanation of "moral hazard"
if is the prospect that a party insulated from risk may behave differently from the way it would behave if it were fully exposed to the risk
If the demand for loanable funds increases at the same time that the supply of loanable funds increases, then which of the following will happen with certainty
increase in the equilibrium quantity of loanable funds
Based on the quantity theory of money, hyperinflations are most likely caused by a rapid
increase in the growth of the money supply
If the reserve ratio is 10%, and banks do not hold excess reserves, when the Fed buys $10 million dollars of bonds from the public, bank reserves
increase initially by $10 million and the money supply eventually increases by $100 million
Cost-push inflation is
inflation caused by decreases in aggregate supply that are not matched by decreases in aggregate demand
Kim is paid $50,000 per year, and pays an annual income tax of 10%. Due to an inflation rate of 10%, her pay increases to $55,000, which puts her in a higher tax bracket where she must pay 20%. Which of the following can be said of kim
inflation caused her to be taxed more heavily and decreased her purchasing power
The difference between the nominal interest rate and the real interest rate is the
inflation rate
The portion of income that is present on productive inputs, such as factories, machinery, and inventories, is called
investment
Contractionary fiscal policy is so named because it
is aimed at reducing aggregate demand
Which of the following is true of "fiat money"
it has no intrinsic value
Which of the following is not a problem with deflation
it reduces the value of savings that savers have accumulated over time
why is deflation such a problem for consumption and investment
it slows both
When a government runs a deficit
its debt increases
one of the costs not associated with predictable inflation is
labor costs
The presence of automatic stabilizers means that the federal budget deficit is ____ than it otherwise would be in a recession and ____ than it otherwise would be in an expansion
larger;smaller
Which of the following statements about the Federal Reserve is incorrect
the member of the board of governors are also presidents of the Federal Reserve's regional banks
Monetary policy refers to the actions the Federal Reserve takes to manage
the money supply and interest rate to pursue its economic objectives
If the Fed pursues an expansionary monetary policy then
the money supply will increase, interest rates will fall and GDP will rise
Menu costs refer to
the money, time. and opportunity used to change prices to keep pace with inflation
According to the quantity theory of money, if there are fewer dollars available to spend on the same number of goods and services then
the price level will fall
The quantity theory of money asserts that inflation is the result of growth in
the quantity of money
The loanable funds market is in equilibrium, as shown in the figure above. An increase in business confidence about the future could result in which of the following
the real interest rate is 5% and the quantity of loanable funds is $150 million
Assuming all else equal, if there is an increase in the interest rate
there will be movement up and to the left along the demand for loanable funds curve
Which of the following is cost of anticipated inflation
there will be tax distortion
which of the following is INCORRECT regarding tax revenues
they increase during recessions
