ECON 202 homework questions
The three main monetary policy tools used by the Federal Reserve to manage the money reserve
open market operations, discount policy and reserve requirements
A function of money that would be violated under high inflation
store of value
If tomatoes were money, which function of money would be hardest to satisfy?
store of value
US net export spending rises when
The growth rate of US GDP is slower than the growth rate of GDP in other countries.
2 things a bank holds its reserves as
Vault Cash, deposits at the Federal Reserve
Investment spending ____ during a recession, and ____ during an expansion
declines, increases
If the marginal propensity to save is 0.25, then a $10,000 decrease in disposable income will
decrease consumption by 7500
An increase in price level results in a ______ in the quantity of real GDP demanded because _____
decrease, a higher price level reduces consumption, investment and net export
4 factors of aggregate expenditure
government spending, net exports, consumption expenditures, and investment expenditures (not actual investment spending)
Commodity money
has value independent of its use as money.
When economies experience rapid increases in the price level it is called
hyperinflation
If you transfer all of your currency to your checking account then intitally M1 will ____ and M2 will ____-
not change, not change
Five most important variables that determine level of consumption
-Disposable Income -Wealth -Expected Future Income -Price Level -Interest rate
Assumptions made by the dynamic model of aggregate demand and aggregate supply
-the short run aggregate supply curve shift to the right except during periods when workers and firms expect higher wages -the aggregate demand curve shifts to the right during most periods -potential real GDP increases continuously
What causes hyperinflation?
A high rate of growth in the money supply
if full employment GDP is equal to 4.2 trillion, what does the long run aggregate supply curve look like?
A vertical line at 4.2 trillion
Illustrates the relationship between the price level and the quantity of planned aggregate expenditure, holding constant all other factors affect aggregate expenditure
Aggregate Demand Curve
If firms find that consumers are purchasing more than expected, what would you expect to happen?
Aggregate expenditure will likely be greater than GDP
How do banks create money?
Banks create checking account deposits when making loans from excess reserves
How could the Federal Reserve decrease the money supply
Conduct an open market sale of Treasury securities
_____ in taxes will decrease consumption spending, and ____ in transfer payments will increase consumption spending
Increase, Increase
Goods that have been produced but not sold
Inventories
Increase of price level in the US will do what to the aggregate expenditure line?
It will shift downward.
If the Federal Reserve included virtual money, what would happen to M1 or m2?
M1 would rise
How could the federal reserve offset the effect of households and firms deciding to hold more of their money in checking account deposits and less in currency?
Sell Treasury securities
Foreign workers leaving the US to search for work at home during a recession would
Shift the short-run aggregate supply curve of the home country to the right.
The process of an economy adjusting from a recession back to potential GDP in the long run without government intervention is called
an automatic mechanism
What can lead to a decrease in real GDP?
increase in interest rates
Decrease in exports affect the aggregate demand curve by:
shifting it to the left.
What is a reason for the decline in aggregate demand that led to the recession of 2007-2009
the end of the housing bubble
The quantity theory of money implies that the price level will be stable when the growth rate of the money supply equals
the growth rate of real GDP
