ECON 211 Exam 3 - MindTap
A bank's reserve ratio is 8 percent and the bank has $1,000 in deposits. Its reserves amount to
$80
Assuming a multiplier effect, but no crowding-out or investment-accelerator effects, a $100 billion increase in government expenditures shifts aggregate
demand rightward by more than $100 billion
The marginal propensity to consume (MPC) is defined as the fraction of
extra income that a household consumes rather than saves
Refer to Figure 33-4. If the economy starts at A and moves to D in the short run, the economy
moves to C in the long run
Refer to Figure 33-4. If the economy is at A and there is a fall in aggregate demand, in the short run the economy
moves to D
Government purchases are said to have a
multiplier effect on aggregate demand
The most common method employed by the Fed to increase the money supply is the
purchase of U.S. government bonds
Refer to Financial Crisis. If nominal wages are sticky, which of the following helps explains the change in output?
real wages rise, so firms choose to produce less
Suppose the economy is in long-run equilibrium. If the government increases its expenditures, eventually the increase in aggregate demand causes price expectations to
rise. This rise in price expectations shifts the short-run aggregate supply curve to the left.
An economic expansion caused by a shift in aggregate demand remedies itself over time as the expected price level
rises, shifting aggregate supply left.
In the long run, fiscal policy influences
saving, investment, and growth; in the short run, fiscal policy primarily influences the aggregate demand for goods and services
When the Federal Reserve increases the Federal Funds target rate, it achieves this target by
selling government bonds. This action will reduce investment and shift aggregate demand to the left.
Refer to Figure 34-8. An increase in government purchases will
shift aggregate demand from AD1 to AD2
Changes in the interest rate
shift aggregate demand if they are caused by fiscal or monetary policy, but not if they are caused by changes in the price level
Refer to Stock Market Boom 2015. In the long run, the change in price expectations created by the stock market boom shifts
short-run aggregate supply left
Refer to Financial Crisis. In the long run, if the Fed does not respond, the change in price expectations created by the crisis shifts
short-run aggregate supply right
Which of the following would cause prices to fall and output to rise in the short run?
short-run aggregate supply shifts right
Economic expansions in Europe and China would cause
the U.S. price level and real GDP to rise.
Which of the following can banks use to borrow from the Federal Reserve?
the discount window or the term auction facility
When the Fed sells government bonds,
the money supply decreases and the federal funds rate increases
The government builds a new water-treatment plant. The owner of the company that builds the plant pays her workers. The workers increase their spending. Firms from which the workers buy goods increase their output. This type of effect on spending illustrates
the multiplier effect
Which of the following tends to make aggregate demand shift further to the right than the amount by which government expenditures increase?
the multiplier effect
Refer to Stock Market Boom 2015. How is the new long-run equilibrium different from the original one?
the price level is higher and real GDP is the same
The term crowding-out effect refers to
the reduction in aggregate demand that results when a fiscal expansion causes the interest rate to increase
When production costs rise,
the short-run aggregate supply curve shifts to the left.
The logic of the multiplier effect applies
to any change in spending on any component of GDP
The Fed purchases $200 worth of government bonds from the public. The reserve requirement is 12.5 percent, people hold no currency, and the banking system keeps no excess reserves. The U.S. money supply eventually increases by
$1,600
If the reserve ratio is 5 percent, then $500 of additional reserves can create up to
$10,000 of new money
Suppose the MPC is 0.9. There are no crowding out or investment accelerator effects. If the government increases its expenditures by $30 billion, then by how much does aggregate demand shift to the right? If the government decreases taxes by $30 billion, then by how far does aggregate demand shift to the right?
$300 billion and $270 billion
Refer to Table 29-6. If the Fed's reserve requirement is 5 percent, then what quantity of excess reserves does the Bank of Pleasantville now hold?
$500
If the reserve ratio is 10 percent, the money multiplier is
10
If the MPC is 3/5 then the multiplier is
2.5, so a $100 increase in government spending increases aggregate demand by $250
If the MPC = 0.75, then the government purchases multiplier is about
4
Which of the following is an example of the menu costs of inflation?
Tito's Restaurant has to print new menus to update its prices compared to other prices in the economy
Refer to Figure 33-4. If the economy is in long-run equilibrium, then an adverse shift in aggregate supply would move the economy from
C to D
A bank has an 8 percent reserve requirement, $10,000 in deposits, and has loaned out all it can given the reserve requirement.
It has $800 in reserves and $9,200 in loans
Refer to Figure 33-6. Which of the long-run aggregate-supply curves is consistent with a short-run economic expansion?
LRAS1
Refer to Figure 33-7. Suppose the economy starts at Y. If there is a fall in aggregate demand, then the economy moves to
Z in the long run
Refer to Figure 33-5. In Figure 33-5
Point B represents a short-run equilibrium, and Point A represents a long-run equilibrium
Which of the following shifts aggregate demand to the right?
The Fed purchases government bonds on the open market.
Refer to Stock Market Boom 2015. What happens to the expected price level and what impact does this have on wage bargaining?
The expected price level rises. Bargains are struck for higher wages
Which of the following is an example of a decrease in government purchases?
The government cancels an order for new military equipment
Refer to Figure 33-5. Starting from point B and assuming that aggregate demand is held constant, in the long run the economy is likely to experience
a rising price level and a falling level of output, as the economy moves to point A
If net exports fall $40 billion, the MPC is 9/11, and there is a multiplier effect but no crowding out and no investment accelerator, then
aggregate demand falls by 11/2 x $40 billion
Imagine that in 2015 the economy is in long-run equilibrium. Then stock prices rise more than expected and stay high for some time. Refer to Stock Market Boom 2015. Which curve shifts and in which direction?
aggregate demand shifts right
The price level rises in the short run if
aggregate demand shifts right or aggregate supply shifts left
Which of the following would cause stagflation?
aggregate supply shifts left
The multiplier effect
amplifies the effects of an increase in government expenditures, while the crowding-out effect diminishes the effects
Which of the following would raise the price level in both the short and long run?
an increase in government expenditures
Which of the following would increase output in the short run?
an increase in stock prices makes people feel wealthier government spending increases firms chose to purchase more investment goods
Which of the following policy actions shifts the aggregate-demand curve?
an increase in the money supply an increase in taxes an increase in government spending All of the above are correct
The federal funds rate is the interest rate that
banks charge one another for loans
Suppose that there is an increase in the costs of production that shifts the short-run aggregate supply curve left. If there is no policy response, then eventually
because unemployment is high, wages will be bid down and short-run aggregate supply will shift right.
Suppose that banks are less able to raise funds and so lend less. Consequently, because people and households are less able to borrow, they spend less at any given price level than they would otherwise. The crisis is persistent so lending should remain depressed for some time Refer to Financial Crisis. What happens to the price level and real GDP in the short run?
both the price level and real GDP fall
Imagine that in 2015 the economy is in long-run equilibrium. Then stock prices rise more than expected and stay high for some time. Refer to Stock Market Boom 2015. In the short run what happens to the price level and real GDP?
both the price level and real GDP rise
To decrease the interest rate the Federal Reserve could
buy bonds. The fall in the interest rate would increase investment spending
If the federal funds rate were above the level the Federal Reserve had targeted, the Fed could move the rate back towards its target by
buying bonds. This buying would increase reserves
When the government reduces taxes, which of the following decreases?
consumption take-home pay household saving *None of the above is correct*
Permanent tax cuts shift the AD curve
farther to the right than do temporary tax cuts
Wealth is redistributed from debtors to creditors when inflation was expected to be
high and it turns out to be low
When government expenditures increase, the interest rate
increases, making the change in aggregate demand smaller
If the Fed conducts open-market sales, which of the following quantities increase(s)?
interest rates, but not investment or prices
Refer to Table 29-5. If the bank faces a reserve requirement of 8 percent, then the bank
is in a position to make a new loan of $14,000
When the Fed conducts open-market purchases,
it buys Treasury securities, which increases the money supply
In a fractional-reserve banking system, a bank
keeps only a fraction of its deposits in reserve
Assume the MPC is 0.8. Assuming only the multiplier effect matters, a decrease in government purchases of $100 billion will shift the aggregate demand curve to the
left by $500 billion
When there is a reserve requirement, banks
may hold more than, but not less than, the required quantity of reserves