ECON 211 Final Exam Review

exports will increase aggregate demand, rising costs of imported inputs will decrease aggregate supply

A county decides to depreciate its currency. In the short run ___________, but in the long run ____________.

is essentially the same as insurance against a default

A credit default swap:

magnifies both gains and losses

A leveraged account:

is the price of one country's currency for another's

A nominal exchange rate

past rates of inflation only

Adaptive expectations theory describes the use of _________ to form expectations of inflation.

adaptively, 1.9%

Assume that inflation rates for the past 5 years have been 1%, 2%, 2.5%, 2%, 2%. The Federal Reserve announces that it is going to decrease the money supply because it is concerned about inflationary pressure in the economy. If people form their expectations __________, then in light of the Fed's announcement, they will expect an inflation rate of _______.

overspending, low

Both ________ on credit by households and ______ interest rates set in motion the events that led to the 2007-2009 financial crisis.

are financial instruments backed by a collection of mortgages

Collateralized debt obligations

current

Foreign aid transfers are part of the _______ account

4

If 1 dinar will buy 25 cents, how many dinar will one U.S. dollar buy?

$1 will buy .77 euro

If 1 euro will buy $1.30:

current, credited

If American farmers sell corn to a Russian grain dealer, then the ________ account is ________.

increase

If the dollar depreciates relative to the yuan, then American exports to China will

reduce interest rates

If the economy has high levels of employment, the Federal Reserve will

raise interest rates.

If the economy is facing inflationary pressures, the Federal Reserve will:

buy bonds

If the unemployment rate is 10% and the inflation rate is 2%, the Federal Reserve will most likely:

sell bonds

If the unemployment rate is 4.5% and the inflation rate is 6%, the Federal Reserve will most likely:

output begins to rise but employment growth does not

In a jobless recovery:

monetary policy is ineffective in changing income and output.

In a liquidity trap:

both full employment and price stability

In counteracting demand shocks, the Federal Reserve can achieve:

Q = $10 trillion

In the equation of exchange, if M = $1.5 trillion, V =7, and P =1.05, then:

the velocity of money (V)=6

In the equation of exchange, if M = $2 trillion, P = 1.5, and Q = $8 trillion:

the money supply is controlled to target interest rates

Monetary policy deals with how:

there has been a supply shock.

Monetary policy is LEAST effective in maintaining low inflation and high GDP when:

policymakers face a tradeoff between low unemployment and low inflation

One implication of the Phillips curve when it is unable to shift in the short run is that:

increases the real value of existing debt

One of the problems with deflation is that it:

The monetary rule would recommend ongoing steady expansion; inflation targeting would recommend contractionary policy; the Taylor rule would recommend expansionary policy.

Suppose a country faces an inflation rate of 5%; target inflation rate of 2%; current federal funds rate of 3%; current GDP is 4% below full-employment GDP, and long-run real GDP growth rate = 3%. Which statement correctly describes monetary policy actions that would be recommended according to the monetary rule, inflation targeting, and the Taylor rule?

£1 for US $1.50

Suppose an MP3 player sells for $75 in the United States and for 50 pounds in Britain. Which exchange rate is consistent with purchasing power parity?

oil shocks

The Phillips curve tradeoff worsened in the 1970s because of

targets the federal funds rate.

The Taylor Rule:

the federal funds target rate should be equal to 2% plus the inflation rate plus one-half the inflation gap plus one-half

The Taylor rule suggests that:

capital account

The ___________ summarizes the flow of money into and out of domestic and foreign assets.

exports of goods and services minus imports of goods and services

The balance of trade is(are):

Big Mac should cost about the same in all countries

The concept of purchasing power parity implies that the:

the real exchange rate takes relative purchasing power into account, while the nominal rate does not

The difference between the nominal and real exchange rates is that:

the real exchange rate takes relative purchasing power into account, while the nominal rate does not.

The difference between the nominal and real exchange rates is that:

MV=PQ

The equation of exchange is

Phillips curve

The graph that shows the tradeoff between inflation and money wages is called the:

the relationship between inflation and unemployment when the actual inflation rate and the expected inflation rate are equal

The long-run Phillips curve shows:

is the misperception that one is wealthier, it occurs when the money supply grows.

The money illusion:

the liquidity trap

The phenomenon that interest rates may be so low that increases in the money supply will have no impact on aggregate demand is called:

forward-looking; backward-looking

The rational expectations theory describes the assumptions that people are __________, and the adaptive expectations theory describes the assumption that people are __________.

inflationary expectations

The short-run Phillips curve holds ________ constant

upward sloping, vertical

The short-run aggregate supply curve is _______ and the long--run aggregate supply curve is _______.

stagflation

The simultaneous occurrence of rising inflation and rising unemployment is called:

the Phillips curve could shift over time.

The stagflation of the 1960s and 1970s showed policymakers that:

economic growth with low unemployment and stable prices with moderate long-term interest rates

The twin goals of monetary policy are:

rise, demand, decrease

Tightening monetary policy causes interest rates to _________ and aggregate ________ to ________.

contractionary; reduces both output and the price level

To counteract a positive demand shock, the Federal Reserve uses _________ monetary policy, which _________.

output and price level decrease

What occurs during a negative demand shock?

less, decrease

When the interest rate falls, American bonds become __________ attractive to foreign investors, often leading to a(n) ____________ in the value of the US dollar in foreign exchange markets.

an increase in input costs

Which of these is considered a supply shock?

The public lacked faith in the ability of the U.S. Treasury to pay government bonds

Which of these was NOT a factor leading to the financial crisis of 2007-2009?

If the Fed pursues an inflation target, it increases the money supply when the actual inflation rate is below the target inflation rate.

Which statement about inflation targeting is true?

Currency depreciation

____________ occurs when the value of a currency falls relative to other currencies.