Econ 222 Final Exam Study Guide

What can the federal government do to finance a deficit?

borrow funds

The underlying motives behind capital flows reflect international differences in:

both savings and investment opportunities

(Figure: Changes in the Money Supply) Look at the figure Changes in the Money Supply. If the supply of money shifts from S1 to S2, the Federal Reserve must have _____ Treasury bills in the open market.

bought

Which of the following is considered to be investing in a physical asset?

buying a new factory that produces IBM handheld devices

A change in _____ would cause a shift in the short-run aggregate supply curve.

commodity prices

Refer to Figure 2. If the economy is in equilibrium at Y1 and P1, the government should use the _________ fiscal policy to shift the aggregate demand curve to the__________.

contractionary; left

When a currency depreciates, the prices of its exports to other countries will:

decrease

If the marginal propensity to consume is 0.75 and government purchases of goods and services decrease by $30 billion, real GDP will

decrease by $120 billion

Refer to Figure 2. The accompanying graph shows the current short-run equilibrium in the economy. Appropriate fiscal policy action in this situation would be a(n):

decrease in transfer payments.

To close an inflationary gap using monetary policy, the Federal Reserve should _____ the money supply to _____ investment and consumer spending and shift the aggregate demand curve to the _____.

decrease; decrease; left

If during 2007 the interest rate on one-month Treasury bills was 2.5% and during 2008 it was 2%, the opportunity cost of holding money:

decreased

A reduction in government transfers _________ , therefore shifting the aggregate demand curve to the _____________ .

decreases disposable income and consumption; left

contractionary fiscal policy includes:

decreasing government expenditures

Suppose that the value of the euro fell from $1.32 on April 30, 2012, to $1.24 on July 5, 2012. This implies that during this period the euro _____ and the dollar _____.

depreciated; appreciated

The demand curve for loanable funds slopes:

downward, because demand is lower when the price to borrow money is higher

Money that some authority, generally a government, has ordered to be accepted as a medium of exchange is called _____ money.

fiat

Which of the following would shift the aggregate demand curve to the left?

fiscal policy that raises taxes

Money flows into the United States from other countries as a direct result of:

foreign purchases of U.S. goods and services.

Discretionary fiscal policy refers to changes in:

government spending or taxes to close a recessionary or inflationary gap.

A positive demand shock leads to:

higher prices and higher employment.

The short-run aggregate supply curve slopes upward because a __________ aggregate price level leads to ___________ .

higher; higher output, since most production costs are fixed in the short run.

One difference between a closed and an open economy is that:

in the latter, foreign savings complement domestic savings in financing investment spending.

When a currency appreciates, the prices of its exports to other countries will:

increase

(Figure: Shift of the Aggregate Demand Curve) Look at the figure Shift of the Aggregate Demand Curve. A movement from point A on AD1 to point C on AD2 could have resulted from a(n):

increase in the total quantity of consumer goods and services demanded.

(Scenario: Fiscal Policy) Look at the scenario Fiscal Policy. If actual output is 500 billion arcs, to restore the economy to potential output the government should _____ by 25 billion arcs.

increase spending

If the marginal propensity to consume is 0.85 and government transfers increase by $60 million, then real GDP will_____________ by______________ :

increase; $340 million

To close a recessionary gap using monetary policy, the Federal Reserve should _____ the money supply to _____ investment and consumer spending and shift the aggregate demand curve to the _____.

increase; increase; right

If the Federal Reserve conducts an open-market purchase, bank reserves _____ and the money supply _____.

increase; increases

When the Fed decreases the discount rate, banks are likely to _____ their lending and the money supply _____.

increase; increases

Suppose the Federal Reserve buys Treasury bills. We can expect this transaction to _____ the money supply, _____ Treasury bill prices, and _____ interest rates.

increase; raise; lower

(Figure: Inflationary and Recessionary Gaps) Look at the figure Inflationary and Recessionary Gaps. A movement from AD1 to AD3 could be caused by

increased government purchases

(Figure: Changes in the Money Supply) Look at the figure Changes in the Money Supply. Federal Reserve policy to increase the supply of money, hence to lower the interest rate from 6% to 4%, is accomplished by action that _____ the _____ Treasury bills.

increases; demand for

According to the liquidity preference model, if the interest rate rises above its equilibrium value, the quantity demanded of nonmonetary interest-bearing financial assets _____, and this leads to a _____ in the interest rate.

increases; fall

Stagflation is a combination of _________ unemployment and inflation __________

increasing; increasing

Refer to Figure 2. The accompanying graph shows the current short-run equilibrium in the economy. The appropriate fiscal pol- icy action in this situation would cover a(n):

inflationary gap.

Real GDP equals $150 billion, potential output equals $130 billion, and the marginal propensity to consume is 0.2. Based on this information, if the government wants to cover the __________ gap, it must _______ or __________.

inflationary; decrease government purchases by $16 billion; decrease government transfers by $80 billion.

(Figure: Change in the Demand for U.S. Dollars) Look at the figure Change in the Demand for U.S. Dollars. The change from D1 to D2 will occur, all other things being equal, if:

interest rates are higher in the United States.

Potential output:

is the level of output that the economy would produce if all prices, including nominal wages, were fully flexible

The short-run aggregate supply curve will shift to the:

left if nominal wages increase.

Suppose that Jim just got a $20,000 loan from his credit union to buy a new car. The loan is a _____ for Jim and a _____ for the credit union.

liability; financial asset

A family signs a 15-year mortgage agreement with their local bank. The mortgage contract specifies an interest rate of 5% per year. Assume that the bank expects the inflation rate to stay constant at 2% per year for the next 15 years. If the actual inflation rate is 3%, then the bank___________ and the family________ .

loses; wins.

Generally, the more liquid an asset is, the:

lower its rate of return

Banks create money when they:

make loans

All of the following are roles of money EXCEPT a:

measure of wealth

When the central bank announces the desired inflation rate and sets policy to reach that rate, it is using:

nflation targeting.

(Figure: Fiscal Policy Options) Look at the figure Fiscal Policy Options. If the aggregate demand curve is AD:

no change in discretionary fiscal policy is warranted.

To change the money supply, the Federal Reserve most frequently uses:

open-market operations.

A _____ balance on the financial account means a _____.

positive; financial account surplus.

An amount that would equal a particular future value if deposited today at the prevailing interest rate is the:

present value

In a closed economy government spending was $30 billion, consumption was $70 billion, taxes were $20 billion, and GDP was $110 billion this year. Investment spending was $10 billion. As a result:

private savings were $20 billion.

A sale of Treasury bills by the Federal Reserve _____ interest rates and _____ the money supply.

raises; reduces

Real GDP equals $50 billion, potential output equals $75 billion, and the marginal propensity to consume is 0.5. Based on this information, if the government wants to cover the_________ gap, it must _________ or ______________ .

recessionary; increase government purchases by $12.5 billion; increase government transfers by $25 billion.

Higher rates of interest tend to _________ the quantity of loanable funds demanded, and lower rates of interest tend to_____________ it.

reduce; increase

The three main monetary policy tools are:

reserve requirements, the discount rate, and open-market purchases.

The federal funds rate is the interest rate on _____, and it is controlled by the _____.

reserves that banks lend to each other; Federal Open Market Committee

In the long run, as the economy self-corrects, an increase in aggregate demand will cause the price level to _____ and potential output to _____

rise; remain stable

If the target rate of interest is higher than the equilibrium interest rate, the Federal Reserve will _____ Treasury bills in the open market, _____ the supply of money, and _____ the interest rate to the target rate.

sell; decrease; raise

Suppose that productivity increases as workers' health improves. This increase in productivity will:

shift the short-run aggregate supply curve to the right.

If inflation increases from 2% to 5%, the money demand curve will

shift to the right

A major problem with bank runs is that they:

spread to other banks

In the short run, wages and some prices are considered to be:

sticky

National savings is the sum of private savings and:

the budget balance

Suppose that the United States and European Union are the only trading partners in the world. If interest rates in the United States are significantly lower than those in the European Union, we would expect:

the demand for the dollar to fall, depreciating the dollar.

The point where the long-run aggregate supply curve intercepts the horizontal axis is:

the economy's potential output.

Suppose that an economy is in an inflationary gap in the short run. In the long run:

the economy's self-correcting mechanism will restore GDP to its potential level.

The Fisher effect states that:

the expected real rate of interest is unaffected by the change in expected inflation.

All of the following are examples of bank regulations designed to prevent bank runs EXCEPT:

the federal funds rate

Purchasing power parity refers to:

the nominal exchange rate for which a market basket would cost the same in each country.

The short-run aggregate supply curve illustrates:

the positive relationship between the aggregate price level and aggregate output supplied.

A business will be likely to borrow to fund projects if:

the rate of return on the project is at least as high as the interest rate on the loan

Open-economy macroeconomics deals with:

the relationships between economies of different nations.

Changes in aggregate demand can be caused by changes in:

the stock of physical capital.

Banks can lend money because:

they know not everyone wants their deposits back at the same time.

Government's efforts to stabilize the business cycle through fiscal policy can destabilize the economy because of:

time lags in the process of drafting a budget appropriate to the circumstances.

The money supply curve is:

vertical

Nominal wages are sticky because:

wagesareslowtorisewhentherearelaborshortagesandslowtofallevenwhenthelevelofunemploymentissignificant.

If the exchange rate is ¥200 per U.S. dollar, the U.S. price level is 120, and the Japanese price level is 600, then the real exchange rate is:

¥40.

If the rate of exchange is €1 = US$2, then US$1 =

€0.50.

Given an annual interest rate of 3%, the present value of a future payment of $2,080 to be paid in 3 years is:

$1,903.50.

Table: National Income Accounts) Look at the table National Income Accounts. The value of national savings is:

$1.6 trillion

The present value of a $110 payment in one year, given an annual 10% interest rate, is:

$100

(Table: Monetary Aggregates) Look at the table Monetary Aggregates. M2 is:

$3,355 billion.

Assume a closed economy (S = I). GDP is $12 trillion this year in a closed economy. Consumption is $8 trillion and government spending is $2 trillion. Taxes are $0.5 trillion and there are no government transfers (Transfers are $0). How much is private saving?

$3.5 trillion

Assume an open economy (I = S+NCI). GDP is $12 trillion this year. Consumption is $8 trillion, and government spending is $2 trillion. Taxes are $0.5 trillion, while government transfers are zero. Exports are $1 trillion, and imports are $3 trillion. How much is the private savings?

$3.5 trillion

Suppose a bank gets a new deposit of $100 cash and it has a 20% required reserve ratio. If the bank lends the maximum amount of money allowed, then the checkable deposits (including the original deposit) increase by:

$500

(Table: International Transactions) Look at the table International Transactions. The balance of payments on goods and services is:

$51,000

(Table: Balance Sheet) Look at the table Balance Sheet. If the reserve ratio is 25%, loans are

$60,000

(Table: Balance Sheet) Look at the table Balance Sheet. If the reserve ratio is 25%, deposits are:

$80,000

(Table: Monetary Aggregates) Look at the table Monetary Aggregates. The value of M1 is:

$895 billion

If the balance of payments on financial account is $25, the balance of payments on goods and services is -$20, and the statistical discrepancy in the financial account is $2, then the sum of net international transfer payments and net international factor income is:

-$7

Table: Investment Spending, Private Spending, and Capital Inflows) Look at the table Investment Spending, Private Spending, and Capital Inflows. What is the budget balance as a percentage of GDP in Northlandia?

10%

A 20% increase in the aggregate price level will increase the quantity of money demanded by:

20%

Assume that the marginal propensity to consume is 0.8 and potential output is $800 billion. The government spending multiplier is:

5

(Table: Loanable Funds) Look at the table Loanable Funds. At what interest rate will the market for loanable funds be in equilibrium?

5%

In the United States in 2013, public debt accounted for about _____ of GDP.

72%

(Scenario: Taylor Rule) Look at the scenario Taylor Rule. In this case, the Federal Reserve will set the federal funds rate at:

9.8%

Refer to Figure 1. Which of the following might produce a new equilibrium interest rate of 8% and a new equilibrium quantity of loanable funds of $150 billion?

Businesses become more optimistic about the return on in- vestment spending.

Which of the following might produce a new equilibrium interest rate of 8% and a new equilibrium quantity of loanable funds of $75 billion?

Capital inflows from foreign citizens decline.

Consider the following statements. Which one is correct?

Discretionary fiscal policy indicates deliberate action by policy makers.

(Figure: Short- and Long-Run Equilibrium II) Look at the figure Short- and Long-Run Equilibrium II. Which of the following would be the appropriate response on the part of the government upon viewing the state of the economy?

Raise tax rates to close the inflationary gap

Which of the following is TRUE with respect to short-run and long-run aggregate supply?

The economy can be on both curves simultaneously.

Refer to Figure 2. The size of the gap between Real GDP and potential output is equal to:

Y1−YP

A decrease in the demand for money would result from:

a decrease in real GDP.

Assume a closed economy (S = I). GDP is $12 trillion this year in a closed economy. Consumption is $8 trillion and government spending is $2 trillion. Taxes are $0.5 trillion and there are no government transfers (Transfers are $0). How much is the government budget balance?

a deficit of $1.5 trillion

Over the past few decades in the United States, large federal budget deficits most often have been caused by:

a depressed economy.

Which of the following would be included in the U.S. current account?

a dividend on stock in a U.S. company paid to someone in Japan

Commodity money is

a good used as a medium of exchange that has other uses.

Commodity-backed money is:

a medium of exchange with no intrinsic value.

If a country has a trade surplus, we can conclude that it also has:

a net capital outflow

Figure: Inflationary and Recessionary Gaps) Look at the figure Inflationary and Recessionary Gaps. The intersection of AD with SRAS in panel (b) indicates

a short-run equilibrium

(Figure: The Market for Loanable Funds II) Look at the figure The Market for Loanable Funds II. Other things being equal, if there is an increase in the interest rate above 8%, _____ quantity of loanable funds will be demanded.

a smaller

A deficit in the current account means there will be:

a surplus in the financial account.

Investment spending in macroeconomics refers to:

adding to physical capital.

Which of the following fiscal policies would make a budget surplus smaller or a budget deficit larger?

an increase in government purchases of goods and services

An increase in aggregate demand will generate _____ in real GDP and _____ in the price level in the short run

an increase; an increase

(Figure: The Multiplier) Look at the figure The Multiplier. If this economy is at Y1 and the price level decreases:

an upward movement along the AD1 will take place, reflecting an increase in the price level.

The three consequences of the decline in demand during the Great Depression were_______ prices, ________ output, and a surge in unemployment.

falling; declining