Econ Chapter 10-14

Match the following curves in the aggregate demand and aggregate supply diagram with their correct shapes.

Aggregate Demand Downward sloping Aggregate Supply Upward sloping Full employment level of output Vertical line

Assume that the U.S. economy is at its full-employment level of output, and there is a fall in net exports. Click on the area that represents the short-run equilibrium for the U.S. economy.

Bottom Point

Match the following types of unemployment with the main cause explaining their occurrences:

Cyclical unemployment Unemployment caused by business cycles Structural unemployment Unemployment caused by a mismatch of skills and job opportunities Frictional unemployment Unemployment caused by the normal process of leaving jobs¸ getting fired¸ graduating from school¸ and searching for new jobs

Match the following types of inflation with the main cause explaining their occurrences.

Demand-Pull Inflation When the cause of inflation is aggregate demand increasing more rapidly than aggregate supply Cost-Push Inflation When inflation is caused by changes in higher prices of inputs or higher costs of production

Let us assume that there is a decrease in spending. Which of the following initial aggregate demand curves is least likely to result in a recession due to decreased spending?

First Point

The position of the aggregate demand relative to the full-employment level of real GDP and the aggregate supply curve determine the state of current economic conditions. Let us assume that there is an increase in spending. Which of the following initial aggregate demand curves will result in the highest possible increase in prices due to increased spending?

First Point

Match the following views of economic growth with the main cause explaining their occurrences.

Journalist's view of growth Aggregate demand increases Economist's view of growth Aggregate demand and aggregate supply increase

Sort the following events in the order of occurrence explaining the process of natural adjustment to full-employment level of output in response to a decrease in aggregate demand.

Output falls below full-employment level. High unemployment puts downward pressure on wages. Lower wages increase aggregate supply. Output is back at full-employment level.

Sort the following events in the order of occurrence, explaining the process of natural adjustment to full-employment level of output in response to an increase in aggregate demand.

Output rises above full-employment level. Very low unemployment puts upward pressure on wages. Higher wages lower aggregate supply. Output is back at full-employment level.

If the economy is currently at full employment, what will be the short-run effect of a fall in U.S. exports?

Real GDP Decrease Price level Decrease

As a result of a higher cost of production, what will be the short-run effect on price and output level?

Real GDP Decrease Price level Increase

As a result of the higher cost of production, what will be the short-run effect on price and output level?

Real GDP Decrease Price level Increase

Compare two economies, A and B. Everything is the same except economy A is in recession and economy B is at full employment. Given an increase of $25 billion in exports in each of the two economies, analyze the changes (if any) in price levels and real GDP in economy A in the long-run equilibrium.

Real GDP Increase Price level Increase

If the economy is currently at full employment, what will be the short-run effect of an increase in foreign demand for U.S. exports?

Real GDP Increase Price level Increase

Analyze the changes (if any) in price levels and real GDP in economy B in the long-run equilibrium.

Real GDP No change Price level Increase

Assume that the U.S. economy is at its full-employment level of output. Click on the area that represents the new equilibrium if the U.S. economy experiences growth based on the economist's view.

Right Point

Assume that the U.S. economy is at the full-employment level of output, and there is a surge in aggregate demand. Click on the area that represents the short-run equilibrium for the U.S. economy.

Right Point

Assume that the U.S. economy is at its full-employment level of output. Click on the area that represents the new equilibrium if the U.S. economy experiences economic growth based on the journalist's view of growth.

Top Point

In the journalist's view of growth, it is growth in spending leading to inflationary conditions. According to their opinion, which point is the new equilibrium if spending expands.

Top Point

Now click on the area that represents the long-run equilibrium for the U.S. economy.

Top Point

If $800 is deposited into a bank account earning 8% interest, how much will this become if the banks make the most loans they can?

a $10,000

Today you have $10. If the interest rate is 3.25 percent, what is the future value of that $10 one year from now?

a $10.33

You have $4,000 in your pocket today. If you deposit this into a bank account paying 4 percent interest, what is the future value of that money in one year?

a $4,610

Currently, bank reserves are equal to $2,000, the required reserve ratio is 10 percent, banks make as many loans as they can, and no borrower withdraws currency and leaves the loan balance in the bank after a loan is created. But now banks decide to increase their reserves and start to hold 15 percent of their reserves. Assume this change is permanent. How much will the money supply change?

a $6,667

Today you have $700. If the interest is 9 percent, what is the future value of $700 in one year from now?

a $763

During the Great Depression, unemployment was extraordinarily high for more than twelve years. Prices fell significantly. Which of the following is a possible explanation of the length of the Depression?

a Aggregate demand must have decreased causing a new short-run equilibrium. d Wages must not have fallen.

An increase in spending in the economy will cause which of the following changes in interest rates?

a An increase in interest rates as the demand for money increases

M(1) includes:

a Currency. b Demand deposits. c Travelers checks.

If the short-run equilibrium in the economy results in real GDP being less than potential GDP, which of the following changes will most likely occur?

a Falling wages will cause falling prices and rising employment.

What determines how much the money supply can expand?

a How much money people deposit into their bank accounts b How much excess reserves the bank holds c The required reserve ratio

Liquidity means

a How quickly something can be converted to currency

In economy A, we are in the middle of a recession. In economy B, we are experiencing a demand-pull inflation. Assume that total spending increases in both economies. The real GDP level in economy A will ______________. The real GDP level in economy B will ______________.

a Increase; increase

Inflation can result from a change in aggregate demand or a change in aggregate supply. How can one tell which of the two has caused the inflation?

a Inflation caused by demand is accompanied by rising real GDP, while inflation caused by aggregate supply comes with relatively low real GDP.

According to the "Phillips Curve" explaining the relationship between inflation and unemployment, what will happen when spending decreases?

a Inflation decreases

An economy which is producing at its potential level of GDP has just experienced a quadrupling of oil prices. What will happen as a result?

a Inflation will increase and unemployment will increase. Eventually prices will come back down and employment will rise.

You are keeping $50 in your pocket in case you find your favorite candy for sale. Sadly you've been told that the candy is discontinued, but you still carry the money in case you find the candy. Which function of money does this satisfy?

a Money is a store of value.

What are the desirable characteristics of the good used as money?

a Money is a store of value. b Money is a medium of exchange. d Money is a unit of account.

What happens to the price level as a result of an increase in spending?

a Price increases

Stagflation is characterized by which of the following?

a Rising inflation and rising unemployment

Suppose that you have a bond that originally cost you to $1,000 to purchase. It pays you $50 in interest each year. That interest payment does not change, and the original purchase price will be returned to you far in the distant future. What would happen to the current market price of your bond (yes, there is a market, and you can resell the bond to someone else) if interest rates for all similar bonds in the economy rise to 6 percent?

a The price of your bond will fall.

Which of the following is a store of value?

a U.S. dollars and coins c Gold bars d A Picasso painting

Explain why the economy may naturally return to the full employment level of real GDP if we are currently producing more than the potential level of real GDP in the short run.

a With low unemployment, there will be a tendency for wages to rise, lowering production, increasing prices, and lowering consumer spending.

You have $10,000 in your pocket today. If the currency is deposited into a bank account paying 4 percent interest, what is the future value of that deposit in one year?

b $10,400

You have $10,000 in your pocket today. If you deposit $5,000 into bank A and $5,000 into bank B with both accounts earning 4 percent interest, what is the future value of this deposit in one year?

b $10,400

If bank reserves are equal to $2,000, the required reserve ratio is 10 percent, and banks make as many loans as they can, what will be the upper limit of the money supply assuming no borrower withdraws currency and leaves the loan balance in the bank after a loan is created?

b $20,000

Currently, bank reserves are equal to $2,000, the required reserve ratio is 10 percent, banks make as many loans as they can, and no borrower withdraws currency and leaves the loan balance in the bank after a loan is created. A news report has made people want to carry currency, and this causes the reserves to fall to $1,500. Assume the change is permanent. How much has the money supply decreased?

b $5,000

Currently, bank reserves are equal to $2,000, the required reserve ratio is 10 percent, banks make as many loans as they can, and no borrower withdraws currency and leaves the loan balance in the bank after a loan is created. There is $500 in currency that is found and deposited into the bank. Assume that the currency was not previously in the banking system and is permanent. How much has the money supply increased?

b $5,000

You have $5,000 in your pocket today. If the currency is deposited into a bank account paying 4 percent interest, what is the future value of that deposit in one year?

b $5,200

Suppose that banks keep no excess reserves and individuals and firms hold on to no currency. If someone finds $7.5 million in currency and deposits all of it into a checking account, what is the upper limit or maximum amount of the money supply when the required reserve ratio is 10 percent?

b $75 million

Which of the following is an example of bartering?

b A cabinet maker gives the plumber a desk since the plumber fixed the cabinet maker's plugged bathtub.

According to the Phillips Curve, there is ______________ relationship between inflation and the employment rate.

b A negative

An increase in wages will cause a shift in the __________.

b Aggregate supply

Refer to the diagram in the previous question. At the new level of output, is the economy above, below or at full employment?

b Below full employment

Compare two possible situations: I. Current real GDP is above the full employment level of real GDP. II. Current real GDP is below the full employment level of real GDP. Given the two situations above, in which will the change take place more rapidly?

b Faster in situation I

In our aggregate demand and supply model, an increase in wages (and nothing else changes) will cause ______________ prices and ______________ unemployment.

b Higher; higher

The Phillips Curve shows the ______________ short-run relationship between inflation and unemployment.

b Negative

Which of the following expressions does not describe the full employment level of output?

b Non-accelerating inflation rate of real GDP

Which of the following statements is true about the full-employment level of output?

b The absolute capacity is slightly smaller than the full-employment level of real GDP.

If the economy were at a level of real GDP below the potential level of GDP, what are the forces that might bring the economy to full employment without any active fiscal policy?

b With high unemployment, there will be a tendency for wages to fall, stimulating production, lowering prices, and increasing consumer spending.

Bitcoins are used to purchase goods and services from certain vendors. This is evidence that Bitcoin fulfills which of the following functions of money?

b Bitcoins are a medium of exchange (for those stores that accept it).

Assume that bank reserves are equal to $2,000, and the required reserve ratio is changed from 10 percent to 20 percent. Banks make as many loans as they can. What is the upper limit of the money supply when the required reserve ratio is increased? Also, assume no borrower withdraws currency and leaves the loan balance in the bank after a loan is created.

c $10,000

The figure below shows the effect of an increase in total national spending. What is the level of output after the increase in spending?

c $17 trillion

Assume there is only one bank and that all the people deposit all of their money into the bank. The people deposit $10 million and the bank holds 5 percent of the deposits as reserves. What is the simple money multiplier in this economy?

c 20

Which of the following will result in a decrease in the supply of money in the economy?

c A customer repaying a loan

If prisoners did not have dollars to use to purchase goods and services in prison but they had access to Top Ramen noodles that is then used as money by the prisoners, then Top Ramen becomes:

c A medium of exchange and a unit of account.

If unemployment falls below the full-employment level of GDP, inflation will begin to ______________ because wages begin to ______________.

c Accelerate; increase

Assume the economy is at full employment. An increase in government spending will have which of the following effects over time?

c An increase in real GDP and prices, followed in the long run by a period of decreasing real GDP and increasing prices

At the new level of output, is the economy above, below or at the full employment level of output?

c At full-employment

Assume the economy is currently at full employment. Now suppose there is an increase in U.S. exports. The price-level in the short run will ______________; the price-level in the long run will ______________.

c Increase; increase again

If individuals hold less currency because it is easy to get currency from automatic teller machines, and everything else is the same, will the money supply be larger or smaller?

c Larger, because banks will be able to make more loans given the amount of reserves.

What would happen to the money market if there was an increase in economic growth?

c Money demand will increase.

The people of MicroIsland use sea shells as a way of exchanging goods and services. The shells are:

c Not money because the government didn't print it.

The broader definition of the money supply M(2) includes

c Small time Certificates of Deposit (CD's) d Checkable deposits

How would the money market change if there was an increase in bank reserves?

c The money supply will increase.

What is the opportunity cost of holding currency?

c The opportunity cost is the interest that could have been earned if the currency was in the bank.

What happens to the level of unemployment because of an increased spending?

c Unemployment falls below the full-employment rate of unemployment.

What happens to the level of unemployment because of the increased spending?

c Unemployment falls below the full-employment rate of unemployment.

What happens to the price level as a result of an increase in spending?

c Unemployment falls below the full-employment rate of unemployment.

If the economy is currently at full employment, what will be the short-run effect of an increase in saving?

d A decrease in real GDP, a decrease in the price level

Which of the following will likely cause an increase in the supply of money?

d An increase in bank reserves

A friend has won a lottery and comes to you and asks which choice he should take. Either $185 million paid one year from now or $165 million paid now? What would you tell him to do?

d Cannot tell with the information given.

The simple money multiplier will ______________ as the required reserve ratio ______________

d Increase, decreases

An increase in the labor force will have which of the following results? Aggregate supply will ______________. Potential Real Gross Domestic Product will ______________.

d Increase; increase

Why will an economy return naturally to the potential level of Gross Domestic Product more quickly from an output level greater than the full-employment level than an output level less than the full-employment level?

d It takes longer for wages to fall than it does for wages to increase.

In economy A, we are in the middle of a recession. In economy B, we are experiencing a demand-pull inflation. Assume that total spending increases in both economies. Economy A's price level will change by ______________ economy B's price level. Economy A's real GDP will change by ______________ economy B's real GDP.

d Less than; more than

Compare two economies, A and B. Everything is the same except economy A is in recession and economy B is at full employment. Assume that consumption spending increases. Economy A's price level will change by _____ than economy B's price level. Economy A's real GDP will change by _____ than economy B's real GDP level.

d Less, more

Compare two economies, A and B. Everything is the same except economy A is in recession, and economy B is at full employment. Assume that consumption spending increases. Economy A's price level will change by ______________ than economy B's price level. Economy A's real GDP will change by ______________ than economy B's real GDP level.

d Less, more

Compare the following two situations. Both have rapidly rising aggregate spending. However, economy A is experiencing rapidly rising productivity; economy B is experiencing no or little change in productivity. In economy A, we would expect ______________ inflationary pressures and ______________ output than in economy B.

d Lower; more

Which of the following expressions does not describe the natural rate of unemployment?

d Potential unemployment

If the economy is in a recession, which of the following is true?

d Short-run equilibrium output is less than the full employment level of output.

What is the opportunity cost of $1.00 when the interest rate is 60 percent?

d The opportunity cost is $0.60.

What happens to aggregate demand and aggregate supply if the price of an important input increases?

d There is no change in aggregate demand but aggregate supply decreases.

Compare two possible situations: I. Current real GDP is above the full employment level of real GDP. II. Current real GDP is below the full employment level of real GDP. Which of the following is most likely?

d Wages will rise in situation I and fall in situation II.

An increase in investment spending can ultimately cause ______________ in the aggregate demand curve, ______________ in the aggregate supply curve, and ______________ in the potential level of GDP.

e An increase, an increase, an increase