Econ Final pt. 3

The economy moves from a short-run equilibrium to the long-run equilibrium through:

adjustments in wages and prices

If the Fed wanted to reduce the market interest rate, it could:

decrease the required reserve ratio

When the economy is in a boom, the intersection between the:

short run AS and the AD occurs at an output level higher than potential output.

When generating a political business cycle, a politician chooses lower unemployment in the ________ over inflation and crowding out in the ________.

short run; long run

Suppose an automobile maker producing a certain kind of car suddenly experiences an increase in the demand for the car. In the short run:

the demand for steel goes up but the steel prices remain the same.

The wage-price spiral occurs when:

the economy is producing a level of output above full employment. The process by which changes in wages and prices causing further changes in wages and prices

Say's law:

the act of producing goods and services generates income that is equivalent to the value of goods and services produced enabling buyers to purchase those goods.

Which of the following would cause an increase in GDP?

Open market purchase

Assuming that the economy is in the long run equilibrium at full employment, changes in the money supply affect:

Price level

When the Fed conducts open market operations, the Fed buys and sells government securities to:

Private sector

Which of the following statements is correct?

The Fed can change GDP by changing the money supply.

A decrease in the discount rate will increase the money supply. (t/f)

True

A higher interest rate causes lower investment, lower demand, and lower real GDP. (t/F)

True

When the level of output is below potential output, the unemployment rate is higher than the natural rate. (t/f)

True

a higher level of output means an increase in the number of transactions and an increase in the demand for money.(t/f)

True

Wages

________ are the largest cost of production for most firms.

AD Curve

________ is a curve that shows the relationship between the price level and the quantity of real GDP demanded.

Which of the following represents an action by the Federal Reserve that is designed to increase the money supply?

a decrease in the required reserve ratio

Whenever the unemployment rate is pushed ________ the natural rate, wages begin to ________, thus pushing ________.

above; fall; down costs

a rightward shift in the AD curve is caused by

an increase in government spending. an increase in the money supply. an increase in net exports.

According to classical economists, an increase in aggregate demand should result in:

an increase in the price level. no change in the level of real GDP. no reduction in the unemployment rate.

Though a powerful tool, the reserve requirement is seldomly used by the Fed to control the money supply because:

causes significant disruptions in the banking systems

In order to shorten a recession when the economy is producing below full employment, the monetary authority could:

expand the money supply.

If the long-run neutrality of money holds, then an increase in the money supply will ________ investment and output in the long run.

have no effect on

Which of the following will cause the price level to increase in the long run?

increase in money supply

A depreciation of the U.S. dollar will likely cause U.S. exports to ________ and U.S. imports to ________.

increase; decrease

Assuming that the economy is in the long run equilibrium at full employment, an expansionary monetary policy ________ the price level and ________ output.

increases; doesn't change

The Fed indirectly controls long-term interest rates by:

influencing market expectations about future short-term interest rates.

When the economy is in a liquidity trap, the adjustment process without active policy:

may fail because interest rates cannot fall any further.

Assume that the required reserve ratio is 25%. If the Fed buys $5 million worth of government bonds from the public, the maximum change in the money supply is:

more than 5 million

In the money market, the demand and supply of money determine the equilibrium:

nominal interest rate

In the short run, the formal or informal contracts between firms mean that changes in demand will be reflected primarily in changes in ________.

output

The relationship between the level of prices and the total quantity of goods and services that firms supply in the short run is:

positive

Fiscal policy affects the real interest rate through its impact on:

real GDP and money demand

When we draw the aggregate demand curve, ________ should be on the x-axis and ________ should be on the y-axis.

real GDP; the price level

If the quantity of money demanded equals the quantity of money supplied, then the interest rate will:

remain constant

In the long run, an increase in the money supply will cause output:

remain constant

If crowding out occurs in the long run and the government increases spending for infrastructure projects such as roads and bridges, then the additional government spending:

replaces an equivalent amount of private investment.

when the Fed purchases government bonds, the money supply curve shifts to the ________ and the equilibrium interest rate ________.

right; falls

If the economy is in a boom, the prices and wages will ________ causing the short-run AS curve to shift ________ until the economy reaches its long run equilibrium.

rise; left

The aggregate demand curve would shift to the left if:

taxes were increased

When output exceeds the full employment level of output, we expect that the:

wages and prices increase as the short-run aggregate supply curve shifts upward over time.

The ________ is one reason why the aggregate demand curve is downward sloping.

wealth effect

If the marginal propensity to consume is 0.2 and there is a $10 million increase in one component of spending, the aggregate demand curve will shift horizontally to the right by:

$12.5 million

If the marginal propensity to consume is 0.5, an increase in consumption by $200 will shift the aggregate demand curve horizontally to the right by:

$400

According to Keynes, which of the following determines the level of employment in the economy?

AD

In the short run, which of the following determines the level of real GDP?

AD

A decrease in government purchases shifts the ________ curve to the ________.

AD; left

The interest rate that the banks pay to borrow money from the Fed is the:

Discount Rate

An increase in the price level increases the speculative demand for money. (t/f)

False

The speculative demand for money states that in the long run, people hold on to money because it's quicker to make purchases with money than with bonds or stocks. (t/f)

False

Suppose the economy is at full employment. An increase in the money supply will ________ in the short run and ________ in the long run.

decrease interest rates, increase the price level

When the economy is in a recession and the stock market plunges, the interest rates ________ and the bond prices ________.

decrease; increase

Classical economists assumed:

the wage rate adjusts to maintain labor market equilibrium.

Active economic policies are more likely to destabilize the economy if:

the wage-price adjustment is quick enough.