Exam 2 test econ

How does high inflation affect lending?

It makes long term lending very difficult

Solow Growth Model

A model showing how saving, population growth, and technological progress determine the level of and growth in the standard of living.

Financial intermediation may fail if something causes:

an increase in the politicization of lending.

The amount that people save for retirement:

can be affected by simple psychological factors and effective marketing.

A significant, widespread decline in real income and employment

capital and labor become less productive.

_____ interest rates usually result in more _____.

higher; savings

how does an increase in wealth affects the AD curve

increase in aggregate demand

aggregate demand curve

inflation and real demand curve shows all of the combinations

deflation occurs when

inflation is negative

(P2 − P1) ÷ P1 is the formula used to calculate

inflation rate

higher _____ rates usually result in _____ savings.

interest; more

debts are

liabilities

An insolvent firm has _____ in excess of its _____.

liabilities; assets

money illusion

mistaking changes in nominal prices for changes in real prices

Prices are signals, and inflation makes price signals more difficult to interpret.

money illusion

in the long run money is

neutral

_____ are not adjusted for inflation

nominal prices

Infaltion

rise in the general level of prices

investment bank are part of the:

shadow banking system, and those investments are not government guaranteed.

collateral

something of large value given to the lender if the borrower defaults

Monetizing debt occurs when...

the government pays off its debts by printing money

equilibrium interest rate

the interest rate at which the quantity of loanable funds supplied equals the quantity of loanable funds demanded

rate of return

the percentage of increase in the value of your savings from earned interest

The Solow growth curve is vertical, because....

the potential growth rate does not depend on the rate of inflation

SRAS curve

upward sloping

LRAS curve

vertical

inflation prevents the redistribution of wealth

false

The real rate of return is the rate of return that does not account for inflation.

False

True or False Each SRAS curve is associated with many rates of expected inflation.

False

True or False In the short run, an increase in spending growth is split between increases in inflation and decreases in real growth.

False

True or False Long-run equilibrium in the AD-AS model means that the inflation rate that consumers and firms are expecting must exceed the actual inflation rate.

False

If nominal GDP is $10,000,000 and the money supply equals $1,000,000, then velocity equals 10.

True

Deflation

A situation in which prices are declining

Hyperinflation

A very rapid rise in the price level; an extremely high rate of inflation.

If a ceiling on interest rates is set too low can cause___

excess demands for loanable funds

unexpected inflation always turns into

expected inflation

When interest rates rise, bond prices

fall

inflation is painful to initiate

false

inflation transfers wealth from ___ to ____

the public; Government

inflation reduces tax revenues

false

rightward shift

increase in demand/supply

if the demand for loanable funds increases, the equilibrium interest rate will

rise

GDP deflator is calculated as ....

the ratio of nominal to real GDP x 100

Fisher effect

the tendency of nominal interests rates to rise with expected inflation rates

Nominal wage confusion occurs when workers respond to _____ instead of _____.

the wage number on their paychecks; what their wage can buy

A commercial bank where customers keep checking accounts is a part of the:

traditional banking system, and those deposits are government guaranteed.

True or False A spending increase creates a temporary increase in growth.

True

inflation can lead to a breakdown of financial intermediation

True

If the current interest rate is below the equilibrium interest rate, a ______ will be created, pushing the interest rate up.

shortage

aggregate supply curve

shows positive relationship between inflation rate and real growth during the period when prices and wages are sticky

Aggregate Demand

A rapid and unexpected shift in spending

Recession

A significant, widespread decline in real income and employment

If velocity and real GDP are fixed, then if the average price level increases by 10%, the money supply must increase by 10%.

True

Money illusion is mistaking changes in nominal prices for changes in real prices.

True

The quantity theory of money sets out the general relationship among money, velocity, real output, and prices.

True

what would cause the LRAS to shift left?

Bad Weather

Expected inflation rate

Eπ

According to Milton Friedman, "inflation is always and everywhere a real phenomenon."

False

Prices are signals, and inflation makes price signals easier to interpret.

False

The Fisher effect is the tendency of real interest rates to rise with expected inflation rates.

False

Which of the following is False -If velocity is stable at 9 and nominal GDP is $18,000, then the money supply must equal $2,000. -Real GDP in the long run is determined by capital, labor, and technology, none of which is affected by the price level. -If the money supply is $4,000, velocity is stable at 12, and the average price level is 80, then real GDP is $600. -If the money supply is $6,000, the average price level is 90, and real GDP is $900, then velocity is 10.

If the money supply is $6,000, the average price level is 90, and real GDP is $900, then velocity is 10.

What is a costs of inflation covered in the textbook?

Inflation redistributes wealth throughout society in arbitrary ways.

The key identity that relates to the velocity of money is:

M × v = P × YR

Equation to understand AD curve

M+V=inflation + real growth

"inflation is a monetary Phenpmenon"

Milton Friedman

Time preference

People would rather consume today than tomorrow

Which condition is an aggregate demand shock that contributed to the Great Depression?

Reduced Investment spendings

Inflation is a type of ___

Tax

leverage ratio

The ratio of debt to equity

If individuals choose to hold onto their money, afraid to spend it, what impact would this have on the velocity of money?

The velocity of money would decrease.

What determines the equilibrium interest rate

Trading between savers and borrowers

inflation is painful to stop

True

disinflation

When the inflation rate is lower than the rate from the previous year

inflation formula

[(new value − old value) ÷ old value] × 100

What does positive AD affect

both inflation and the real growth rate in the short run, but in the long run affects only inflation.

CPI

consumer price index

A ceiling on interest rates can:

create a shortage of savings

aggregate demand curve

curve shows all of the combinations of inflation and real growth that are consistent with a specified rate of spending growth

leftward shift

decrease in demand/supply

All else equal, if consumers decide to borrow less, the:

demand for funds in the loanable funds market will decrease.

if consumers decide to borrow more

demand for funds in the loanable funds market will increase.

Increased government borrowing, shifts the _____ curve in the market for loanable funds to the right, causing the equilibrium interest rate to _____.

demand; rise

AD curve

downward sloping

Which condition could break the bridge between savers and borrowers?

politicized lending

Increased export growth (or decreased import growth) would cause a ________ aggregate demand shock.

positive

Assume the average price level was 101 in 2016 and 104 in 2017. If the inflation rate was 3.96% in 2016, then the __________ rate in 2017 is _____________.

disinflation; 2.97

The quantity theory of money

is based on the identity that the product of the money supply + the velocity of money = nominal GDP

Interest rates and bond prices:

move in opposite directions

A tariff acts as a negative productivity shock by

moving capital and labor away from industries where it produces the goods for which it has a comparative advantage.

interest rates and bond prices have a ____ relationship

negetive

financial intermediation

primary route for moving funds from lenders to borrowers

what represents the rate of return in interest rate questions

r

nominal price

rate of return that does not account for inflation

Time preference reflects the fact that today feels more _____ than tomorrow.

real