macro economics final
natural rate hypothesis
...
Commodity money a. has no intrinsic value. b. has intrinsic value. c. is used exclusively in the economies of western Europe and north America. d. is used as reserves to back fiat money.
B
Given the following T-account, what is the largest new loan this bank can prudently make if it wishes to maintain a reserve ratio of 10 per cent? Reserves €150 Loans €850 Deposits €1000 a. none of these answers b. €50 c. €0 d. €150 e. €1,000
B
Which of the following policy actions by a central bank is likely to increase the money supply? a. Increasing the refinancing rate. b. All of these will increase the money supply. c. Buying government bonds in open market operations. d. Increasing reserve requirements.
C
Examples of monetary policy that decreases aggregate demand include:
a decrease in the quantity of money and an increase in interest rates.
Shift the phillips curve to the right
if supply shifts to the left
Policymakers following a "lean against the wind" policy would
increase government expenditures when output is low and decrease them when output is high.
An increase in expected future income_______ aggregate demand.
increases
In the short run and increase in consumer spending ______real GDP and _______the price level.
increases; increases
money market
the market in which the commercial banks lend money to one another on a short-term basis
As we move up along the short-run supply curve, ________.
the money wage rate, the prices of other resources, and potential GDP remain constant.
currency
the papaer banknotes and coins in the hands of the public
The aggregate demand curve shows the relationship between the quantity of real GDP demanded and ______, while everything else remains the same.
the price level
A movement along the aggregate demand curve occurs if__________.
the price level changes and all other factors remain unchanged.
Potential GDP increases for all of the following reasons EXCEPT:
the price levels fall
As we move up along the long-run aggregate supply curve, ____________
the real wage rate remains constant
positive supply shock shift phillips curve
to the left
Chinese Premier Wen Jiabao has warned Japan that its companies operating in China should raise the pay for their workers. A rise in wages in China ________.
- does NOT change China's long-run aggregate supply -decreases China's short-run aggregate supply does NOT change Japan's short-run aggregate supply
three funcitons of value
1) medium of exchange 2) unit of account 3) store of value
An example of fiat money is a. paper euros. b. gold. c. silver coins. d. cigarettes.
A
Banca Solida has, in the past, always operated with a reserve ratio of 25 per cent. It has now been taken over by Gung-Ho Bank which operates with a reserve ratio of 12½ per cent. Assuming that Banca Solida adopts the business practices of its new owner, what will be the effect on money supply in the country in which Banca Solida operates? a. Money supply will increase because Banca Solida will increase its loans. b. The effect on money supply cannot be determined from the information given. c. Money supply will decrease because the loans will have to be repaid. d. Money supply will be unchanged because the central bank has made no policy changes.
A
Suppose the central bank purchases a government bond from a person who deposits the entire amount received from the sale in her bank, the money supply will a. rise by an amount that depends on the bank's reserve ratio. b. rise by less than the amount of the deposit. c. fall by exactly the amount of the deposit as long as the bank does not change its reserve ratio. d. fall by exactly the amount of the deposit as long as the bank does not change its reserve ratio. e. be unchanged.
A
Which of the following is not a function of money? a. hedge against inflation b. medium of exchange c. unit of account d. store of value
A
Reserve requirements that may be imposed on an economy's banks by its central bank specify that banks' reserves must be a minimum percentage of their a. assets. b. deposits. c. loans. d. government bonds.
B
Suppose the Bank of England purchases a £1,000 government bond from you. If you deposit the entire £1,000 in your bank, what is the total potential change in the money supply as a result of the Bank of England's action if the your bank's reserve ratio is 20 per cent? a. £4,000 b. £5,000 c. £1,000 d. £0
B
The three main tools of monetary policy are a. fiat, commodity, and deposit money. b. open-market operations, reserve requirements, and the refinancing rate. c. the money supply, government purchases, and taxation. d. government expenditures, taxation, and reserve requirements. e. coin, currency, and demand deposits.
B
Which of the following statements about money is not true? a. A debit card is not really money because it is only a means of transferring money between accounts. b. All the wealth that people hold, in whatever form, should be considered as money. c. Wealth held in the current account you hold with your bank is almost as convenient for buying things as wealth held in your wallet, so the wealth in current accounts should be included in measures of money. d. In a complex economy it is not easy to draw a clear dividing line between assets that should be considered as money and those that should not.
B
Which one of the following is not true? a. The difference between the price at which a commercial bank sells an asset to the central bank and the price it agrees to buy it back can be expressed as an annualized percentage of the selling price, and this is called the refinancing rate. b. Commercial banks may borrow from and lend to each other and the interest rate at which they do this is called the refinancing rate. c. In the UK the refinancing rate is known as the repo rate and in the USA it is referred to as the discount rate. d. If the central bank has bought some assets from a commercial bank with an agreement that the commercial bank will buy them back at a later date, then this would be called a repo. e. If the central bank raises its refinancing rate then the commercial banks will try to reduce their lending and so reduce the need to borrow from the central bank.
B
If the banks in an economy operate with a reserve ratio of 20 per cent then the money multiplier is: a. 4 b. 20 c. 25 d. 5 e. 20
D
Suppose Gerard moves his €1,000 demand deposit from Bank A to Bank B. If both banks operate with a reserve ratio of 10 per cent, what is the potential change in money supply as a result of Gerard's action? a. €10,000 b. €1,000 c. €9,000 d. €0
D
The refinancing rate is a. the interest rate at which commercial banks lend to and borrow from each other. b. the interest rate the European Central Bank pays on reserves. c. the interest rate the public pays when borrowing from banks. d. the interest rate the European Central Bank charges on loans to banks. e. the interest rate banks pay on the public's deposits.
D
Which of the following statements is not true? a. The purchase of government bonds from the public increases the money supply. b. The US Federal Reserve is run by its Board of Governors, which comprises seven people who are appointed by the US President. c. When the central bank sells government bonds to the public, the money supply decreases. d. Monetary policy in the UK is set by the Chancellor of the Exchequer in consultation with the Bank of England. e. Monetary policy in the euro area is set by the Governing Council of the European Central Bank.
D
If there is a general shortage of liquidity in the money market then a. the banks will increase their lending. b. the short-term interest rate at which the economy's commercial banks lend to and borrow from each other will fall and the central bank may be expected to reduce the supply of liquidity to the banks. c. the short-term interest rate at which the economy's commercial banks lend to and borrow from each other will rise and the long-term interest rate may be expected to rise as a result. d. the long-term interest rate in the economy will rise and the central bank will raise its interest rate in response. e. the short-term interest rate at which the economy's commercial banks lend to and borrow from each other will rise and the central bank may be expected to increase the supply of liquidity to the banks.
E
Suppose all banks maintain a 100 percent reserve ratio. If an individual deposits €1,000 of currency in a bank, a. the money supply increases by more than €1,000. b. the money supply increases by less than €1,000. c. the money supply decreases by less than €1,000. d. the money supply decreases by more than €1,000. e. the money supply is unaffected.
E
Which of the following is correct?
Economic forecast are imprecise and aggregate spending responds to interest rate changes with a lag.
Fiat money is money that is used in Italy. T or F?
F
Money and wealth are the same thing. T or F?
F
Money has three functions: It acts as a medium of exchange, a unit of account, and a hedge against inflation. T or F?
F
When you are willing to go to sleep tonight with £100 in your wallet and you have complete confidence that you can spend it tomorrow and receive the same amount of goods as you would have received had you spent it today, money has demonstrated its function as a medium of exchange. T or F?
F
Tax laws do not give preferential treatment to some kinds of retirement saving
False
Which of the following statements generates the greatest amount of disagreement among economists? a. In the long run, increases in the money supply increase prices, but not output. b. Recessions are associated with decreases in consumption, investment, and employment. c. Government should use fiscal policy to try to stabilize the economy. d. Increases in the money supply shift aggregate demand to the right.
Government should use fiscal policy to try to stabilize the economy
There are no trade offs between inflation and unemployment in the long run because
In the long run, when inflation changes, unemployment stays the same because the long run Philips curve is vertical
Mexico trades with the U.S. When the economy goes into an expansion, _________.
Mexico's exports to the U.S. INCREASE, Mexico's aggregate demand INCREASES, and Mexico's AD curve SHIFTS RIGHTWARD
Which of the following is correct according to the long-run Phillips curve
Monetary policy cannot change the natural rate of unemployment, but other government policies can
A depository institution is one that accepts deposits, and so provides people with a safe place to keep their money, but does not make loans. T or F?
T
A repurchase agreement is an agreement between the central bank and a commercial bank whereby a bond or other non-monetary asset is sold by one to the other with an agreement to reverse the transaction a short time later. T or F?
T
Commodity money has value independent of its use as money. T or F?
T
If the central bank wishes to contract the money supply, it could do any of the following: sell government bonds, raise the reserve requirement, and raise the refinancing rate. T or F?
T
If there is 100 per cent reserve banking, the money supply is unaffected by the proportion of its money that the public chooses to hold as currency rather than as bank deposits. T or F?
T
The Bank of England is the central bank of the United Kingdom and its Monetary Policy Committee comprises members appointed by the Bank and by the Chancellor of the Exchequer (the UK finance minister). T or F?
T
The central bank cannot control the amount of money that the economy's commercial banks lend because the banks may choose what proportion of deposits to hold as reserves. T or F?
T
When the central bank in an economy raises the refinancing rate it encourages commercial banks to reduce their lending, thereby tending to reduce the money supply. T or F?
T
If expected inflation changes in the same direction that actual inflation changes. what happens to the position of the short-run phillips curve? after the recession, does the economy face a better of worse set of inflation-unemployment combinations
The Phillips curve will shift back to the natural rate of unemployment. After the recession, the economy will face a better set of inflation-unemployment combination because the unemployment rate will be at its natural rate and the inflation rate will be lower than it originally was.
suppose a drought destroys farm crops and drives up the price of food. What is the effect on the short run tradeoff between inflation and unemployment
The drought will shift aggregate supply to the left, resulting in a rightward shift in the short run phillips curve. This shift in the short run phillips curve increases inflation
What is "natural" about the natural state of unemployment?
The fact that the natural rate of unemployment is beyond influence of monetary policy makes it "natural"
Suppose the Fed responds quickly to these shocks and adjusts monetary policy to keep unemployment and output at their natural rates. What action would it take?
The fed would use expansionary monetary policy by increasing the money supply to keep unemployment and output at their natural rates.
there is little confidence in the Fed's determination to reduce inflation
The pessimism will shift the aggregate supply farther left and that will make the recession more sever. A larger shift left in the aggregate supply will shift the short run Phillips curve farther right resulting in higher inflation and higher unemployment.
Expectations of inflation adjust quickly to actual inflation
This will make the recession less severe because when expected inflation quickly adjusts to actual inflation, the short run Phillips curve will shift back to the natural rate of unemployment. This movement will reduce the unemployment rate.
Although monetary policy cannot reduce the natural rate of unemployment, other types of government policies can
True
Forward-looking parents can reverse the adverse effects of government debt by saving more and leaving a larger bequest to their children
True
If the marginal propensity to consume is 4/5, then a decrease in government spending of $1 billion decreases the demand for goods and services by $5 billion
True
Samuelson and Solow believed that the Phillips curve offered policymakers a menu of possible economic outcomes
True
The logic behind the tradeoff between inflation and unemployment is that high aggregate demand puts upward pressure on wages and prices while raising output
True
Wage contracts have short durations
With shorter contracts, the wages are not as sticky so the short run aggregate supply curve would be more vertical, so inflation would be impacted more than unemployment.
fractional-reserve banking
a banking system in which banks hold only a fraction of deposits as reserves
The Phillips curve
a curve that shows the short-run tradeoff between inflation and unemployment
A rise in the money wage rate with no change in potential GDP creates______.
a leftward shift of the SAS curve and no change in the LAS curve.
A macroeconomic equilibrium in which real GDP exceeds potential GDP is _____equilibrium. And one in which real GDP is less than potential GDP is _____equilibrium.
an above full-employment; a below full-employment
supply shock
an event that directly alters firms costs and prices, shifting the economy's aggregate supply curve and thus the phillips curve
Examples of fiscal policy that increase aggregate demand include______
an increase in government expenditure, a decrease in taxes, and and increase in transfer payments
In theory the severity of recessions can be diminished with
an increase in government spending, which the length of the political process can delay
According to liquidity preference theory, a. an increase in the price level reduces the quantity of money demanded. This is shown as a movement along the money-demand curve. An increase in the interest rate shifts money demand rightward. b. an increase in the interest rate increases the quantity of money demanded. This is shown as a movement along the money-demand curve. An increase in the price level shifts money demand leftward. c. an increase in the interest rate reduces the quantity of money demanded. This is shown as a movement along the money-demand curve. An increase in the price level shifts money demand to the right. d. an increase in the price level increases the quantity of money demanded. This is shown as a movement along the money-demand curve. An increase in the interest rate shifts money demand leftward.
an increase in the interest rate reduces the quantity of money demanded. This is shown as a movement along the money-demand curve. An increase in the price level shifts money demand to the right
central bank
an institution designed to regulate the quantity of money in the economy
medium of exchange
an item that buyers give to sellers when they want to purchase goods and services
store of value
an item that people can use to transfer purchasing power from the present to the future
Proponents of tax-law changes to encourage saving would
argue that corporate tax rates should be decreased
demand deposits
balances in bank accounts that depositors can access on demand by using a debit card or writing a cheque
A tax increase has
both a crowding out and multiplier effect
Which of the following models imply that a decrease in the money supply reduces unemployment temporarily but not permanently?
both the long-run Phillips curve and the aggregate supply and aggregate demand model
If people eventually adjust their inflation expectations so that in the long run actual and expected inflation are the same, then policymakers
can exploit a tradeoff between inflation and unemployment in the short run but not in the long run.
The principal reason that monetary policy has lags is that it takes a long time for
changes in the interest rate to change aggregate demand
Other things the same, which of the following responses would we expect to result from an decrease in U.S. interest rates? a.U.S. citizens decide to hold more foreign bonds. b. People choose to hold more currency. c. You decide to purchase a new oven for your cookie factory. d. all of the above
d. (All of the above are correct)
The Fed cuts the quantity of money and all other things remain the same. In the short run, aggregate demand_________
decreases
A deep recesion hits the world economy.
decreases aggregate demand
U.S. businesses expect future profits to fall.
decreases aggregate demand
When Mexico decreases the quantity of money, Mexico's aggregate demand______.
decreases and its AD curve shifts leftward.
The World oil price rises sharply.
decreases short-run aggregate suppy
People are likely to want to hold more money if the interest rate a. decreases, making the opportunity cost of holding money rise. b. increases, making the opportunity cost of holding money rise. c. increases, making the opportunity cost of holding money fall. d. decreases, making the opportunity cost of holding money fall.
decreases, making the opportunity cost of holding money fall
reserves
deposits that banks have received but have not loaned out
Which among the following assets is the most liquid
deposits that can be withdrawn using ATMs
The cost of disinflation depends on how quickly
expectations of inflation fall
Permanent tax cuts shift the AD curve
farther to the right than do temporary tax cuts.
An increase in world oil prices would be an adverse supply shock that would
give policymakers a less favorable tradeoff between inflation and unemployment. That is, after an adverse shock policymakers have to accept a higher rate of inflation for any given rate of unemployment of a higher rate of unemployment for any given rate of inflation
A program to reduce inflation is likely to have higher costs if the sacrifice ratio is
high and the reduction is unexpected
By expanding aggregate demand, policymakers can choose a point on the Phillips curve with
higher inflation and lower employment
An increase in expected future profits ______aggregate demand.
increases
An increase in the expected future inflation rate ______aggregate demand
increases
Canada trades with the U.S. a. The government of Canada cuts income taxes. Canada's aggregate demand _______. b. The U.S. experiences strong economic growth. Canada's aggregate demand ________. c. Canada sets new environmental standards that require power utillities to upgrade the production facilities. Canada's aggregate demand _______.
increases; increases; increases
Starting from a full-employment equilibrium, an increase in aggregate demand_____real GDP, and creates _______gap. In the long run, the money wage rage_____, short-run aggregate suppy ____, and the economy returns to a full-employment equilibrium.
increases; an inflationary rises; increases
Starting from a full-employment equilibrium, a decrease in short-run aggregate supply _____the price level, _____real GDP, and creates _________.
increases; decreases; stagflation
In the short run, an increase in exports _______real GDP and_____the price level.
increases; increases
In the short-run, an increase in business investment ______real GDP and _____the price level.
increases; increases
If businesses and consumers become pessimistic, the Federal Reserve can attempt to reduce the impact on the price level and real GDP by a. decreasing the money supply, which lowers interest rates. b. increasing the money supply, which lowers interest rates. c. decreasing the money supply, which raises interest rates. d. increasing the money supply, which raises interest rates
increasing the money supply, which lowers interest rates.
Why might the natural rate of unemployment differ across countries
it differs because every country has a different labor market with different policies that influence their natural rate of unemployment
Changes in the interest rate bring the money market into equilibrium according to a. classical theory, but not liquidity preference theory. b. both liquidity preference theory and classical theory. c. neither liquidity preference theory nor classical theory. d. liquidity preference theory, but not classical theory.
liquidity preference theory, but not classical theory
When the full-employment quantity of labor increases, or the quantity of capital increases, or technology advances __________.
long-run aggregate supply AND short-run aggregate supply increase.
By contracting aggregate demand, policymakers can choose a point on the Phillips curve with
lower inflation and higher unemployment
Stimulus spending in 2009 was used for
making payments to the unemployed,building roads and bridges,providing aid to local and state governments (All of the above are correct)
commodity money
money that takes the form of a commodity with intrinsic (spezifischem) value
fiat money
money without intrinsic value that is used as money because of government decree (Regierungsverordnung)
Long-run macroeconomic equilibrium______________.
occurs when real GDP = potential GDP, and the LAS, SAS and AD curves INTERSECT.
The quantity of real GDP supplied depends on all of the following EXCEPT the _____
quantity of real GDP demanded
reserve requirements
regulations on the minimum amount of reserves that banks must hold against deposits
From 1993-2001 the U.S. economy experienced
relatively low inflation and unemployment rates.
The Federal Reserve
requires little time to change policy but aggregate demand responds slowly.
The Fed moves the economy from one point on the short-run Phillips curve to another by
shifting the aggregate demand. This action will result in movement along the short-run Phillips curve
In the long run, a decrease in the money supply growth rate
shifts the short-run Phillips curve left so unemployment returns to its natural rate
The short run Phillips curve also shifts because of
shocks to aggregate supply
When the Fed contracts growth in the money supply to reduce inflation , it moves the economy along the
short run Phillips curve, which results in temporally high unemployment
When the price level, the money wage rate and other factor prices rise by the same percentage, there is a movement along_______. Potential GDP________.
the LAS curve; does not change.
When the price level rises but the money wage rate and other factor prices remain the same, there is a movement along ______. The quantity of real GDP supplied _____.
the SAS curve, decreases
money multiplier
the amount of money the banking system generates with each unit of reserves: Original deposits = 100$ First Bank = 90$ (90% x 100$) Second Bank = 81$ (90% x 90$) Second Bank = 72.90$ (90% x 81$) ... Total money supply = 1000$
liquidity
the ease with which an asset can be converted into the economy's medium of exchange
reserve ratio
the fraction of deposits that banks hold as reserves
repo rate
the interest at which the Bank of England lends on a short-term basis to the UK banking sector
refinancing rate
the interest rate at which the European Central Bank lends on a short-term basis to the euro area banking sector
discount rate
the interest rate at which the Federal Reserve lends on a short-term basis to the US banking sector
sacrifice ratio
the number of percentage points of annual output lost in the process of reducing inflation by 1 percentage point
outright open-market operations
the outright sale or purchase of non-monetary assets to or from the banking sector by the central bank without a corresponding agreement to reserve the transaction at a later date
The political business cycle refers to
the potential for a central bank to increase the money supply and therefore real GDP to help the incumbent get re-elected
open-market operations
the purchase and sale of non-monetary assets from and to the banking sector by the central bank
money supply
the quantity of money available in the economy
When the price level in Mexico rises,
the quantity of real GDP demanded decreases
An increase in the price level when the money wage rate remains unchanged increases_______.
the quantity of real GDP supplied.
repurchase agreement (repo)
the sale of a non-monetary asset together with an agreement to repurchase it at a set price at a specific future date
monetary policy
the set of actions taken by the central bank in order to affect the money supply
money
the set of assets in an economy that people regularly use to buy goods and services from other people
In the long-run, expected inflation adjust to changes in actual inflation, and
the short run Phillips curve shifts. As a result, the long-run Phillips curve is vertical at the natural rate of unemployment
rational expectations
the theory that people optimally use all the information they have, including government policies, when forecasting the future
unit of account
the yardstick people use to post prices and record debts
Monetary Policy in Southland In Southland the Department of Finance is responsible for monetary policy. Southland has had an inflation rate of 25% for many years. Refer to Monetary Policy in Southland. Suppose that the Southland Department of Finance has run a public relations campaign claiming it will reduce inflation to 12.5% but it actually raises inflation to 30%. Suppose that the public had expected that the Department of Finance would reduce inflation but only to 22%. Then
unemployment falls, but it would have fallen less if people had been expecting 25% inflation
Monetary Policy in Southland In Southland the Department of Finance is responsible for monetary policy. Southland has had an inflation rate of 25% for many years. Refer to Monetary Policy in Southland. Suppose that the Southland Department of Finance has run a public relations campaign claiming it will reduce inflation to 12.5% but that it actually leaves inflation at 25%. Suppose that the public had expected that the Department of Finance would reduce inflation, but only to 20%. Then
unemployment falls, but it would have fallen more if people had been expecting 12.5% inflation.
Monetary Policy in Southland In Southland the Department of Finance is responsible for monetary policy. Southland has had an inflation rate of 25% for many years. Refer to Monetary Policy in Southland. Suppose that the Southland Department of Finance has run a public relations campaign claiming it will reduce inflation to 12.5% and that it actually reduces inflation to that level. Suppose that the public had expected that the Department of Finance would reduce inflation but only to 22%. Then
unemployment rises, but it would have risen more if people had been expecting 25% inflation
In his famous article published in an economics journal in 1958, A.W. Phillips
used data for the United Kingdom to show a negative relationship between the rate of change of wages in the U.K. and the U.K. unemployment rate
If a central bank were required to target inflation at zero, then when there was a negative aggregate supply shock the central bank
would have to decrease the money supply. This would move unemployment further from the natural rate
