MACRO Exam 3

Ryan saved $50,000 last year so that he could buy a car this year. In this case, money served the function of a ________.

store of value

When an asset enables people to transfer purchasing power into the future, it serves the function of a ________.

store of value

Anna, Barry, and Clara grew up together in Michigan. After college, they each went overseas to countries that had different currencies. They had a group chat in which they were comparing costs of living. So that they could understand one another, they each converted their costs into U.S. dollars. What purpose did the U.S. dollar serve in their conversation?

unit of account

When an asset is used as a universal yardstick for expressing the worth of different goods and services, it serves the function of a ________.

unit of account

Y Potential GDP > Y Actual GDP

Recessionary Output Gap

If Jack received a $1,000 bonus and his MPC is 0.75, his consumption rises by $______

750

If the value of the government multiplier is 1.5, which of the following is likely to be true if all other variables remain unchanged?

A $1 increase in government expenditure increases GDP by $1.50.

What is the cure for a recession?

An increase in demand

Holding all else constant, if banks choose to hold less excess reserves, the money multiplier will decrease

False

Output when the labor market is at equilibrium

Y Potential GDP

The Bank of New York has $4 million in demand deposits and $400,000 in reserves. If the required reserve ratio is 5%, excess reserves are equal to

$200,000

Assume that taxes depend on income. The MPC is 0.75 and the progressive tax (t) is 0.1. If lump sum taxes increase by $10 billion, the equilibrium level of output will decrease by

$23.10 billion

Assume that taxes depend on income and the MPC is 0.75 and the progressive tax (t) is 0.1. An increase government spending of $10 billion will increase equilibrium income by:

$30.77 billion

Assume that taxes depend on income. The MPC is 0.75 and the progressive tax (t) is 0.1. The government tax multiplier is

-2.31

If a $10 billion reduction in taxation produces a change of $50 billion in output, the value of the tax multiplier is ________.

-5

If consumption is $25,000 when disposable income is $26,000, and consumption increases to $26,100 when income increases to $28,000, the MPC is

0.55

The Federal Reserve System consists of ___________Federal Reserve Banks.

12

Assume that taxes depend on income. The MPC is 0.75 and the progressive tax (t) is 0.15. The government spending multiplier is

2.76

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

Buying government securities (bonds) on the open market

Cigarettes at different points in time have been used as money. This is an example of

Commodity Money

Using the labor market diagram under the assumption of flexible prices, unemployment

Could not persist because wages would fall to eliminate the excess supply of labor

When the Federal Reserve raises the required reserve ratio, the bank's excess reserve _____ and the money supply _____. [Hint: Remember the following: Total Reserves = Required Reserves + Excess Reserves]

Decrease; decreases

Holding all else constant, if households choose to hold more of their income as cash outside the bak, the money multiplier will increase

False

Holding all else constant, if the Federal Reserve increases the required reserve ratio, the money multiplier will increase.

False

Suppose a recessionary output gap of $1000 exists. Suppose that the marginal propensity to consume (b) is 0.75 and the progressive tax rate is 0.2. To get rid of the recessionary output gap, the government can either increase government spending by $400 or cut taxes by $400 to get rid of the output gap.

False

The marginal propensity to consume (b) in an economy can be any positive number larger than 0

False

The money multiplier will increase if either banks decide to hold onto less excess reserves, or the Federal Reserve lowers the required reserve ratio, or households hold onto more money outside the banking system

False

The progressive tax rate in an economy (t) can be any positive number larger than 0

False

The time it takes a change in economic policy to induce people and firms to change their behavior is the implementation lag

False

The time it takes policy makers to implement an economic policy to stimulate the economy is known as the response lag

False

The time it takes policy makers to see that the economy is going into a recession or an inflationary period is known as the response lag

False

________ money refers to something that is used as money but is otherwise worthless and typically has the backing of the government or a central bank.

Fiat

Contract the economy ---> Decrease demand

G decreases, T increases

Expand the economy ---> Increase demand

G increases, T decreases

If the progressive tax rate (t) in a country increase, ________.

The slope of the demand line will decrease

If real GDP is $5 trillion and exports and imports are equal, this implies that

The total spending of consumers, businesses, and the government is $5 trillion, The total income received is $5 trillion, & The total output produced is $5 trillion

If consumers save the entire amount of the increase in their disposable income due to a tax cut, the tax cut will ________.

have no effect on GDP

Daniel lives in Fiji. He learns that the Fijian dollar is an example of fiat money. This means that the Fijian dollar ________.

is not backed by a physical commodity like gold or silver

When an asset is traded for goods and services, it serves the function of a ________.

medium of exchange

The Federal Reserve determines and implements the ________ policy of the United States, while the Congress as the ability to alter the ______ policy of the United States.

monetary; fiscal

If government expenditure (G) in a country decreases, ________.

The entire demand line will shift down

If the lump-sum taxes (T0) in a country increase, ________.

The entire demand line will shift down

Assume that a Cobb-Douglas production function is a good representation of the economy, the substitution effect is stronger than the income effect, and that the economy was initially at equilibrium. Suppose that Congress passes a law decreases spending on research and development which results in a decrease in total factor productivity in the economy. If the real wage is completely flexible, what will happen to the equilibrium output level?

The equilibrium output level will decrease

Assume that a Cobb-Douglas production function is a good representation of the economy, the substitution effect is stronger than the income effect, and that the economy was initially at equilibrium. Suppose that Congress passes a law decreases spending on research and development which results in a decrease in total factor productivity in the economy. If the real wage is completely flexible, what will happen to the equilibrium real wage rate and quantity of labor?

The equilibrium real wage rate will decrease and equilibrium quantity of labor will decrease

According to Keynes, recessions are the consequence of

The level of aggregate demand for goods and services being too low

Assume that a Cobb-Douglas production function is a good representation of the economy, the substitution effect is stronger than the income effect, and that the economy was initially at equilibrium. Suppose that Congress passes a law decreases spending on research and development which results in a decrease in total factor productivity in the economy. If the real wage is sticky/rigid, what will happen to the output level?

The level of output will decrease

Assume that a Cobb-Douglas production function is a good representation of the economy, the substitution effect is stronger than the income effect, and that the economy was initially at equilibrium. Suppose that Congress passes a law decreases spending on research and development which results in a decrease in total factor productivity in the economy. If the real wage is sticky/rigid, what will happen to the real wage and quantity of labor?

The real wage will remain constant and labor will decrease

The current Federal Reserve Chair is Jerome Powell

True

The Bank of Charleston has $250 million in demand deposits. The Bank of Charleston is meeting its reserve requirement and has no excess reserves. It has $10 million in reserves. The Bank of Charleston faces a required reserve ratio of

4%

If a $10 increase in government expenditure produces a change of $70 in GDP, the value of the government expenditure multiplier is ________.

7

If the value of a government taxation multiplier is -1.8, which of the following is likely to be true if all other variables remain unchanged?

A $1 reduction in taxation increases GDP by $1.80.

An open market sale of government securities (bonds) by the Federal Reserve results in _____ in excess reserves and _____in the money supply.

A decrease; a decrease

Assume that a Cobb-Douglas production function is a good representation of the economy, the substitution effect is stronger than the income effect, and that the economy was initially at equilibrium. Suppose that Congress passes a law decreases spending on research and development which results in a decrease in total factor productivity in the economy. If the real wage was perfectly flexible and given the change in the labor market, what would happen to the production function?

A downward shift of the entire production function

Assume that a Cobb-Douglas production function is a good representation of the economy, the substitution effect is stronger than the income effect, and that the economy was initially at equilibrium. Suppose that Congress passes a law decreases spending on research and development which results in a decrease in total factor productivity in the economy. What type of shock has occurred in the U.S. economy?

A negative labor demand shock

An open market purchase (buying) of government securities (bonds) by the Federal Reserve results in _____ in bank excess reserves and _____ in the money supply.

An increase; an increase

The Board of Governors of the Federal Reserve

Are appointed by the US President, Have a 14 year term, & Has seven members

To bring the economy out of an inflationary period, Keynes argued that the government should

Increase taxes and/or decrease government spending

Suppose the economy suffers a high rate of unemployment. According to Keynesian economists, the government should increase employment by

Increasing aggregate demand

Suppose the economy suffers a high rate of unemployment during a recession. According to Keynesian economists, the government should increase employment by

Increasing government spending and/or decrease taxes

Y Actual GDP > Y Potential GDP

Inflationary Output Gap

The belief that the government can stabilize the economy through government spending or taxes

Keynesian Economics

An increase in the progressive tax rate (t)

Makes the slope of the consumption function flatter

An increase in the marginal propensity to consume (MPC or b)

Makes the slope of the consumption function steeper

Because money eliminates the double coincidence of wants problem that occurs with barter, the development of money as a ______ has facilitated the expansion of trade

Medium of Exchange

Early in 2000, the United States introduced its eighth dollar coin-the Sacagawea dollar. Over one billion of the coins were minted/created during 2000 with half remaining in the vaults of Federal Reserve Banks and the other half put in circulation to the general public. Although half the coins were put in circulation for the general public, a large proportion of the "circulating" dollars to the general public were being hoarded by collectors. Which function(s) of money is the Sacagawea dollar coin not fulfilling?

Medium of Exchange

When actual GDP differs from potential GDP

Output gaps

What makes a U.S. $100 bill valuable?

People are likely to accept a $100 bill as payment.

An increase in the lump-sum tax (T0)

Shifts the consumption function downward

An increase in autonomous consumption (a)

Shifts the consumption function upward

Using the labor market diagram under the assumption of flexible prices, if the quantity of labor demanded exceeds the quantity supplied, there is a

Shortage of labor and wages will rise

Prices that do not always adjust rapidly to maintain equality between quantity supplied and quantity demanded are

Sticky prices

According to Keynes, unemployment can be explained by introducing the concept of

Sticky/Rigid prices and wages

Julie won $1,000 in the lottery. She deposits her $1,000 winnings into a savings so that she can use the money next year to help her pay for a new car. This is an example of money serving as a(n)

Store of Value

The study of macroeconomics evolved as a way to explain

The Great Depression

Assume that a Cobb-Douglas production function is a good representation of the economy, the substitution effect is stronger than the income effect, and that the economy was initially at equilibrium. Suppose that Congress passes a law decreases spending on research and development which results in a decrease in total factor productivity in the economy. If the real wage is completely flexible, what will happen to the marginal productivity of capital?

There would be a decrease in the marginal productivity of capital

Assume that a Cobb-Douglas production function is a good representation of the economy, the substitution effect is stronger than the income effect, and that the economy was initially at equilibrium. Suppose that Congress passes a law decreases spending on research and development which results in a decrease in total factor productivity in the economy. If the real wage is completely flexible, what will happen to the marginal productivity of labor?

There would be a decrease in the marginal productivity of labor

Holding all else constant, if banks choose to hold more excess reserves, the money multiplier will decrease

True

Holding all else constant, if households choose to hold less of their income as cash outside the bank, the money multiplier will increase

True

Holding all else constant, if the Federal Reserve decreases the required reserve ratio, the money multiplier will increase.

True

Monetary policy has a shorter implementation lag than fiscal policy

True

Sticky wages can give us unemployment

True

The President of the NY Federal Reserve Bank is always a member of the Federal Open Market committee.

True

The absolute value of both the government spending multiplier and the tax multiplier will increase if households decide to increase their marginal propensity to consume

True

When a car dealer attaches price stickers to his products, he is using money as a

Unit of Account

Assume that exports and imports are equal. The economy is in equilibrium when

Y = C+I+G

Betsy enters a roadside cafeteria and orders a medium-sized cappuccino and a chicken burger. She hands over $5 at the cash counter and collects the food. In this example, money serves the function of ________.

a medium of exchange