Macro Final

Marta lends money at a fixed interest rate and then inflation turns out to be higher than she had expected it to be. The real interest rate she earns is

lower then she had expected, and the real value of the loan is lower than she had expected.

If M = 2,000, P = 2.25, and Y= 6,000, what is velocity?

6.75.

. If the Fed requires a reserve ratio of 6 percent, then what quantity of excess reserves does the Bank of Springfield now hold?

$9,000

When the price level falls, the number of dollars needed to buy a representative basket of goods

decreases, so the value of money rises.

According to the quantity equation (also known as the equation of exchange), the price level would change less than proportionately with a rise in the money supply if there were also

either a rise in output or a fall in velocity.

During a recession the economy experiences

falling employment and income

The nominal interest rate is 6 percent and the inflation rate is 3 percent. What is the real interest rate?

3 percent

If the MPC = 0.75, then the government purchases multiplier is about

4.

If the sacrifice ratio is 3, then reducing the inflation rate from 5 percent to 3 percent would require sacrificing

6 percent of annual output.

Which of the following effects helps to explain the slope of the aggregate-demand curve?

All of the above are correct.

Which of the following is an example of crowding out?

An increase in government spending increases interest rates, causing investment to fall.

Last year, Jane spent all of her income to purchase 200 units of corn at $5 per unit. This year, she spent all of her income to purchase 180 units of corn at $6 per unit.

Jane's nominal income increased this year, but her real income decreased.

Refer to the figure above. If the economy starts at Y, then a recession occurs at

W.

If the central bank unexpectedly increases the money supply, then in the short run unemployment will move

below its natural rate. The short-run Phillips curve shifts right as the economy moves back to its natural rate of unemployment.

In 2009 Congress passed legislation providing states with funds to build roads and bridges. It also instituted tax cuts. Which of these shifts aggregate demand right?

both the increased funding for states and the tax cuts

For questions 17-19, imagine that in 2020 the economy is in long-run equilibrium. Then stock prices rise more than expected and stay high for some time. In the short run what happens to the price level and real GDP?

both the price level and real GDP rise.

Monetary policy

can be implemented quickly, but most of its impact on aggregate demand occurs months after policy is implemented.

Proponents of rational expectations argued that the sacrifice ratio

could be low because people might adjust their expectations quickly if they found anti-inflation policy credible.

Which list ranks assets from most to least liquid?

currency, stocks, fine art

Other things the same, a decrease in the price level causes the interest rate to

decrease, the dollar to depreciate, and net exports to increase.

If the Fed increases the money supply, then 1/P

falls, so the value of money falls.

​Many macroeconomic variables

fluctuate together and by different amounts.

Fiscal policy refers to the idea that aggregate demand is affected by changes in

government spending and taxes.

Fiat money

has no intrinsic value.

Keynes believed that economies experiencing high unemployment should adopt policies to

increase aggregate demand.

If monetary neutrality holds, then an increase in the money supply

increases nominal but not real variables. Most economists think that monetary neutrality is a good description of the long run.

When the interest rate increases, the opportunity cost of holding money

increases, so the quantity of money demanded decreases.

As the reserve ratio decreases, the money multiplier

increases.

Higher inflation makes relative prices

more variable, making it less likely that resources will be allocated to their best use.

Other things the same, a decrease in the price level makes the dollars people hold worth

more, so they can buy more.

According to classical macroeconomic theory, changes in the money supply affect

nominal variables, but not real variables.

According to Friedman and Phelps, policymakers face a tradeoff between inflation and unemployment

only in the short run.

Economic variables whose values are measured in goods are called

real variables.

Stagflation exists when prices

rise and unemployment rises.

Other things the same, when the price level rises, interest rates

rise, so firms decrease investment.

Which of the following is included in M2 but not in M1?

savings deposits

Suppose that the MPC is 0.7, and there are no crowding-out effects. If government expenditures increase by $30 billion, then aggregate demand

shifts rightward by $100 billion.

In the long run, the change in price expectations created by the stock market boom shifts

short-run aggregate supply left.

Menu costs help explain

sticky price theory

You saved $500 in currency in your piggy bank to purchase a new laptop. The $500 you kept in your piggy bank illustrates money's function as a _______. The laptop's price is posted as $500. The $500 price illustrates money's function as a _____. You use the $500 to purchase the laptop. This transaction illustrates money's function as a ______.

store of value, unit of account, medium of exchange

The long-run aggregate supply curve shifts right if

technology improves.

The short-run relationship between inflation and unemployment is often called

the Phillips curve.

The interest rate the Fed charges on loans it makes to banks is called

the discount rate.

Using the liquidity-preference model, when the Federal Reserve decreases the money supply,

the equilibrium interest rate increases.

Critics of stabilization policy argue that

the lag problem ends up being a cause of economic fluctuations.

Which of the following is not an automatic stabilizer?

the minimum wage

The government builds a new water-treatment plant. The owner of the company that builds the plant pays her workers. The workers increase their spending. Firms from which the workers buy goods increase their output. This type of effect on spending illustrates

the multiplier effect.

If aggregate demand shifts left, then in the short run

the price and real GDP both fall

How is the new long-run equilibrium different from the original one?

the price level is higher and real GDP is the same.

The sticky-wage theory of the short-run aggregate supply curve says that the quantity of output firms supply will increase if

the price level is higher than expected making production more profitable.

Real and nominal variables are highly intertwined, and changes in the money supply change real GDP. Most economists would agree that this statement accurately describes

the short run, but not the long run.

A change in expected inflation shifts

the short-run Phillips curve, but not the long run Phillips curve.

An increase in the expected price level shifts the

the short-run but not the long-run aggregate supply curve left.

A basis for the slope of the short-run Phillips curve is that when UNEMPLOYMENT is LOW there are

upward pressures on prices and wages.

The aggregate supply curve is

vertical in the long run and slopes upward in the short run.

If the reserve ratio is 12.5 percent, then $2,000 of additional reserves can create up to

$16,000 of new money.

When the Federal Reserve conducts open-market operations to increase the money supply, it

buys government bonds from the public.