Macroeconomics Final Review
money is valuable because: -____ -legal ____ -relative ____
acceptability; tender; scarcity
excess reserves equals ____ - ____
actual reserves, required reserves
excess reserves = ____ - ____
actual reserves; required reserves
difficulty in changing policy once the problem has been recognized
administrative lag
real GDP desired at each level; inverse relationship
aggregate demand
schedule or curve that shows the amount of a nation's output (real GDP) that buyers collectively desire to purchase at each possible price level
aggregate demand
schedule or curve showing the relationship between a nation's price level and the amount of real domestic output that firms in the economy produce
aggregate supply
to the extent that they want to hold money as an asset, disadvantage is to earns no or very little interest
asset demand for money
taxes vary directly w/ GDP; transfers vary inversely w/ GDP
automatic stabilizers
statement of assets- things owned by the bank or owed to the bank and claims on those assets, summarizes the financial position of the bank at the a certain time, assets must balance with liabilities and net worth
balance sheet
interest rates and ____ ____ are inversely related
bond prices
government spending in excess of tax revenues; used when economy faces a recession
budget deficit
tax revenues in excess of government spending; used when economy faces demand-pull inflation
budget surplus
automatic response; anything that increases the government's budget deficit (or reduces its budget surplus) during a recession and increases its budget surplus (or reduces its budget deficit) during an expansion w/out requiring explicit action by policymakers
built-in stability
reduces severity of business fluctuations
built-in stability
the Federal Reserve requires banks (and thrifts) to deposit in their regional Federal Reserve Bank a certain percentage of their ____ ____ as ____
check able deposits, reserves
required reserves = ____ x ____
checkable deposits; reserve ratio
reserve ratio equals ____ / ____
commercial's bank's required reserves, commercials bank's check able-deposit liabilities
changes in aggregate demand can cause shift factors affecting ____, ____, ____, and ____
consumer spending; investment spending; government purchases; net exports
making loans ____ money while loan repayment ____ money
creates; destroys
most common thrift institutions?
credit unions
____ cards not considered money, but ____ cards are
credit; debit
an expansionary fiscal policy (deficit spending) may increase the interest rate and reduce investment spending, thereby weakening or cancelling the stimulus of the expansionary policy
crowding-out effect
can occur w/ gov't deficit spending; may increase the interest rate and reduce private spending which weakens or cancels the stimulus of fiscal policy
crowding-out effect
____ held in a bank is not part of the economy's ____ supply ____ not total supply of money changes
currency, money, compensation
Federal Reserve Functions: -issue ____ -set ____ requirements -lend money to ____ -collect ____ -act as a ____ ____ for the US government -supervise ____ -control the ____ ____
currency; reserve; banks; checks; fiscal agent banks; money supply
any large imbalance in economic factors that occur due to purely cyclical reactions by a market or nation
cyclical asymmetry
use tax increases to ____ consumer spending
decrease
to reduce the size of the government: if recession, then ____ government spending -if inflation, then ____ taxes
decrease; decrease
Built-in stability means that: A. an annually balanced budget will offset the pro-cyclical tendencies created by state and local finance and thereby stabilize the economy. B. with given tax rates and expenditures policies, a rise in domestic income will reduce a budget deficit or produce a budget surplus while a decline in income will result in a deficit or a lower budget surplus. C. Congress will automatically change the tax structure and expenditure programs to correct upswings and downswings in business activity. D. government expenditures and tax receipts automatically balance over the business cycle, though they may be out of balance in any single year.
B.
restrictive monetary policy supply of federal funds ____, raising the federal funds rate to the new ____ ____ ____ shift of supply curve multiple ____ of the nation's money supply ____ investment ____ aggregate demand ____ demand-pull inflation
decreases, targeted rate, upward, discourage, lower, restrain
increase in money supply ____ interest rate, thereby ____ investment and aggregate demand and vice versa
decreases; increases
If you place a part of your summer earnings in a savings account, you are using money primarily as a: A. medium of exchange. B. store of value. C. unit of account. D. standard of value.
B.
The difference between M1 and M2 is that: A. the former includes time deposits. B. the latter includes small-denominated time deposits, noncheckable savings accounts, money market deposit accounts, and money market mutual fund balances. C. the latter includes negotiable government bonds. D. the latter includes cash held by commercial banks and the U.S. Treasury.
B.
The foreign purchases effect suggests that an increase in the U.S. price level relative to other countries will: A. increase the amount of U.S. real output purchased. B. increase U.S. imports and decrease U.S. exports. C. increase both U.S. imports and U.S. exports. D. decrease both U.S. imports and U.S. exports.
B.
The transactions demand for money is most closely related to money functioning as a: A. unit of account. B. medium of exchange. C. store of value. D. measure of value.
B.
Which of the following represents the most expansionary fiscal policy? A. A $10 billion tax cut. B. A $10 billion increase in government spending. C. A $10 billion tax increase. D. A $10 billion decrease in government spending.
B.
contractionary fiscal policy: -use during ____ ____ ____ -____ government spending -____ taxes -creates a ____ -____ aggregate demand and ____ or eliminate inflation
demand-pull inflation; decrease; increase; surplus; decrease; decrease
commercial banks have 2 basic functions 1) to accept ____ of ____ 2) to make ____
deposits of money, loans
political business cycle can ____ the economy e.g. election years
destabilize
the interest rate the Federal Banks charge interest on loans they grant to commercial banks
discount rate
changes w/ shifts in the money supply and money demanded
equilibrium interest rate
the rate at which the amount of money demanded and the amount of supplied are equal
equilibrium interest rate
the intersection of demand and supply determines the ____ ____ in the market for money
equilibrium price
intersection of the aggregate demand curve AD and the aggregate supply curve AS; aggregate demand and aggregate supply jointly establish the price level and level of real GDP
equilibrium price level and equilibrium real output
Contractionary fiscal policy is so named because it: A. involves a contraction of the nation's money supply. B. necessarily reduces the size of government. C. is aimed at reducing aggregate demand and thus achieving price stability. D. is expressly designed to expand real GDP.
C.
The aggregate supply curve: A. is explained by the interest rate, real-balances, and foreign purchases effects. B. gets steeper as the economy moves from the top of the curve to the bottom of the curve. C. shows the various amounts of real output that businesses will produce at each price level. D. is downsloping because real purchasing power increases as the price level falls.
C.
The asset demand for money is most closely related to money functioning as a: A. unit of account. B. medium of exchange. C. store of value. D. measure of value.
C.
maximum check able- deposit creation equals ____ x ____
excess reserves, money multiplier
functions of money: -medium of ____ -unit of ____ -store of ____ -is ____
exchange; account; value; liquid
"easy money policy", policy will lower the interest rate to bolster borrowing and spending, which will increase aggregate demand and expand real output
expansionary monetary policy
factors that affect expected returns
expectations about future business conditions, technology, degree of excess capacity, and business taxes
dollar depreciation encourages US ____ and discourages ____
exports; imports
the interest rate paid on these overnight loans
federal funds rate
the rate of interest that banks charge one another on overnight loans made from temporary excess reserves
federal funds rate
aggregate supply: -in the immediate short run, both input prices and output prices are ____ -in short run, input prices are ____, but output prices are ____ -in long run, input prices as well as output prices are ____
fixed; fixed; vary; vary
when US price level rises relative to foreign price levels, foreigners buy fewer US goods and Americans buy more foreign goods; US exports fall and US imports rise; rise in price level reduces quantity of US goods demanded as net exports
foreign purchases effect
when price level falls, other things being equal, US prices will fall relative to foreign prices, which will tend to increase spending on US exports and also decrease import spending in favor US products that compete with imports
foreign purchases effect
a portion (fraction) of check-able deposits are backed up by the reserves of currency in bank vaults or deposits at the central ban
fractional reserve banking system
fiscal policy is designed to achieve ____ ____, control ____, and encourage ____ ____
full employment; inflation; economic growth
fiscal policy involves deliberate changes in ____ ____ and ____
government spending; taxes
____ renders money unacceptable
hyperinflation
The cyclically adjusted budget refers to: A. the inflationary impact that the automatic stabilizers have in a full-employment economy. B. that portion of a full-employment GDP that is not consumed in the year it is produced. C. the size of the federal government's budgetary surplus or deficit when the economy is operating at full employment. D. the number of workers who are underemployed when the level of unemployment is 4 to 5 percent.
C.
The factors that affect the amounts that consumers, businesses, government, and foreigners wish to purchase at each price level are the: A. real-balances, interest-rate, and foreign purchases effects. B. determinants of aggregate supply. C. determinants of aggregate demand. D. sole determinants of the equilibrium price level and the equilibrium real output.
C.
The four main tools of monetary policy are: A. tax rate changes, the discount rate, open-market operations, and the federal funds rate. B. tax rate changes, changes in government expenditures, open-market operations, and interest on reserves. C. the discount rate, the reserve ratio, interest on reserves, and open-market operations. D. changes in government expenditures, the reserve ratio, the federal funds rate, and the discount rate.
C.
to expand the size of the government: -if recession, then ____ government spending -if inflation, then ____ taxes
increase; increase
higher expected returns on investment projects will ____ the demand for capital goods and shift the aggregate demand curve to the ____
increase; right
if government spending increases, aggregate demand ____ and vice versa
increases
raising the reserve ratio ____ the amount of required reserves banks must keep
increases
reduction in personal income tax rates ____ consumer purchases at each possible price level
increases
increase in real interest rates ____ borrowing costs, ____ investment spending, and ____ aggregate demand
increases; decreases; decreases
restrictive monetary policy: -periods of rising ____ -____ Federal funds rate -____ money supply -____ other interest rates
inflation; increases; increases; increases
____ prices stickier than ____ prices
input; output
the price paid for the use of money, the price that borrowers need to pay lenders for transferring purchasing power to the future
interest
a decline in price level means lower interest rates that can increase levels of certain types of spending
interest rate effect
relationship between price level and amount of real GDP is ____/____; when price level rises, the quantity of real GDP ____ and vice versa
inverse; negative; decreases
amount of money demanded as an asset varies ____ w/ the rate of interest (which is opportunity cost of holding money as an asset)
inversely
interest rates and bond prices are ____ related
inversely
restrictive monetary policy will cause the money supply curve to shift ____, thereby ____ the interest rate, decreasing investment and aggregate demand
left; increasing
decline in investment spending at each price level will shift the aggregate demand curve to the ____ and increase to the ____
left; right
if aggregate demand decreases, the economy's equilibrium will move ____
leftward
2 significant characteristics of fractional reserve banking system 1) can create money through ____ 2) vulnerable to "____" or"____"
lending, panics, runs
use of borrowed money to magnify profits and losses
leverage
ease with which an asset can be converted quickly into the most widely accepted and easily spent form of money, cash, with little or no loss of purchasing power; key advantage money has over all other assets
liquidity
are assets to Fed but liabilities to commercial banks b/c increase reserves but most be repaid
loans
usable for buying and selling goods and services
medium of exchange
The interest-rate effect suggests that: A. a decrease in the supply of money will increase interest rates and reduce interest-sensitive consumption and investment spending. B. an increase in the price level will increase the demand for money, reduce interest rates, and decrease consumption and investment spending. C. an increase in the price level will increase the demand for money, increase interest rates, and decrease consumption and investment spending. D. an increase in the price level will decrease the demand for money, reduce interest rates, and increase consumption and investment spending.
C.
An economist who favored expanded government would recommend: A. tax cuts during recession and reductions in government spending during inflation. B. tax increases during recession and tax cuts during inflation. C. tax cuts during recession and tax increases during inflation. D. increases in government spending during recession and tax increases during inflation.
D.
Expansionary fiscal policy is so named because it: A. involves an expansion of the nation's money supply. B. necessarily expands the size of government. C. is aimed at achieving greater price stability. D. is designed to expand real GDP.
D.
Suppose that the economy is in the midst of a recession. Which of the following policies would most likely end the recession and stimulate output growth? A. A congressional proposal to incur a federal surplus to be used for the retirement of public debt. B. Reductions in agricultural subsidies and veterans' benefits. C. Postponement of a highway construction program. D. Reductions in federal tax rates on personal and corporate income.
D.
The aggregate demand curve: A. is upsloping because a higher price level is necessary to make production profitable as production costs rise. B. is downsloping because production costs decline as real output increases. C. shows the amount of expenditures required to induce the production of each possible level of real output. D. shows the amount of real output that will be purchased at each possible price level.
D.
The real-balances effect indicates that: A. an increase in the price level will increase the demand for money, increase interest rates, and reduce consumption and investment spending. B. a lower price level will decrease the real value of many financial assets and therefore reduce spending. C. a higher price level will increase the real value of many financial assets and therefore increase spending. D. a higher price level will decrease the real value of many financial assets and therefore reduce spending.
D.
If government wants to use fiscal policy to counter the resulting inflation without changing tax rates, would it increase government spending or decrease it?
Decrease it
the monetary authority who controls the money supply for our country
Federal Reserve System
the US "monetary authorities"; central authority of the US money and banking system; purposely established as an independent agency of gov't that on average keeps interest rates lower; members of the Board of Governors of the:
Federal Reserve System (Fed)
-currency (coins and paper) in the hands of the public -all checkable deposits (all deposits in commercial banks and "thrift" or savings institutions on which checks of any size can be drawn)
M1
includes savings deposits, including money market deposit accounts; small denominated time deposits; money market mutual funds held by individuals; composed of M1 and 3 categories of near-monies
M2
rule of thumb for tracking actual monetary policy; Feds has 2% target inflation rate; target varies as inflation and real GDP vary, central banks are willing to tolerate a small positive rate of inflation if doing so will help the economy to produce at potential output
Taylor Rule
financial instruments issued by the federal government to borrow money to finance expenditures that exceed tax revenues
U.S. government securities
key measure in banking that helps to predict the money supply that will be available to drive economic growth
money multiplier
assets demanded (Da): -____ as a store of value -varies inversely with the ____ ____
money; interest rate
commercial banking system can lend (create money) by a ____ of its excess reserves
multiple
how to calculate new output at each price level?
multiply original values by 1.1
certain highly liquid financial assets that do not function directly or fully as a medium of exchange but can readily be converted into currency or checkable deposits
near-monies
a change in the ____ ____ - working through the transactions demand for money- will shift the ____ ____ ____ curve
nominal GDP, total money demand
transactions demanded (Dt): -determined by ____ ____ -independent of the ____ ____
nominal GDP; interest rate
buying and selling of gov't securities (or bonds) that increase or decrease commercial bank reserves available to affect the amount of money available in the economy; commercial banks and general public; most important tool used by the Feds; gives them great flexibility in controlling the money supply and impact is swift
open market operations
buying gov't bonds (US securities) from or selling gov't bonds to commercial banks and the general public
open-market operations
4 main tools of monetary control Fed uses to alter reserves of commercial banks?
open-market operations, the reserve ratio, the discount rate, interest on reserves
time elapsed between the change in policy and its impact on the economy
operational lag
____ affect purchasing power of money
prices
real output per unit of input; increases reduce costs and decreases increase costs
productivity
prices flexible in supply long run because ____ ____ will always adjust to give firms exactly the right profit incentive to produce exactly the full-employment ____ ____
profit levels; output level
average tax rates rise w/ GDP
progressive tax system
average tax rate remains constant as GDP rises
proportional tax system
US national debt; essentially the accumulation of all past federal deficits and surpluses; emerged mainly from war financing, recessions, and fiscal policy
public debt
the amount of goods and services a unit of money will buy
purchasing power of money
banks that blend private ownership and public control
quasi-public banks
how to calculate productivity?
real GDP / input quantity
when price level falls, the purchasing power of existing financial balance rises, which can increase spending
real balances effect
expansionary fiscal policy: -used during a ____ -____ government spending -____ taxes -creates a ____ -____ aggregate demand and ____ real GDP
recession; increase; decrease; deficit; increase; increase
expansionary monetary policy: -economy faces a ____ -____ target for Federal funds rate -Fed buys ____ -____ money supply -____ pressure on other interest rates
recession; lower; securities; expanded; downward
elapsed time between the beginning of a recession or inflation and awareness of this occurence
recognition lag
3 lags/delays that hinder fiscal policy, monetary policy only first 2
recognition, operational, administrative
when the Federal Reserve Banks sell gov't bonds, commercial banks' reserves ____
reduce
raising the reserve ratio forces banks to ____ the amount of check able deposits they create through ____
reduce, lending
average tax rate falls as GDP rises
regressive tax system
money multiplier equals 1 / ____
required reserve ratio
money multiplier = 1 / (____)
required reserve ratio (R)
an amount of funds equal to a specified percentage of the bank's own deposit liabilities
required reserves
Feds manipulate the ____ ____ in order to influence the ability of commercials banks to lend
reserve ratio
the portion of depositors' balances that banks must have on hand as cash, a requirement determined by the country's central bank, affects the money supply in a country at any given time
reserve ratio
the ratio of the required reserves the commercial bank must keep the bank's own outstanding check able-deposit liabilities
reserve ratio
for periods of rising inflation, "tight money policy", policy will increase the interest rate to reduce borrowing and spending, which will curtail the expansion of aggregate demand and hold down price-level increases, immediate step will be to announce a higher target for the federal funds rate
restrictive monetary policy
a rise in US net exports shifts the aggregate demand curve to the ____ and vice versa
right
a sufficient increase in government spending or reduction in taxes will shift an economy's aggregate demand curve to the ____
right
an increase in government purchases will shift the aggregate demand curve to the ____ and vice versa
right
expansionary monetary policy shifts money supply curve to ____, causing aggregate demand to ____ and shift aggregate demand curve to ____ so real output rises to the full employment level
right; increase; right
consist largely of Treasury bills, Treasury notes, and Treasury bonds issued by the US gov't to finance past budget deficits, part of public debt, mainly bought and sold to influence the size of commercial bank reserves and ability of those banks to create money by lending
securities
2 main assets of the Federal Reserve Banks?
securities and loans
buying government ____ and ____ creates new money
securities; lending
monetary policy advantages over fiscal policy: -____ and flexibility -____ from political pressure -more ____
speed; isolation; subtle
enables people to transfer purchasing power from the present to the future
store of value
interest rates determine by money ____ and money ____
supply; demand
the sum of the transactions demand for money plus the asset demand for money
total demand for money (Dm)
the demand for money as a medium of exchange the level of nominal GDP is the main determinant
transactions demand for money
society uses monetary units as a yardstick for measuring the relative worth of a wide variety of goods, services, and resources
unit of account
how to calculate per-unit production cost?
(price of input unit x input quantity) / real GDP
nation's "central bank" and bankers' bank; blend private and public control
12 Federal Reserve Banks
A $70 price tag on a sweater in a department store window is an example of money functioning as a: A. unit of account. B. standard of deferred payments. C. store of value. D. medium of exchange.
A.
An economist who favors smaller government would recommend: A. tax cuts during recession and reductions in government spending during inflation. B. tax increases during recession and tax cuts during inflation. C. tax cuts during recession and tax increases during inflation. D. increases in government spending during recession and tax increases during inflation.
A.
An expansionary fiscal policy is shown as a: A. rightward shift in the economy's aggregate demand curve. B. movement along an existing aggregate demand curve. C. leftward shift in the economy's aggregate supply curve. D. leftward shift in the economy's aggregate demand curve.
A.
If you write a check on a bank to purchase a used Honda Civic, you are using money primarily as: A. a medium of exchange. B. a store of value. C. a unit of account. D. an economic investment.
A.
In the United States, the money supply (M1) includes: A. coins, paper currency, and checkable deposits. B. currency, checkable deposits, and Series E bonds. C. coins, paper currency, checkable deposits, and credit balances with brokers. D. paper currency, coins, gold certificates, and time deposits.
A.
The economy's long-run AS curve assumes that wages and other resource prices: A. eventually rise and fall to match upward or downward changes in the price level. B. are flexible upward but inflexible downward. C. rise and fall more rapidly than the price level. D. are relatively inflexible both upward and downward.
A.
The immediate-short-run aggregate supply curve represents circumstances where: A. both input and output prices are fixed. B. both input and output prices are flexible. C. input prices are fixed, but output prices are flexible. D. input prices are flexible, but output prices are fixed.
A.
Which one of the following would not shift the aggregate demand curve? A. A change in the price level. B. Depreciation of the international value of the dollar. C. A decline in the interest rate at each possible price level. D. An increase in personal income tax rates.
A.
Assume that a bank initially has no excess reserves. If it receives $5,000 in cash from a depositor and the bank finds that it can safely lend out $4,500, the reserve requirement must be: A. zero. B. 10 percent. C. 20 percent. D. 25 percent.
B.
Suppose that the data below shows an economy's relationship between real output and the inputs needed to produce that output: Input Quantity Real GDP 150.0 $400 112.5 $300 75.0 $200 Instructions: Round your answers to 2 decimal places. a. What is the level of productivity in this economy? __?__ b. What is the per-unit cost of production if the price of each input unit is $2? __?__ c. Assume that the input price increases from $2 to $3 with no accompanying change in productivity. What is the new per-unit cost of production? __?__ In what direction would the $1 increase in input price push the economy's aggregate supply curve? __?__ What effect would this shift of aggregate supply have on the price level and the level of real output? __?__ d. Suppose that the increase in input price does not occur but, instead, that productivity increases by 100 percent. Instructions: Round your answer to 3 decimal places. What would be the new per-unit cost of production? __?__ In what direction would this change in per-unit production cost push the economy's aggregate supply curve? __?__ What effect would this shift of aggregate supply have on the price level and the level of real output? __?__
a.) 2.67 b.) $0.75 c.) $1.12; to the left; price level increase and real output decrease d.) $0.375; to the right; price level decrease and real output increase
Assume that the following data characterize the hypothetical economy of Trance: money supply = $200 billion; quantity of money demanded for transactions = $150 billion; quantity of money demanded as an asset = $10 billion at 12 percent interest, increasing by $10 billion for each 2-percentage-point fall in the interest rate. a. What is the equilibrium interest rate in Trance? ____ percent. b. At the equilibrium interest rate, what are the quantity of money supplied, the total quantity of money demanded, the amount of money demanded for transactions, and the amount of money demanded as an asset in Trance? Quantity of money supplied = ____ billion. Quantity of money demanded = ____ billion. Amount of money demanded for transactions =____ billion. Amount of money demanded as an asset = ____ billion.
a.) 4 b.) 200; 200; 150; 50
Suppose that a country has no public debt in year 1 but experiences a budget deficit of $40 billion in year 2, a budget deficit of $20 billion in year 3, a budget surplus of $10 billion in year 4, and a budget deficit of $2 billion in year 5. a. What is the absolute size of its public debt in year 5? $____ billion b. If its real GDP in year 5 is $104 billion, what is this country's public debt as a percentage of real GDP in year 5? ____ percent.
a.) 52 b.) 50
(A) Price Level Real GDP 110 275 100 250 95 225 90 200 (B) Price Level Real GDP 100 200 100 225 100 250 100 275 (C) Price Level Real GDP 110 225 100 225 95 225 90 225 a. Which set of data illustrates aggregate supply in the immediate short-run in North Vaudeville? __?__ Which set of data illustrates aggregate supply in the short run in North Vaudeville? __?__ Which set of data illustrates aggregate supply in the long run in North Vaudeville? __?__ b. Assuming no change in hours of work, if real output per hour of work increases by 10 percent, what will be the new levels of real GDP in the right column of A? __?__ Instructions: Round your answer to 1 decimal place. With a price level of 110, new output = __?__ Instructions: Enter your answer as a whole number. With a price level of 100, new output = __?__ Instructions: Round your answer to 1 decimal place. With a price level of 95, new output = __?__ Instructions: Enter your answer as a whole number. With a price level of 90, new output = __?__ Does the new data reflect an increase in aggregate supply or does it indicate a decrease in aggregate supply? __?__
a.) B.; A.; C. b.) 302.5; 275; 247.5; 220; increase
