Macroeconomics HW 5

Suppose the government increases taxes by $60 billion and the marginal propensity to consume is 0.80. By how will equilibrium GDP change? The change in equilibrium GDP is: $ ____ billion.

- MPC / (1-MPC) -.8/(1-.8)=-4 -4*60=-240

Suppose the economy is at point C. If investment spending decreases in the economy, where will the eventual long- run equilibrium be? A.) A B.) B C.) C D.) D

A.) A

Suppose the economy is initially in long-run equilibrium. The Fed enacts a policy to decrease the required reserve ratio. In the short-run, this expansionary monetary policy will cause: A.) A shift from AD1 to AD2 and a movement to point B, with a higher price level and higher output. B.) A shift from SRAS2 to SRAS1 and a movement to point D, with a higher price level and lower output. C.) A shift from AD2 to AD1 and a movement to point C, with a lower price level and the same output. D.) A shift from SRAS1 to SRAS2 and a movement to point B, with a lower price level and higher output.

A.) A shift from AD1 to AD2 and a movement to point B, with a higher price level and higher output.

Interest rates in the economy have risen. How will this affect aggregate demand and equilibrium in the short run? A.) Aggregate demand will fall, the equilibrium price will fall, and the equilibrium level of GDP will fall. B.) Aggregate demand will rise, the equilibrium price level will fall, and the equilibrium level of GDP will rise. C.) Aggregate demand will fall, the equilibrium price level will rise, and the equilibrium level of GDP will fall. D.) Aggregate demand will rise, the equilibrium price level will rise, and the equilibrium level of GDP will rise.

A.) Aggregate demand will fall, the equilibrium price level will fall, and the equilibrium level of GDP will fall.

Consider the figures below. Determine which combination of fiscal policies shifted AD1 to AD2 in each figure and returned the economy to long-run macroeconomic equilibrium. Example A AD1--->AD2 Example B AD2--->AD1 A.) Example (A): Expansionary fiscal policy. Example (B): Contractionary fiscal policy. B.) Example (A): Contractionary fiscal policy. Example (B): Contractionary fiscal policy. C.) Example (A): Expansionary fiscal policy. Example (B): Expansionary fiscal policy D.) Example (A): Contractionary fiscal policy. Example (B): Expansionary fiscal policy.

A.) Example (A): Expansionary fiscal policy. Example (B): Contractionary fiscal policy.

The graph to the right shows a situation in which the economy was in equilibrium at potential GDP (at point A) when the demand for housing sharply declined. What actions can Congress and the president take to move the economy back to potential GDP? A.) Increase government spending or decrease taxes. B.) Increase the money supply. C.) Decrease government spending or increase taxes. D.) Both A and B.

A.) Increase government spending or decrease taxes.

Suppose that initially, the economy is in long-run macroeconomic equilibrium at point A. If there is increased pessimism about the future of the economy, the AD curve will shift from ___________. The new short-run macroeconomic equilibrium occurs at _______. Long-run adjustment will shift the SRAS curve from ______________ as workers adjust to lower-than-expected prices. The new long-run macroeconomic equilibrium occurs at ______.

AD0 to AD1; point B; SRAS0 to SRAS1; point C

Refer to the diagram to the right. Suppose the economy is in a recession and the Fed pursues an expansionary monetary policy. Using the static AD-AS model, this would be depicted as a movement from A.) A to E. B.) A to B. C.) C to D. D.) C to B. E.) B to C.

B.) A to B.

Suppose you have $2000 in currency in a shoebox in your closet. One day, you decide to deposit the money in a checking account. How will this action affect the M1 and M2 definitions of the money supply? A.) M1 will increase and M2 will decrease. B.) Both M1 and M2 will remain unchanged. C.) M1 will decrease and M2 will increase. D.) Both M1 and M2 will increase by $2,000.

B.) Both M1 and M2 will remain unchanged.

Which of the following is not a correct statement about M2? A.) M2 includes savings accounts, small-denomination time deposits, and money market mutual funds. B.) M2 is the best definition of money as a medium of exchange. C.) M2 includes all of the assets in M1. D.) M2 is a broader definition of money compared to M1 and currency. If you move $100 from your savings account to your checking account, then M1 will ______________ and M2 will _____________.

B.) M2 is the best definition of money as a medium of exchange. increase by $100; remain the same

The process of an economy adjusting from a recession back to potential GDP in the long run without any government intervention is known as A.) fiscal policy. B.) an automatic mechanism. C.) "releasing sticky prices." D.) monetary policy.

B.) an automatic mechanism

Stagflation occurs when A.) inflation falls and GDP falls. B.) inflation rises and GDP falls. C.) inflation falls and GDP rises. D.) inflation rises and GDP rises

B.) inflation rises and GDP falls.

Which one of the following is not a function of money? A.) Store of value. B.) Medium of exchange. C.) Open market operation. D.) Unit of account. If something is to be considered as money, it has to fulfill ________________________.

C.) Open market operation all four functions

Silver is an example of a A.) representative money. B.) fiat money. C.) commodity money. D.) barter money.

C.) commodity money.

Which of the following functions of money would be violated if inflation were high? A.) medium of exchange B.) unit of account C.) store of value D.) certificate of gold

C.) store of value

Suppose there has been an increase in investment. As a result, real GDP will ________ in short run, and ________ in the long run. A.) increase; increase further B.) decrease; decrease further C.) decrease; increase to its initial level D.) increase; decrease to its initial value

D.) increase; decrease to its initial value

According to the quantity theory of money, if velocity does not change, when the money supply of a country increases, what will occur? A.) the price level will decrease B.) the nominal interest rate will decrease C.) the discount rate will increase D.) nominal GDP will increase

D.) nominal GDP will increase

A decrease in aggregate demand causes a decrease in _______ only in the short run, but causes a decrease in __________ in both the short run and the long run. A.) the price level; the price level B.) real GDP; real GDP C.) the price level; real GDP D.) real GDP; the price level

D.) real GDP; the price level

Consider the figures below and determine which is the best description of what causes the shift from AD1 to AD2. Example A AD2--->AD1 Example B AD1--->AD2 A.) Example A shows a contractionary monetary policy. The price level and real GDP both fall. B.) Example B shows an expansionary monetary policy. The price level and real GDP both rise. C.) Example A shows an expansionary monetary policy. The price level rises and real GDP falls. D.) Both examples show expansionary monetary policy. The price level and real GDP both rise. E.) Both A and B.

E.) Both A and B

Refer to the diagram to the right. Suppose the economy is in short run equilibrium above potential GDP, the unemployment rate is very low, and wages and prices are rising. Using the static AD-AS model, the correct Fed policy for this situation would be depicted as a movement from A.) C to D. B.) A to B. C.) A to E. D.) B to C. E.) C to B.

E.) C to B.

Using the following information what is the velocity of money? Money supply $1,500 Price level 1.21 Real GDP $10,000 The velocity of money is equal to: ____.

M*V=P*Y V=(P*Y)/M V=(1.21*10000)/1500 V=8.07

Suppose the government increases expenditures by $10 billion and the marginal propensity to consume is 0.50. By how will equilibrium GDP change? The change in equilibrium GDP is: $ __ billon.

Multiplier= 1/(1-MPC) Multiplier= 1/(1-.5) GDP= change in government expenditure*multiplier GDP = 10*2 GDP=20

Consider the following simplified balance sheet for a bank: Assets: Reserves $10,000 Loans $66,000 Liabilities: Deposits $70,000 Stockholders' equity $6,000 (a) If the required reserve ratio (RR) is 10 percent, this bank currently holds _____ in excess reserves. (b) The maximum amount by which the bank can expand its loans is _____. (c) Assets: Reserves ________ Loans ________ Liabilities: Deposits ________ Stockholders' equity ________

RR= rr*D RR=.10*$70,000 RR=$7,000 ER= R-RR ER=$10,000-$7,000 ER= $3,000 (a) $3,000 (b) $3,000 (c) Assets: Reserves $10,000 Loans $69,000 Liabilities: Deposits $73,000 Stockholders' equity $6,000

Suppose the Deja owns a McDonald's franchise. She decides to move her restaurant's checking account to Wells Fargo, which causes the changes show on the following T-account. Wells Fargo Assets Reserves +$100,000 Liabilities Deposits $100,000 If the required reserve ratio is 0.20, or 20 percent, and Wells Fargo currently has no excess reserves, the maximum loan Wells Fargo can make as result of this transaction is $____.

RR= rr*D RR=.20*$100,000 RR=$20,000 ER= R-RR ER=$100,000-$20,000 ER= $80,000

Suppose you deposit $2,100 cash into your checking account. By how much will checking deposits in the banking system increase as a result when the required reserve ratio is 0.50? The change in checking deposits is equal to: $____

deposit * 1/rr 2,100*(1/.5)

If the reserve requirement ratio (rr) is 0.20, what does the FED have to do to *increase* the money supply in the economy by $200 million? A.) sell $40 million in government bonds. B.) buy $40 million in government bonds. C.) buy $200 million in government bonds. D.) sell $200 million in government bonds.

∆M=m*∆R ∆M=200 m=1\rr = 1/.20 = 5 200/5=∆R ∆R=40 B.) buy $40 million in government bonds.

Suppose the reserve requirement ratio (rr) is 0.05. What happens to the money supply, if the FED *sells* $10 billion worth of government bonds? A.) money supply goes down by $20 billion. B.) money supply goes down by $10 billion. C.) money supply goes down by $200 billion. D.) money supply goes up by $10 billion.

∆M=m*∆R ∆R=10 m=1/rr = 1/.05 = 20 ∆M=20*10 ∆M=200 C.) money supply goes down by $200 billion.