Wingender Macro Final

non price determinants of the aggregate supply (5)

-changes in the size of the labor force/capital stock -technological advances -future price expectations -changes in natural resource prices -business taxes/subsidies

what three facts make the aggregate demand and aggregate supply model dynamic?

-potential real GDP increases continually, shifting the long run aggregate supply curve to the right -during most years, aggregate demand shifts to the right -except during periods when workers and firms expect high rates of inflation, aggregate supply curve shifts to the right

which of the following functions of money would be violated if inflation where high? -unit of account -certificate of gold -store of value -medium of exchange

-store of value

How many federal banks are there?

12

in expansionary fiscal policy, T _______

Decreases

T/F : expansionary fiscal policy involves increasing government purchases and increasing taxes

F

government cutting taxes to stimulate economy would be an example of _______ policy

Fiscal

fiscal policy involves

G and T

if aggregate demand just increased, which of the following may have caused the increase? : an increase in ______

G or T

government purchases will ______ aggregate demand

Increase

in contractionary fiscal policy, T _______

Increases

monetary policy involves two things

M and I

quantity equation (definition and equation)

M x V = P x Y relates money supply to the price level M- money supply, V- velocity of money, P-price level, Y-real output

T/F: an appropriate fiscal policy response when aggregate demand is growing at a slower rate than aggregate supply is to cut taxes

T

a decrease in disposable income will shift the AD curve to the left (T/F)

T

required reserve ratio

The minimum fraction of deposits banks are required by law to keep as reserves

What happens to the equilibrium when we encounter: recession, expansion, or supply shocks?

We make 2 assumptions: 1. there is no inflation and none is expected 2. there is no long term growth

Interest rates in the economy have fallen: aggregate demand will ____, equilibrium price will _____, and the equilibrium level of GDP will ___

__rise, rise, rise

M2

a broader definiton of money supply: M1 + non-checking savings accounts, CD's, + money market mutual supply

Fed as a lender of last resort

a central bank (Fed) can stop a bank panic by making loans to banks that cannot borrow funds elsewhere

stagflation

a combination of inflation and stagnation, usually resulting from supply shock

why is the aggregate demand curve downward sloping?

a decline in the price level increases the quantity of real GDP demanded (consumption, investment, and net exports increase)

security

a financial asset (such as a stock/bond) that can be bought or sold in a financial market

Phillips curve

a graph showing the short run relationship between unemployment rate and inflation rate

bank panic

a situation in which many banks experience runs at the same time

if firms become more optimistic about the future profitability of investment spending, ______ will shift to the right.

aggregate demand curve

supply shock

an unexpected event that causes the short-run aggregate supply curve to shift

the increase in government spending on unemployment insurance payments to workers who lose their jobs during a recession and the decrease in government spending on unemployment insurance payments to workers during an expansion is an example of

automatic stabilizers

tax cuts on business income increase aggregate demand by increasing

business investment spending

The change in checking accounts deposits

change in reserves x 1/RR

fiscal policy

changes in federal taxes and purchases that are intended to achieve macroeconomic policy goals

what are the three categories that cause the aggregate demand curve to shift?

changes in government policies, changes in the expectations of households and firms, changes in foreign variables

discretionary fiscal policy

changes in government spending and taxes that are the option of the federal government

who controls fiscal policy?

congress and the president

what are the four non-price determinants of aggregate demand?

consumption (C) consumer spending investment (I), government purchases (G), and net exports (NX)

securitization

creating a secondary market in which loans that have been bundled together can be bought and sold in financial markets (just as corporate or government bonds are)

When banks lose reserves, loans _______ and the money supply _______

decrease, decreases

contractory monetary policy on the part of the Fed results in an _______ in the money supply, a ________ in interest rates, and a _______ in GDP

decrease, increase, decrease

in contractionary fiscal policy, G _______

decreases

usually the biggest liabilities banks have

deposits

reserves

deposits the bank has retained rather than loaned out or invested

government debt

every time the federal government runs a budget deficit, the treasury must borrow funds from investors by selling Treasury securities

countercyclical policy - during a recession, use _________ fiscal policy

expansionary

increasing government purchases and cutting taxes are examples of (contractionary/expansionary) policy.

expansionary

if the economy is falling below potential real GDP, which of the following would be an appropriate fiscal policy to bring back long-run aggregate supply? an INCREASE in

government purchases

automatic stabilizers

government spending and taxes that automatically increase or decrease along with the business cycle

an objective of fiscal policy

high rates of economic growth

a decrease in the price level in the aggregate demand curve leads to a ________ level of real GDP demanded

higher

why is the long run aggregate supply curve vertical?

in the long run, real GDP is always at its potential level and is unaffected by price level

deflation will _______ the quantity of GDP demanded

increase

When banks gain reserves, loans _______ and the money supply _______

increase, increases

in expansionary fiscal policy, G ______

increases

largest source of fed gov revenue include

individual income taxes, followed by social insurance taxes

contractionary fiscal policy

involves decreasing G or increasing T and shifts AD to the left. The goal of this is to reduce increases in AD that seem likely to lead to inflation

expansionary fiscal policy

involves increasing G or decreasing T and shifts AD to the right. The goal of this is to increase AD relative to what it would have been without the policy

Contractionary monetary policy

is when a central bank uses its monetary policy tools to fight inflation.

tax increases necessary to fund future Social Security and Medicare benefit payments would be....

large, slowing economic growth

transfer payments

largest and fastest growing category of federal government expenditures

in contractionary fiscal policy, AD shifts to the _______

left

raising interest rates causes the aggregate demand curve to shift to the _______.

left

if workers and firms both expect that prices will be 2.5% higher next year, the short-run aggregate supply curve will shift to the _____ and wages will ____

left, increase

usually the the biggest assets banks have

loans

discount loans

loans the Federal Reserve makes to banks

open market operations

mainly consist of buying and selling treasury securities

what is money?

medium of exchange, unit of account, store of value

when the government takes action in the economic world, it is through _____ policy.

monetary, fiscal

M1

narrow definition of money supply: the sum of currency in circulation, checking account deposits in banks, and holdings of traveler's checks

the main tool the Fed uses to conduct monetary policy

open market operations

monetary policy - the three tools the Fed uses to implement monetary policy

open market operations, discount policy, reserve requirements

the short run aggregate supply curve has a ________ slope because as prices of _________ rise, prices of _________ rise more slowly

positive, final goods and services, inputs

the level of aggregate supply in the long run is not affected by changes in _______ ________

price level

potential GDP refers to the level of

real GDP in the long run

excess reserves

reserves greater than the required amounts

required reserves

reserves that a bank is legally required to hold, based on its checking account deposits

three major assets on a banks balance sheet

reserves, loans, and holdings of securities

if households are optimistic about the future, aggregate demand curve will shift to the ____. right

right

if net exports fall, aggregate demand curve will shift to the _______.

right

in expansionary fiscal policy, AD shifts to the _______

right

lowering interest rates causes the aggregate demand curve to shift to the _______.

right

which way would a long period of technological innovation (like cotton gin, industrial revolution) shift the short-run aggregate supply curve?

right

a technological advance would cause a short-run aggregate supply curve shift to the _______

right _______

what does the aggregate demand and aggregate supply model explain?

short-run fluctuations in real GDP and price level

when the aggregate demand curve and the short-run aggregate supply curve intersect, the economy is in a...

short-run macroeconomic equilibrium

Aggregate demand

shows the amount of real output that buyers collectively desire to purchase at each possible price level. Inverse relationship between price level and amount of GDP demanded (AD)

aggregate demand curve

shows the relationship between the price level and the quantity of real GDP demanded

1/Reserve Ratio

simple deposit multiplier

government transfer payments include

social security and medicare

Federal Open Market Committee

the 12 member group that determines the purchase and sale policies of the Federal Reserve Banks in the market for U.S. government securities . meets in D.C. eight times per year to discuss monetary policy

federal reserve system

the US central bank, consisting of Board of Governors of the Federal Reserve and the 12 Federal Banks, which controls the activity of the nation's banks and thrifts and thus the money supply commonly referred to as the Fed

monetary policy

the actions the federal reserve takes to manage money supply and interest rates to achieve macroeconomic policy goals

what happens to the economy on the aggregate demand and supply model if any other variable than the price level changes?

the aggregate demand curve will shift

velocity of money

the average number of times each dollar in the money supply is spent during the year

what happens to the economy on the aggregate demand and supply model if the price level changes (and all other determinants stay the same)?

the economy will move up or down a stationary aggregate demand curve

Discount rate

the interest rates the Federal Reserve charges on discount loans

the use of fiscal policy to stabilize the economy is limited because

the legislative process is slow

simple deposit multiplier

the ratio of the amount of deposits created by banks to the amount of new reserves

bank reserves include

vault cash and deposits with the federal reserve

fractional reserve banking system

when a bank keeps less than 100 percent of deposits as reserves

bank run

when many depositors decide to withdraw simultaneously from a bank

why does the short run aggregate supply curve slope upward?

workers and firms fail to predict accurately the future price level (contracts make wages/prices "sticky", businesses often adjust wages slowly, menu costs sometimes make prices "sticky")