Ch. 11-16
The equation of exchange
*All of the above.*
Which of the following statements is true concerning a fractional reserve banking system?
Banks maintain a fraction of deposits on hand to meet the daily needs of their customers.
Which of the following is an example of the precautionary demand for money?
Carla keeps 2k in a bank account in case of emergencies.
In the Modern Keynesian Model the short run aggregate supply curve slopes upward. How could one explain the shape of the upward sloping short-run aggregate supply curve by only focusing on the capital input?
Existing machinery can be used longer hours.
Which of the following is not a duty of the a central bank?
Guarantee the savings of its citizens.
Which of the functions of the Federal Reserve is appropriately matched with its correct institution?
Holds reserve balances for depository institutions; The Federal Reserve Bank.
Which of the following is a major reason why financial intermediaries, such as banks, exist
The existence of asymmetric information makes financial intermediaries more efficient in channelling money to its most efficient use.
Which of the following is a major reason why financial intermediaries, such as banks, exist?
The existence of asymmetric information makes financial intermediaries more efficient in channelling money to its most efficient use.
The reserve requirement is 10%. Suppose that the Fed sells $50,000 worth of U.S. government securities from a bond dealer, electronically debiting the dealer's deposit account at Reliable Bank. Which of the following correctly describes the immediate effect of this transaction on the money supply?
The money supply decreases by $50,000.
Which of the following is the definition of the public debt?
The total value of all outstanding government securities.
(T/F) The level of employment in an economy determines its real GDP.
True
The net public debt has continually risen since the year 2000.
True
In modern Keynesian analysis, a decrease in aggregate demand will result in
a decrease in both the price level and output.
The demand for money curve shows the relationship between the interest rate and the quantity of money demanded, and is
downward sloping.
Fiscal policy is likely to be least effective
during normal economic times.
The bond market is depicted in the graph to the right. a. The bond demand curve is downward sloping because
lower bond prices translate into higher interest rates and returns.
In an open economy, the net export effect
may offset an expansionary fiscal policy but enhance an expansionary monetary policy.
If the prices were sticky, according to Keynes, this would then imply that the
short-run aggregate supply is horizontal.
The modern Keynesian Model assumes that
that prices respond to changes in aggregate demand but not fully.
An increase in the money supply will
*all of the above*
Ancient goldsmiths are credited with
*all of the above*
Excess reserves
*all of the above*
Since the financial meltdown of the late 2000s, the Fed has launched a credit policy which consists of
*all of the above*
The Federal Deposit Insurance Corporation (FDIC)
*all of the above*
The Fed's credit policy since 2008 has
*all of the above*
Suppose that each 0.1 percentage point decrease in the equilibrium interest rate induces a $10 billion increase in real planned investment spending by businesses. In addition, the autonomous spending multiplier is 5 and the money multiplier is equal to 2. Furthermore, every $20 billion increase in the money supply brings about a 0.1 percentage point reduction in the equilibrium interest rate. How much must real planned investment increase if the Fed desires to bring about a $200 billion increase in real GDP?
40 billion.
As a result of monetary policy of the Fed, the dollar appreciated and the amount of exports decreased. Which of the following Fed policies could have caused this outcome?
A Fed sale of bonds to brokers and banks.
You are a member of Congress. The economy is currently experiencing an inflationary gap. Which of the following are fiscal policies that Congress can enact in an attempt to correct the economy?
A decrease in government spending and an increase in taxes.
Demand-pull inflation arises due to Which of the following would create demand-pull inflation?
A decrease in the real rate of interest An increase in household income.
What type of relationship exists between the growth of the money supply and changes in the inflation rate?
A direct relationship.
Which of the following will occur when aggregate supply remains stable but aggregate demand falls in the short run?
A recessionary gap is created.
Which of the following does not describe some of the functions of the Federal Reserve Bank?
Acts as a medium of exchange, a unit of accounting, a store of value and a standard of deferred payment.
An economy is currently in a long run equilibrium where SRAS = LRAS = AD. Suppose that real rate of interest decreases, which of the following is the best explanation of the outcome?
Aggregate demand increases.
An example of a fiduciary monetary system is
American one-dollar bills.
Which of the following is the definition of the government budget deficit?
An excess of government spending over revenues during a given period of time.
Suppose that Congress enacts a significant tax cut with the expectation that this action will stimulate aggregate demand and push up real GDP in the short run. In fact, however, neither real GDP nor the price level changes significantly as a result of the tax cut. This outcome can be explained by all of the following, except one. Which one of the following is the exception?
Automatic stabilizers.
Which of the following is a true statement?
Both the direct and the indirect effects of an expansionary monetary policy are to increase aggregate demand.
Say's Law fits best in the ____ since this philosophy placed great importance on ____ to determine the ____.
Classical Theory aggregate supply level of output
What are the features of federal deposit insurance?
Depository institutions' premiums are based on the value of their deposits with the funds being held for use in the case of a failed bank so that depositors can be reimbursed.
(T/F) A stonger dollar contributes to inflation.
False
According to the Keynesian approach, a decrease in the money supply increases real GDP by lowering interest rates, which increases investment.
False
In the United States, the dollar volume of payments using checks exceeds the volume using debit cards.
False
Since 2001, the average annual government budget deficit has exceeded 10 percent of GDP.
False
Consider a country whose economic structure matches the assumptions of the classical model. After reading a recent best-seller documenting a growing population of high−income elderly people who were over−prepared for retirement, most residents of this country decide to decrease their saving at any given interest rate. From the list given below choose the letter that gives the resulting outcome for each of the following variables: The current equilibrium interest rate. Current equilibrium real GDP. Current equilibrium employment. Current equilibrium investment. Future equilibrium real GDP.
I N N D D
Consider a bank balance sheet, with "Assets" on the left and "Liabilities" on the right side. Identify where the following items belong. I. U.S. Treasury bonds. II. Small−denomination time deposits.
I: assets; II: liabilities.
Which of the following best describes the linkage between money and prices?
Increases in the money supply are directly related to increases in prices in the long run.
Which of the following is a possible explanation for sticky prices?
Labor contracts cause wages to be fixed over the contract period.
Jennifer has $1,000 in her checking account. Is this counted in M1 only, M2 only, M1 and M2, or neither?
M1 and M2.
The liquidity approach to measuring money defines the M2 money supply as
M1 plus near monies
Elisabeth gets a new credit card with a $5,000 credit limit. Is this counted in M1 only, M2 only, M1 and M2, or neither?
Neither M1 nor M2.
Which of the following is not one of the four major assumptions of the classical model?
People suffer from money illusion.
The reserve requirement is 10%. Suppose that Ginie deposits $20,000 in cash in a checking account at First Bank. Which of the following best describes the initial effect on First Bank's balance sheet?
Reserves increase by $20,000 and transactions deposits increase by $20,000.
Which of the following is not a function of the Federal Reserve System?
Taking deposits of small lenders to pool savings and make loans.
Which of the following is a reason for this resurgence in federal government budget deficits?
Tax revenue not keeping pace with growth in spending.
Which of the following events would be likely to increase the supply of money?
The Fed decreases the discount rate relative to the federal funds rate.
Which of the following statements is true when considering the expenditures of the U.S. federal government?
The expenditures are used for all these purposes.
Suppose that the Fed pursues a contractionary monetary policy. Which of the following statements best explains the transmission mechanism in an open economy?
The increase in interest rates will cause capital inflow, increasing the value of the dollar and decreasing net exports.
Which of the following statements is true when considering liquidity?
The most liquid assets typically earn no or little interest.
What is the basic structure of the Federal Reserve Bank?
There are 12 district banks, a Board of Governors and a Federal Open Market Committee
Which of the following statements is incorrect?
There are a total of 25 Federal Reserve district banks.
Which of the following is not an expense incurred by the Federal Reserve?
The Fed's interest receipts on securities and other interest-bearing holdings.
Individuals purchasing new bonds issued by a corporation is an example of direct finance for the corporation.
True
Liabilities refer to amounts owed, and assets refer to amounts owned. The possibility that a borrower might engage in riskier behavior after a loan has been obtained is known as
True moral hazard.
Which of the following statements is true when considering national banking structures around the world?
U.S. businesses only obtain approximately 30% of their funds from bank loans compared to 65% for European firms.
Suppose that the value of the US dollar ($) yesterday was $1 = 4 yen. Today the exchange rate changed such that $1 = 3 yen. One can say that the A depreciation of the U.S. dollar should result in
US $ depreciated. a higher price level but the impact on the level of real GDP depends on the magnitude of the shifts in the aggregate demand and short-run aggregate supply curves.
The federal government has its best opportunity to lower its national debt when it has
a budget surplus.
The indirect effect of an increase in the money supply works through
a decrease in the interest rate increasing investment and consumption.
According to Say's law, surpluses in the market will lead to
a decrease in the price level.
Refer to the economy shown in the graph to the right. Suppose that there is an increase in wages. The short-run effect of this change on the economy is
a leftward shift of the SRAS curve, and cost-push inflation.
Suppose that the economy is currently operating at full employment as depicted in the graph to the right. Using the line drawing tool, show the effect on the economy if it were to run a federal budget surplus due to contractionary fiscal policy. Properly label this line. Carefully follow the instructions above, and only draw the required objects. Thus, in the short-run the economy will experience
a recessionary gap.
When a temporarily illiquid bank which is otherwise in good financial condition borrows money from the Fed in an attempt to prevent a loss of confidence in the bank or in other banks, this is an example of the Fed
acting as the lender of last resort.
When an economist is using the term "discretionary" as in discretionary spending, they are referring to the
amount of government spending decided upon by Congress or the government's ruling body
In the Classical Model, an increase in aggregate demand will result in
an increase in the price level and no change in output.
According to Say's law, shortages in the market will lead to
an increase in the price level.
When there is ________ gap, the government would increase taxes in an attempt to shift the aggregate demand curve to the ________.
an inflationary; left
The classical model assumes that wages and prices
are always completely flexible.
During the late 1970s, prices quoted in terms of the Israeli currency, the shekel, rose so fast that grocery stores listed their prices in terms of the U.S. dollar and provided customers with dollar-shekel conversion tables that they updated daily. Although people continued to buy goods and services and make loans using shekels, many Israeli citizens converted shekels to dollars to avoid a reduction in their wealth due to inflation. Thus, the U.S. dollar functioned as money in Israel during this period
as a store of value
Since 1970 the U.S. government's budget deficit as a percentage of real GDP has
averaged approximately 3%.
When there is ________ gap, the government would increase spending in an attempt to shift the aggregate demand curve to the ________.
a recessionary; right
Suppose that there is a temporary, but significant increase in oil prices in an economy with an upward-sloping SRAS curve. As a policy response to this short-lived but sudden increase in oil prices, a central bank
cannot stabilize both the price level and the real GDP simultaneously.
The financial intermediary with liabilities of shares and checkable deposits and assets that include consumer debt and long term mortgage loans is a
credit union
Cost-push inflation is caused by persistent
decreases in short-run aggregate supply.
To use money, people must hold money. Therefore, they have a ___ for money balances.
demand
With stable aggregate supply, an abrupt outward shift in AD may lead to what is called ____ inflation. With stable aggregate demand, an abrupt shift inward in SRAS may lead to what is called ____ inflation. A ____ dollar will reduce the cost of imported inputs, thereby causing SRAS to shift outward to the right. At the same time, a _____dollar will lead to lower net exports, causing the aggregate demand curve to shift inward. The equilibrium price level definitely falls, but the net effect on equilibrium real GDP depends on which shift is larger.
demand-pull cost-push stronger / stronger
Fiscal policy refers to
discretionary changes in government spending and taxes.
In early 2008, it appeared that the U.S. economy was either in a recession or growing very slowly. President Bush announced a program of tax rebates. This program can be described as ___________ and was intended to ______________.
discretionary fiscal policy; increase consumer spending
Describe the basic shape that a figure of the multiple expansion in the money supply due to $100,000 in new reserves when the reserve ratio is 10 percent would take if the Fed had instead generated a multiple contraction in the money supply by removing $100,000 in reserves from the banking system via an open market sale. Click the icon to view the relevant figure. If the Fed had instead generated a multiple contraction in the money supply by removing $100,000 in reserves from the banking system via an open market sale, then
every number in the figure would have a *negative* value of the same absolute amount currently displayed and the basic shape of the figure would be a *vertical* mirror image of the existing figure, with all amounts appearing below the horizontal axis.
By most measures, the aggregate indebtedness of all national governments currently exceeds 60 percent of global GDP. In what way could this unusually large government debt create a "burden" for future generations? If the accumulation of additional global debt crowds out investment, the stock of capital goods will ________. The result for future generations would be ________ rates of global economic growth
fall; reduced
One of the advantages of fiscal policy is that it
generates a psyche of safety for consumers and investors because they know the government has the ability to use it.
The net public debt is equal to
gross government debt minus all government interagency borrowing.
The accumulation of borrowing by all federal government agencies is referred to as the
gross public debt
The Ricardian equivalence theorem proposes that an increase in the government budget deficit ________ aggregate demand.
has no effect on
In the long run, increased government budget deficits
have no effect on equilibrium real GDP
Entitlements
include payments for Medicare and other health programs such as medicaid
Suppose that an particular economy has a real GDP of 10.0 trillion in 2004. It grows to 10.2 trillion in 2005. Meanwhile, the national debt was 5.0 trillion in 2004. In 2005 the federal government ran a budget deficit of 1.5 trillion, which was totally financed by borrowing. Given this set of circumstances the national debt as a percentage of real GDP has
increased.
Contractionary monetary policy causes the
interest rate to increase.
Traditional Keynesian analysis suggests that *increases* in the money supply shift the aggregate demand curve through increasing
investment
Traditional Keynesian analysis suggests that *decreases* in the money supply shift the aggregate demand curve by decreasing
investment.
The demand for money
is a downward sloping function of the interest rate.
Keynesians believe that monetary policy applied during recessions
is ineffective since changes in the money supply have little impact on the interest rate.
Net public debt
is net public debt *minus* the portion that is held by government agencies.
During normal economic times, when there is not "excessive" unemployment or inflation, discretionary fiscal policy
is probably not very effective due to lags and the uncertainty created by repeated tax policy changes
The model of long-run equilibrium
is the same as the Classical Model.
Scott is seeking a loan from his bank for a home improvement project. He receives the loan and then decides to take a special vacation opportunity to Las Vegas and enter a gambling tournament. The bank, as a financial intermediary, is facing a problem of
moral hazard.
The lower the rate of interest, the ________ profitable it is to invest and the ________ the level of desired investment.
more higher
What have government and private economists estimated the net effects of recent U.S. discretionary fiscal policy actions to be on aggregate demand? For the years 2009-2014, the estimated net effects of U.S. discretionary fiscal policies on aggregate demand are _______. In the years since 2014, the overall estimated net effects on aggregate demand are ________.
negative; positive
$50 billion in U.S. Treasury bills is counted in
neither M1 nor M2.
In long-run macroeconomic equilibrium, after the economy has fully adjusted to changes in all factors, the effect of an increased government budget deficit resulting from higher government spending or lower taxes is
no change in equilibrium real GDP, and a redistribution of real GDP from private spending to public spending.
Suppose that the Fed judges inflation to be the most significant problem in the economy and that it wishes to employ all three of its policy instruments, then the Fed will engage in
open market sales, increasing the reserve requirement, and increasing the discount rate
A currency will cease to function as money if
people think that they will not be able to use it to exchange for goods and services later.
An important difference between the Classical Model and the Keynesian Model is that
prices adjust to bring about equilibrium in the Classical Model and output adjusts to bring about an equilibrium in the Keynesian Model.
Which of the following government expenditures is least likely to result in a direct expenditure offset?
purchasing military aircraft
There are several time lags involved when fiscal policy is applied. The first hurdle faced by a government is
recognizing that the economy is facing a problem that could be solved by applying fiscal policy.
Since the nominal wage is deemed inflexible, a decrease in aggregate demand causes firms to
reduce their workforce.
On a bank's balance sheet, ________ are assets and ________ are liabilities.
reserves and loans; transactions deposits
Expansion of the money supply during a recession, according to the Keynesians, will
result in virtually no change in investment and aggregate demand.
A balanced-budget increase in government real spending (G) causes total spending to
rise by the exact amount of the rise in G
Since the 1940s, more often than not, the U.S. federal government has
run a budget deficit.
Since 2001, more often than not, the U.S. federal government has
run a budget deficit.
The M1 measurement of the money supply includes all of the following components except The M2 measurement of the money supply includes all of M1 plus several other highly liquid assets. Which of the following is not one of those assets which is included in M2?
savings deposits. credit card balances
Changes in factors of production that influence economic growth will
shift SRAS and LRAS.
A short-lived change in production input prices will
shift SRAS but not LRAS.
Suppose that the value of the US dollar ($) yesterday was $1 = 4 euros. Today the exchange rate changed such that $1 = 8 euros. Given that the US $ has appreciated, the aggregate demand in the United States should Given that the US $ has appreciated, the short-run aggregate supply in the United States should
shift to the left. shift to the right.
_____ -run equilibrium occurs at the intersection of the aggregate demand curve, AD, and the short-run aggregate supply curve, SRAS. _____-run equilibrium occurs at the intersection of AD and the long-run aggregate supply curve, LRAS. Any unanticipated shifts in aggregate demand or supply are called aggregate demand or aggregate supply ____.
short / long shocks
The federal budget deficit is the year-to-year
short fall in tax revenues relative to government spending. The federal government debt is the accumulation of all past *deficits*
The Keynesian Model of the macroeconomy argues that prices are sticky due to labor contracts and unions. The existence of sticky prices causes the _______ to be horizontal.
short-run aggregate supply
The assumption that the price level is fixed allows an increase in government spending to
show up exclusively as a rise in real GDP.
When money is used as a means of settling debts maturing in the future, it is serving as a
standard of deferred payment.
When money is set aside to be used for future purchases, it is serving as a
store of value.
Say's law states that ____ creates its own ____ and therefore desired expenditures will equal actual expenditures.
supply demand
Say's law asserts that
supply creates its own demand.
To eliminate the deficit (and halt the growth of the net public debt), a politician suggests that "we should tax the rich." The politician makes a simple arithmetic calculation in which he applies the higher tax rate to the total income reported by "the rich" in a previous year. He says that this is how much the government could receive from increasing taxes on "the rich." This argument has been proved wrong because of all the following statements, except
that taxing "the rich," since they have higher earnings, is the answer to solving the problem of a growing deficit.
Another year and a half elapses following passage of the government spending boost. The government has undertaken no additional policy actions, nor have there been any other events of significance. Nevertheless, by the end of the second year, real GDP has returned to its original level, and the price level has increased sharply. This possibly happened because
the LRAS was vertical; the increase in government spending raised aggregate demand and resulted in only a rise in the price level in the long run.
Due to the Gramm-Leach-Bliley Act of 1999
the US government allowed commercial banks to own stock and sell insurance policies.
Contractionary monetary policy by the Fed can be hampered by
the ability of U.S. citizens and businesses to obtain dollars from foreign sources.
Inflation in an economy implies that Cost-push inflation arises due to Which of the following would create cost-push inflation?
the average price level has increased over a stated period of time. a decrease in the short-run aggregate supply curve. An increase in wages paid to workers.
When considering the gross public debt, one can argue that it is overstated because
the federal government owes itself money.
According to the classical economists,
the interest rate will ensure that the amount households plan to save will equal the amount businesses desire to invest.
The assumption that the price level is fixed in the Keynesian model allows
the multiplier to be fully applied.
An increase in government spending shows up exclusively as a change in real GDP when
the price level is assumed to be constant.
According to classical economists, aggregate demand primarily determines
the price level.
The long-run aggregate supply curve will not shift if there is a change in All of the following will shift the short-run aggregate supply and the long-run aggregate supply except for
the price level. a temporary change in input prices.
The total value of all outstanding federal government securities is
the public debt.
During normal times, fiscal policy probably achieves most of its impact through
the workings of automatic stabilizers.
The bond market is depicted in the graph to the right. a. The supply curve of bonds is drawn vertically because
the Fed's decision to buy or sell bonds is independent of bond prices.
The long-run effect of higher government budget deficits on the equilibrium annual flow of real GDP is zero. Who, therefore, benefits in the long run from higher government deficits? Those who benefit in the long run from higher budget deficits are
those who receive the larger share of the annual flow of real GDP to government-provided goods and services—that is, those to whom these goods and services are redistributed.
Holding money as a medium of exchange to make payments is known as
transactions demand.
When money is used as a standard of value that allows people to compare the relative worth of various goods and services, it is serving as a
unit of accounting.
Which of the following is an example of a flow variable?
wealth
If federal budget deficits increase, then a part of that deficit
will be financed by foreign dollar holders, who will buy fewer U.S. exports, thus increasing the U.S. trade deficit.
If the Fed decreases the discount rate, relative to the federal funds rate, then this
would decrease the cost of funds for institutions borrowing from the Fed
Suppose that the economy is depicted in the graph to the right. The equilibrium price level and real GDP in this economy are respectively
80; $10 trillion.
What did Keynes mean when he said that prices are sticky?
Prices, especially the price of labor, are inflexible downward.
By most measures, the aggregate indebtedness of all national governments currently exceeds 60 percent of global GDP. In what way could this unusually large government debt create a "burden" for future generations? If the accumulation of additional global debt crowds out investment, the stock of capital goods will ________. The result for future generations would be ________ rates of global economic growth.
fall; reduced
When the Fed makes an open market purchase, the supply curve for bonds in the private market shifts to the ________ and the price of bonds ________.
left; increases
As real GDP rises, tax revenues tend to ________ and government transfers tend to ________.
rise; fall
Which of the following assets is the most liquid?
A traveler's check.
With contractionary monetary policy, the net export effect results in a deprecaition of the dollar, where the international price of the dollar falls.
False
In what way might society gain if the Fed implements an anti-recessionary policy instead of simply permitting long-run adjustments to take place?
*All of the above.*
A credit card is not considered money because
*all of the above*
Money is the least liquid asset. The value of the U.S. dollar is based on
False the public's faith that the dollar can be exchanged for goods and services.
How could one explain the shape of the upward sloping short-run aggregate supply curve by only focusing on profits?
Firms are able to earn higher profits as long as the price level increases and the nominal wage rate remains constant.
If you live in Atlanta, Georgia, and you purchase a computer in Los Angeles, California, while there on vacation, which of the following paths would your check take before it finally clears?
The check goes from the computer store's bank to the Federal Reserve bank in San Francisco, then to the Federal Reserve bank in Atlanta, and then to your bank.
Suppose that the Fed pursues an expansionary monetary policy. Which of the following statements best explains the transmission mechanism in an open economy?
The decrease in interest rates will cause capital outflow, lowering the value of the dollar and increasing net exports.
Bad drivers may be more likely to purchase auto insurance than good drivers. This is an example of
adverse selection.
According to Keynes, when there is excess capacity in an economy, the equilibrium level of real GDP per year is determined by
aggregate demand.
The Ricardian equivalence theorem states that
an increase in the government budget deficit has no effect on aggregate demand.
In the previous decade, a stock-market upturn and rising home prices generated a significant increase in U.S. household wealth that induced most U.S. residents to boost their planned real spending at any given price level. From a short-run Keynesian perspective, the predicted effects of this event on the equilibrium U.S. price level and equilibrium U.S. real GDP were what? The spending gap caused by the increase in household wealth and spending in the last decade can best be described as
an increase in the price level along with an increase in equilibrium real GDP an inflationary gap.
Between early 2018 and late 2019, total planned expenditures by U.S. households substantially increased in response to changes in federal tax laws that resulted in a net tax reduction. From a short-run Keynesian perspective, the predicted effects of this event on the equilibrium U.S. price level and equilibrium U.S. real GDP were The resulting spending gap between early 2018 and late 2019 when total planned expenditures by U.S. households substantially increased in response to changes in federal tax laws that resulted in a net tax reduction can best be described as
an increase in the price level along with an increase in equilibrium real GDP. an inflationary gap.
Suppose that the rental rate of machinery decreased temporarily. The result of this would be best described by
an increase in theshort-run aggregate supply curve only
Suppose that the barrel price of petroleum decreased temporarily. The result of this would be best described by
an increase in theshort-run aggregate supply curve only.
Given that the economy is currently in a long run equilibrium where SRAS = LRAS = AD real rate of interest decreases the economy would then experience
an inflationary gap.
Entitlements
are often called noncontrollable expenditures.
Required reserves
are the minimum amount of legal reserves that a depository institution must have to back up its checkable deposits.
Open market operations
are the purchase and sale of existing U.S. government securities by the Federal Reserve.
During the 1945-1946 Hungarian hyperinflation, when the rate of inflation reached 41.9 quadrillion percent per month, the Hungarian government discovered that the real value of its tax receipts was falling dramatically. To keep real tax revenues more stable, it created a good called a "tax pengö", in which all bank deposits were denominated for purposes of taxation. Nevertheless, payments for goods and services were made only in terms of the regular Hungarian currency, whose value tended to fall rapidly even though the value of a tax pengö remained stable. Prices were also quoted only in terms of the regular currency. Lenders, however, began denominating loan payments in terms of tax pengös. The tax pengö functioned as money in Hungary in 1945 and 1946
as a standard of deferred payment.
During the 1945-1946 Hungarian hyperinflation, when the rate of inflation reached 41.9 quadrillion percent per month, the Hungarian government discovered that the real value of its tax receipts was falling dramatically. To keep real tax revenues more stable, it created a good called a "tax pengö", in which all bank deposits were denominated for purposes of taxation. Nevertheless, payments for goods and services were made only in terms of the regular Hungarian currency, whose value tended to fall rapidly even though the value of a tax pengö remained stable. Prices were also quoted only in terms of the regular currency. Lenders, however, began denominating loan payments in terms of tax pengös. The tax pengö functioned as money in Hungary in 1945 and 1946
as a store of value.
Gross public debt
is net public debt plus the portion that is held by government agencies.
Since the modern Keynesian Model allows for some price response, the aggregate supply curve
is upward sloping.
According to the equation of exchange, if velocity is constant and output is fixed at the full employment level, then any percentage increase in the money supply will
lead to an equal percentage increase in the price level.
Obviously financial intermediaries need to collect money from a variety of sources so they can redirect it where it can be used efficiently. The primary source of funds for a financial intermediary are known as its
liabilities.
Any change in factors influencing _____-run output, such as _______, capital, or _______, will shift both the SRAS curve and the LRAS curve. A temporary change in input prices will shift only the ____ curve.
long / labor / technology SRAS
When sellers accept money as payment in market transactions, money is serving as a
medium of exchange
When sellers accept money as payment in market transactions, money is serving as a
medium of exchange.
Which of the following will occur when aggregate supply remains stable but aggregate demand increases in the short run?
An inflationary gap is created.
The market price of existing bonds is directly related to the rate of interest.
False
The net interest cost of the public debt as a percentage of GDP has continually risen since 1940.
False
To eliminate the deficit (and halt the growth of the net public debt), a politician suggests that "we should tax the rich." Suppose the politician defines "the rich" as people with annual taxable incomes exceeding $1 million per year. Given "the rich" rarely earn a combined taxable income exceeding $1 trillion, yet the federal deficit has regularly exceeded $1 trillion in recent years, which of the following must be true?
*all of the above*
The extent to which real GDP responds to changes in the price level along the short-run aggregate supply curve is largely determined by
- the speed with which input prices adjust and people become more fully informed. - the ability of firms to use existing workers and capital more intensively. -the ability of firms to hire additional inputs, particularly workers. *ALL OF THE ABOVE!!!*
Suppose that in the figure to the right, the government determined that the amount by which the AD curve had to be shifted directly rightward from point E1 was equal to $1.09 trillion. If the government decided that a $0.39 trillion increase in real government spending was required to generate this shift, what must be the value of the MPC? The value of the MPC associated with this shift is
0.64
The potential money multiplier is equal to
1 divided by the reserve ratio.
The Keynesian Model was supported empirically by data from the decade of the
1930s
If the total money supply is $45 billion, real GDP is $60 billion, and the price level is 3, the income velocity of money is
4
Which of the following assets is the least liquid?
A house.
Suppose that the economy currently is in long-run equilibrium. Explain the short- and long-run adjustments that will take place in an aggregate demand-aggregate supply diagram if the Fed expands the quantity of money in circulation.
Aggregate demand curve shifts to the right; in the short-run both price level and real GDP increase. Over the long run the short-run aggregate supply curve shifts upward to the left and a new long-run equilibrium is reached at the initial equilibrium GDP but at a higher price level.
Suppose that an economy is currently in a long run equilibrium where SRAS = LRAS = AD. If real rate of interest increases, which of the following is the best description of the outcome in the economy? Suppose that an economy is currently in a long run equilibrium where SRAS = LRAS = AD. Given that real rate of interest increases, the new short run position of the economy finds itself in is termed
Aggregate demand decreases. a recessionary gap.
You are a member of Congress. The economy is currently experiencing a recessionary gap. Which of the following are fiscal policies that Congress can enact in an attempt to correct the economy?
An increase in government spending and a decrease in taxes.
When the money supply increases, interest rates also increase.
False
Imagine that the net public debt of a country's government was currently $6 trillion. The debt was entirely held or owned by the citizens of that country. In other words, there is no external debt. If the government were to pay off the entire $6 trillion of debt today by the use of taxes, which of the following statements is true?
Both are true
The economy is depicted in the graph to the right. Suppose, workers receive more training. Which of the following best describes the result of this event?
Both the short-run and long-run aggregate supply curves shift outward.
Which of the following is a reason why the public debt may impose a burden on future generations?
Future taxes may have to be increased to repay the debt.
Which of the following best describes the historical pattern of U.S. budget deficits since 1950?
In most years, the government has had a budget deficit.
The Modern Keynesian short-run aggregate supply curve is best described by which of the following statements?
It is very flat at low levels of real GDP; increases slightly as real GDP grows; and becomes very steep as real GDP surpasses full employment.
There are two major ways of measuring money, M1 and M2. Which statement is true about the measuring of M1 and M2?
M1 is measured by the transactions approach which stresses the role of money as a medium of exchange while M2 is measured by the liquidity approach which stresses the role of money as a temporary store of value.
Stefanie sells some stock and puts the profits into a money market deposit account in a Washington bank. Is this counted in M1 only, M2 only, M1 and M2, or neither?
M2 only
Paul needs to decide between buying a new home gym for $1,800or being able to go on a Canadian vacation for $1,000 and still having enough left over to buy a new set of free weights for $800. Paul opts for the new set of free weights and the Canadian vacation. Paul has used money in what ways in making hisdecision?
Medium of exchange and a standard unit of account.
Which of the following is not a reason people choose to hold money balances?
Money holdings are good assets during periods of inflation.
A company issues corporate bonds to finance a new building project. Is this counted in M1 only, M2 only, M1 and M2, or neither?
Neither M1 nor M2
The liabilities of most financial intermediaries are the deposits or fund shares of their account holders. What are the primary assets of money market mutual funds?
Short - term credit instruments such as large CDs and treasury bills
The Federal Reserve (the Fed) and the European Central Bank (ECB) apply monetary policy by controlling interest rates: the federal funds rate, and the repo rate respectively. These two central banks apply expansionary policy by reducing the two interest rates and contractionary policy by raising the two target interest rates.
The ECB followed a very passive monetary policy for a long period (from June 2003 to December 2005).
Which of the following actions would cause a decrease in the level of reserves in the banking system?
The FOMC instructs the NY trading desk to *sell* government bonds on the open market.
If a recessionary gap occurs in the short run, then in the long run a new equilibrium arises when input prices and expectations adjust downward, causing the short-run aggregate supply curve to shift downward and to the right and pushing equilibrium real GDP per year back to its long-run value. The Federal Reserve can eliminate a recessionary gap in the short run by undertaking a policy action that increases aggregate demand. Which of the following is one monetary policy action that could eliminate the recessionary gap in the short run?
The Fed can increase the money supply through an open market purchase of Treasury securities
The reserve requirement is 10%. Suppose that the Fed sells $150,000 worth of U.S. government securities from a bond dealer, electronically debiting the dealer's deposit account at Reliable Bank. What is the maximum potential change in the money supply from this transaction, assuming that there are no leakages and that all rounds of deposit expansion have taken place?
The money supply can decrease by $1,500,000.
The reserve requirement is 10%. Suppose that the Fed sells $50,000 worth of U.S. government securities from a bond dealer, electronically debiting the dealer's deposit account at Reliable Bank. What is the maximum potential change in the money supply from this transaction, assuming that there are no leakages and that all rounds of deposit expansion have taken place?
The money supply can decrease by $500,000
Which of the following statements is true when considering budget deficits and the national debt?
The national debt is a stock variable and a federal budget deficit is a flow variable.
What is the relationship between the gross public debt and the net public debt?
The net public debt only included government debt held by the public.
Which of the following statements is true when considering central banks?
The number of central banks in the world grew enormously after the Great Depression.
Which of the following best exemplifies Say's Law?
The production of a $4000 plasma TV set creates demand for other goods and services valued at $4000.
Which of the following defines a *recognition time lag*?
The time required to gather information about the current state of the economy.
Which of the following defines an *effect time lag*?
The time that elapses between the implementation of a policy and the results of a policy.
According to the quantity theory of money, the growth of the money supply is positively related to NGDP. The quantity theory of money is given by the equation: M=1V×PY where M is a measure of money supply, (1/V) is the inverse of the income velocity and is considered constant by the monetarist economist, and PY is the price level (P) times real output (Y), equal to NGDP
There exists a positive relationship between the growth rate of M2 and inflation, although not a very strong one. This relationship starts breaking down in the early 1990's
The 10-year moving average was created by finding the average growth rate over the ten years prior. For example, the 1969 value of the rate of growth for M1 is the average growth rate of M1 for the years 1959-1969, and the value of M1 for 1970 is the average rate of growth of M1 during 1960-1970. The 10-year moving averages of money supply and inflation are utilized because of the strong conviction of monetarist economists that changes in money supply affect prices in the economy with lags, and thus should be analyzed for the medium run.
There exists a relationship between the growth of M1 and inflation, but not a very tight one. This implies that there may be additional variables other than M1 that may affect inflation.
A member of Congress, who has never had an economics course, has just been placed on a Money and Banking Committee. The official needs a briefing prior to the first meeting concerning the role of the money supply in the economy. Which of the following statements should you insist that the official remember when entering the first committee meeting?
There is a direct, albeit loose, relationship between the growth of the money supply and the price level; and a direct relationship between the growth of the money supply and GDP growth
The Fed sells $30,000,000 in bonds to Jim, a bond dealer who pays for the bonds with a check drawn on his bank. Assume a 10% required reserve ratio. Which of the following statements correctly records this transaction at Jim's bank with respect to the bank's reserves?
The bank's reserves will go down by $30,000,000.
(T/F) The classical economists believed that the leakage of saving would be matched by the injection of business investment.
True
According to the Keynesian approach, an increase in the money supply increases real GDP by lowering interest rates, which increases investment.
True
Many traditional Keynesians argue that fighting recession with monetary policy is likely to be relatively ineffective.
True
More than 50 percent of U.S. public debt is owned by foreign residents.
True
When the money supply increases, aggregate demand rises.
True
Suppose that the value of the US $ yesterday was $1 = 4 euros. Today the exchange rate changed such that $1 = 6 euros. One can say the An appreciation of the US $ should result in
US $ appreciated. a lower price level but the impact on the level of real GDP depends on the magnitude of the shifts in the aggregate demand and short-run aggregate supply curves.
Money may serve as a "standard of value" that allows for comparison of the relative worth of various goods and services. What function of money does this describe?
Unit of accounting.
Which of the following will increase both the short-run and long-run aggregate supply curves? Which of the following is true concerning shifts of the long-run aggregate supply curve?
Younger workers in the labor force receive better and more training than their predecessors. An increase in the long-run aggregate supply curve is depicted as a rightward shift and an increase in real GDP.
According to the quantity theory of money and prices, a 2% change in the money supply, holding other variables constant, leads to
a 2% change in the price level.
According to the quantity theory of money and prices, a 8% change in the money supply, holding other variables constant, leads to
a 8% change in the price level.
Suppose that the economy is presently operating at full employment. If there is a decrease in national income, which of the following will occur automatically?
a decrease in tax revenues.
Suppose that the barrel price of petroleum increased temporarily. The result of this would be best described by
a decrease in the short-run aggregate supply curve only.
According to the classical model, if the economy starts at full employment an increase in aggregate demand will cause all of the following to occur except
a decrease in wage rates.
It may be argued that the effects of a higher public debt are the same as the effects of a higher deficit because
a higher deficit creates a higher public debt.
From the end of WWII through 1983 the U.S. government had consistently experienced
a trade surplus.
The time between recognizing an economic problem and implementing policy to solve it is called the ________ time lag.
action
Suppose that Congress and the president decide that economic performance is weakening and that the government should "do something" about the situation. They make no tax changes but do enact new laws increasing government spending on a variety of programs. a. Prior to the congressional and presidential actions, careful studies by government economists indicated that the direct multiplier effect of a rise in government expenditures on equilibrium real GDP is equal to 6. In the 12 months since the increase in government spending, however, it has become clear that the actual ultimate effect on real GDP will be less than half of that amount. This could have happened because of all the following except
a supply-side effect.
In 2005 national government spending is $6.00 trillion and tax collections are $5.00 trillion. This government, in 2005, experienced a
budget deficit.
In 2005 national government spending is $8.00 trillion and tax collections are $8.50 trillion. This government, in 2005, experienced a
budget surplus.
If a government spends more than it receives during a year, then during this year it experiences a ________, and if it spends less than it receives, it experiences a ________.
budget deficit; budget surplus
In each of the past few years, the federal government has regularly borrowed funds to pay for at least one-third of expenditures that tax revenues were insufficient to cover. More than 60 percent of all federal expenditures now go for entitlement spending. This fact implies that the government is paying for most of its discretionary expenditures
by borrowing.
If the Fed engages in an open market sale with a bond dealer, the bond dealer's bank's transactions deposits liabilities will ________ and the money supply will ________.
decrease; decrease
If we assume that the economy is operating on a horizontal short-run aggregate supply curve, the equilibrium level of real GDP per year is completely ____ determined. The horizontal short-run aggregate supply curve has been called the Keynesian short-run aggregate supply curve because Keynes believed that many prices, especially wages, would not be ____ even when aggregate demand decreased. In modern Keynesian theory, the short-run aggregate supply curve, SRAS, shows the relationship between the price level and real GDP without full adjustment or full information. It is upward sloping because it allows for ____ price adjustment in the short run. Real GDP can be expanded in the short run because firms can use existing workers and capital equipment more ____. Also, in the short run, when input prices are fixed, a higher price level means ____profits, which induce firms to hire more workers.
demand reduced partial intensively, higher
Explain the difference between direct and indirect finance. The difference is that
indirect finance is the process through which ultimate lenders channel funds to ultimate borrowers through financial intermediaries, while direct finance does not include financial intermediaries.
When there is an economic downturn, Congress and the President use fiscal policy to stabilize real GDP. But the conduct of the fiscal policy involves several time lags, such as the recognition time lag that causes a delay in identification of the economic problem, the action time lag that is caused by the delay in Congressional approval of the policy, and the effect time lag that arises because policy actions take time to exert their full effects on the economy. These time lags could actually cause discretionary fiscal policy to
destabilize real GDP because by the time a policy has begun to have its effects, the economy might already be recovering and the policy action might push real GDP up faster than intended, thereby making real GDP less stable.
In the figure to the right, will all people who desire to work be employed if the current wage rate is $27 per hour? How many people will be employed and unemployed at this wage rate? If the current wage rate is $27 per hour, there will be an____ in the labor market and ____ people who desire to work will be able to. There will be ____ million people employed and ____ million people unemployed at this wage rate.
excess supply; not all 155; 10
The net export effect of contractionary monetary policy predicts that a country's
exports decrease as the money supply contracts.
A fraction of the funds borrowed by the federal government between 2008 and 2015 were utilized to fund public investments in a number of solar power companies that produced little output and halted operations. These concerns provided no repayments to the government. In what sense might this fraction of deficit spending arguably have imposed a "burden" on future generations? This spending of borrowed funds
failed to contribute to future increases in real GDP, so future generations will have to be taxed at least at a slightly *higher* rate than otherwise would have been required.
The Fed acts like a private banking institution when it he Fed acts like a government agency when it
holds Depository institution's reserves. supplies the economy with fiduciary currency.
An important difference between the Classical Model and the Keynesian Model is that the a. Keynesians believe that the aggregate supply curve is _____. b. The Classical model assumes price ____ vertical and the economy is always ____. c. The Keynesian model indicates that the economy will find an equilibrium however the economy will not always ____.
horizontal in the short run are flexible; at full employment reach full employment
The short-run Keynesian aggregate supply curve is
horizontal.
One of the main conclusions of Say's Law was that
if people supply goods in order to then demand goods, there can be no overproduction in a market economy and full employment will be the normal state of affairs.
Increases in output and increases in the inflation rate have been linked to
increases in the money supply.
In a recession, automatic stabilizers such as income transfer payments work by
increasing government spending and reducing taxes without requiring that a new policy be implemented.
Until 1946, residents of the island of Yap used large doughnut-shaped stones as financial assets. Although prices of goods and services were not quoted in terms of the stones, the stones were often used in exchange for particularly large purchases, such as payments for livestock. To make the transaction, several individuals would place a large stick through a stone's center and carry it to its new owner. A stone was difficult for any one person to steal, so an owner typically would lean it against the side of his or her home as a sign to others of accumulated purchasing power that would hold value for later use in exchange. Loans would often be repaid using the stones. These stones performed the following functions of money:
medium of exchange, store of value, and standard of deferred payment functions of money.
If you have auto insurance, you might be willing to drive more recklessly. This is an example of
moral hazard.
If an excess quantity of labor is supplied at a particular wage level, the wage level
must be above equilibrium.
The Keynesian model argues that prices are sticky. One reason supporting this argument is that
nominal wages are inflexible downwards.
Many economists believe that the growth of the money supply is
positively related to the growth of real GDP.
Thus, according to the Keynesian model full employment is _____.
possible but not guaranteed
If the rate of return on public investments exceeds the interest rate paid on the bonds issued to finance the investments,
present and future generations will be economically better off.
When aggregate demand decreases in the modern Keynesian model of the short-run aggregate supply curve,
price decreases and real GDP decreases.
Assuming that the Fed judges inflation to be the most significant problem in the economy and that it wishes to employ all three of its policy instruments. It sells bonds in the open market, increases the discount rate, and increases the reserve ratio. The net export effect resulting from these monetary policy actions will
raise the interest rate, increase the inflows of international capital, increase the value of the dollar, decrease exports, and as a consequence real GDP will decline even further.
According to the Keynesian theory a *decrease* in the money supply increases the interest rate and decreases investment spending. The result of this is that
real GDP *decreases* by a larger amount than the change in investment.
According to the Keynesian theory, an *increase* in the money supply decreases the interest rate and increases investment spending. The result of this is that
real GDP *increases* by a larger amount than the change in investment.
A contractionary monetary policy lowers equilibrium real GDP in the short run, by increasing the interest rate. In an open economy, the net export effect
reinforces the effect of a contractionary monetary policy since the increase in the interest rate, increases the value of dollar, lowers U.S. *exports* and causes the real GDP to fall.
A contractionary monetary policy lowers equilibrium real GDP in the short run, by increasing the interest rate. In an open economy, the net export effect
reinforces the effect of a contractionary monetary policy since the increase in the interest rate, increases the value of dollar, lowers U.S. exports and causes the real GDP to fall.
The opportunity cost of money holdings is
the alternative interest income foregone from not holding some other asset
The opportunity cost of money holdings i
the alternative interest income foregone from not holding some other asset.
Suppose that the value of the US dollar ($) yesterday was $1 = 4 yen. Today the exchange rate changed such that $1 = 3 yen. Given that the US dollar has depreciated, the aggregate demand in the United States should Given that the US dollar has depreciated the short-run aggregate supply in the United States should
shift to the right. shift to the left.
The Federal Reserve System is divided into 12 districts, each served by one of the Federal Reserve district banks, located in the following cities: Boston, MA; New York, N.Y.; Philadelphia, PA; Washington, D.C.; Richmond, VA; Atlanta, GA; St. Louis, MO; Dallas, TX; Cleveland, OH; Chicago, IL; Minneapolis, MN; Kansas City, MO; and San Francisco, CA. Today, the U.S. population is centered just west of the Mississippi River — that is, about half of the population is either to the west or the east of a line running roughly just west of this river. The current locations of Fed districts and banks are structured this way because
the Fed districts were designed in 1913 to best serve the population at that time; these have remained the same.
Persistent inflation arises due to Which of the following statements best characterizes demand-pull and cost-push inflation?
the aggregate demand curve increasing by a larger proportion than the long-run aggregate supply curve. Both are short run types of inflation.
Suppose you go shopping for a gift for a friend and also find a sweater that you want for yourself. You pay cash for the gift and write a check for the sweater. Your purchases are made with money holdings represented by
the transaction demand for money because you planned to buy the gift and the precautionary demand for money because you did not anticipate buying the sweater.
Required reserves are defined as
the value of reserves that a depository institution must hold in the form of vault cash or deposits at the Fed..
Financial intermediaries
transfer funds from savers to investors.
According to modern Keynesian analysis, the short-run aggregate supply curve is
upward sloping.
Modern Keynesian analysis assumes that the short-run aggregate supply curve is
upward sloping.
The aggregate supply curve implied by the classical model is ____, so that a reduction in aggregate demand will mean a lower overall level of ____.
vertical prices
Fiscal policy is likely to be more effective
when there are less offsetting reductions in private sector spending. during abnormal times as opposed to more normal times. when government borrowing does not increase interest rates substantially. *All of the above*
If the Fed increases the discount rate, relative to the federal funds rate, then this
would increase the cost of funds for institutions borrowing from the Fed.
Question content area Consider a bank balance sheet, with "Assets" on the left and "Liabilities" on the right side. Identify where the following items belong. I. Deposits this bank holds in an account with another private bank. II. Borrowings from another bank in the interbank loan market.
I: assets; II: liabilities.
If the Federal Reserve implements an expansionary monetary policy that reduces the market interest rate, this will tend to ________ foreign investment in U.S. financial assets and ________ U.S. net exports.
discourage; increase
If the economy is operating *beyond* full employment, contractionary monetary policy will shift the aggregate demand curve to the ________ and the price level will ________.
left; decrease
If the economy is operating beyond full employment, contractionary monetary policy will shift the aggregate demand curve to the ________ and the price level will ________.
left; decrease
If the economy is operating at *less than* full employment, expansionary monetary policy will shift the aggregate demand curve to the ________ and the price level will ________.
right; increase
As the dollar becomes stronger in international foreign exchange markets, the short-run aggregate supply curve will shift to the ________ and the aggregate demand curve will shift to the ________.
right; left
