ECON 104 FINAL EXAM

The Federal Reserve responded to the 2008 financial crisis in several ways. Which of the following is one of the ways the Fed responded?

The Fed lent investment banks Treasury securities in exchange for mortgage-backed securities

When housing prices ______________, as they did beginning in 2006 following the housing market bubble, consumption spending on furniture, appliances, and home improvements declined as many households found in _________________ to borrow against the value of their homes.

fall; harder

The simple deposit multiplier is the ratio of the amount of

deposits created by the banks to the amount of new reserves

A bank is legally required to hold a fraction of its ________________ as _____________________.

deposits; required reserves

A person's wealth

equals the value the person's assets minus his or her liabilities

A barter economy is an economy where

goods and services are exchanged for other goods and services

The interest rate effect refers to the fact that a higher price level results in

higher interest rates and lower investment

The short-run aggregate supply curve slopes upward because of all of the reasons except

in the short run, an unexpected change in the price of an important resource can change the cost to firms

If the Fed lowers the reserve requirement, then this

increases excess reserves, encourages banks to make more loans, and increases the money supply

The Fed uses policy targets of interest rates because

it can affect the interest rate and money supply directly and these in turn can affect unemployment, GDP growth, and the price level.

An increase in state income taxes will cause a _________________ of the aggregate demand curve

leftward shift

An increase in interest rates will cause a _____________ of the aggregate demand curve

leftward shift of

Suppose real GDP is $13 trillion, potential real GDP is $13.5 trillion, and Congress and the president plan to use fiscal policy to restore the economy to potential real GDP. Assuming a constant price level, Congress and the president would need to decrease taxes by

less than $500 billion

Typically, a bank's largest asset is its

loans

When the interest rates on Treasury bills and other financial assets are low, the opportunity cost of holding money is ______________, so the quantity of money demanded will be _______________.

low; high

Contractionary fiscal policy to prevent real GDP from rising about potential real GDP would cause the inflation rate to be _______________ and real GDP to be ______________.

lower; lower

If the Fed buys Treasury bills, this will shift the

money supply curve to the right

Poorly timed discretionary policy can do more harm than good. Getting the timing right with fiscal policy is generally

more difficult than with monetary policy

An increase in the price level will cause a ______________ the aggregate demand curve

movement up along

The tax multiplier is

negative

The aggregate demand curve shows the relationship between the __________________ and _________________.

price level; quantity of real GDP demanded

Which of the following are goals of monetary policy?

price stability, economic growth, and high emplyment

Monetary policy refers to the actions the Federal Reserve takes to manage

the money supply and interest rates to pursue its economic objectives

The aggregate demand curve shows the relationship between

the price level and the quantity of real GDP demanded by households, firms, and the government.

The short run aggregate supply curve shows the relationship in the short run between

the price level and the quantity of real GDP supplied by firms

Price level increases, this is a change in _____________ and the LRAS curve will ____________________.

the price level; not change

Labor force increases, this is a change in ________________________, the LRAS curve will_________________.

the productive capacity of the economy; shift to the right

Technology changes, this is a change in ___________________, the LRAS curve will _____________________.

the productive capacity of the economy; shift to the right

There is an increase in the quantity goods, this is a change in ___________________, the LRAS curve will ___________________.

the productive capacity of the economy; shift to the right

Which of the following correctly describes the automatic mechanism through which the economy adjust to long-run equilibrium?

the rightward shift of the short-run aggregate supply cure that occurs after a recession

Increases in households' expectations of their future incomes will make the aggregate demand curve shift

to the right

Additionally, the federal funds rate is

very important for the Fed's monetary policy because the Fed uses the federal funds rate as a monetary policy target since it can control the rate through open market operations

The wealth effect refers to the fact that

when the price level falls, the real value of household wealth rises, and so will consumption

The federal funds rate is

the interest rate that banks charge each other for overnight loans

If the government purchases multiplier equals 2, and real GDP is $14 trillion with potential real GDP $14.5 trillion, then government purchases would need to increase by ____________ to restore the economy to potential real GDP.

$250 billion

With a required reserve ration of 20%, an increase in reserves of $10,000 could lead to a maximum increase in checking account deposits in the entire banking system of

$50,000

What is a banking panic?

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

Which of the following would be considered stabilization policy by the Federal government?

A tax cut is designed to stimulate spending passed during a recession

Which of the following would cause the short-run aggregate supply curve to shift to the left?

An increase in inflation expectations

Which of the following best describes the "interest rate effect"?

An increase in the price level raises the interest rate and chokes off investment and consumption spending

Tax increases on business income decrease aggregate demand by decreasing

Business investment spending

The level of long-run aggregate supply is affected by all of the following EXCEPT

Changes in the price level

Which of the following statements about the Social Security, Medicare, and Medicaid programs is true?

Costs are being driven up by the fact that Americans are living longer and medical costs are rising substantially

Which of the following is a reason why the wages of workers and the prices of inputs rise more slowly than the prices of final goods and services?

Firms are often slow to adjust wages, Menu costs make some prices sticky, Contracts make prices and wages "sticky"

What is a monetary policy target used by the Fed?

Interest rate

What do economists mean by the demand for money?

It is the amount of money--currency and checking account deposits--that individuals hold

The invention of the integrated circuit by Jack Kilby of Texas Instruments gave rise to the information age. What did this technological change do the short-run supply curve?

It shifted the short-run aggregate supply curve to the right.

When a grocery store accepts your $5 bill in exchange for bread and milk, the $5 bill serves as a

Medium of exchange

What is the advantage of holding money?

Money can be used to buy goods, services, or financial assets

What is the disadvantage of holding money?

Money, in the form of currency or checking account deposits, earns either no interest or a very low rate of interest

By the 2000s, an important market change occurred when investment banks became significant participants in the secondary market for

Mortgages

The level of real GDP in the long run is

Potential GDP

Which of the following situations is one in which the Fed will potentially pursue expansionary monetary policy?

Potential GDP is forecasted to be higher than equilibrium GDP

Which of the following is one reason for the decline in aggregate demand that led to the recession

The end of the housing bubble

Which of the following factors brought on the recession of 2007-2009?

The financial crisis, a rapid increase in the price of oil, the end of the housing bubble

Which of the following is the largest category of federal government expenditures?

Transfer payments

Open market operations refer to the buying and selling of ____________ by the _____________ to control the money supply

Treasury securities; Federal Reserve

The statement "This Dell laptop costs $1,200" illustrates which function of money?

Unit of account

The international-trade effect refers to the fact that an increase in the price level will result in

a decrease in exports and an increase in imports

What would cause a decrease in aggregate demand?

a decrease in government spending

Stagflation is often a result of

a negative supply shock

A supply shock is

a sudden increase in the price of an important natural resource, resulting in a leftward shift of the SRAS curve.

Stagflation occurs when

a supply shock shifts the SRAS to the left, increasing the price level and decreasing actual GDP.

A central bank can help stop a bank panic by

acting as a lender of last resort

When the Federal Open Market Committee (FOMC) decides to increase the money supply, it ____________ US Treasury securities. If the FOMC wishes to decrease the money supply, it ________________ US Treasury securities.

buys; sells

Stagflation is a

combination of inflation and recession

M1 includes

currency in circulation, checking account deposits in banks, and holding of traveler's checks

To combat a recession with discretionary fiscal policy, Congress and the president should

decrease taxes to increase consumer disposable income

A faster income growth in other countries will cause a ___________________ of the U.S. aggregate demand curve

rightward shift

An increase in government purchases will cause a ______________________ of the aggregate demand curve.

rightward shift

A rapid increase in the price of oil will tend to

shift short-run aggregate supply to the left

If banks do not loan out all their excess reserves, then the real would multiplier is

smaller than 1/RR

The money supply curve is vertical if

the Fed is able to completely determine the money supply

Which of the following would be considered a positive addition to household wealth?

the balance in your checking account, 1,000 shares of Microsoft stocks, the equity in one's home

The 2007-2009 recession was a clear example of

the effect that a decrease in aggregate demand can have on the economy