Econ 202 Exam 3 Macroeconomics
Stagflation
A combination of inflation and recession, usually resulting from a supply shock.
The economic definition of money is:
Any asset that people are generally willing to accept in exchange for goods and services.
Distinguish among money, income, and wealth.
A person's money is the currency held and the checking account balance, income is the earning and wealth is equal to value of assets minus all debts.
Suppose you decide to withdraw $100 in currency from your checking account. What is the effect on M1?
M1 remains unchanged.
Jill makes a deposit into her savings account at the local bank with $100 in cash. As a result of this transaction,
M1 will decrease by $100.
The M2 definition of the money supply includes
M1, savings accounts, small time deposits, and money markets
Suppose you withdraw $1,000 from a money market mutual fund and deposit the funds in your bank checking account. How will this action affect M1 and M2?
M2 will not be affected, but M1 will increase.
quantity theory of money
MV=PY
Which of the following is included in M2 but not M1?
Money market deposit accounts in banks
The value of the multiplier is larger when
the value of the MPC is larger.
If there is an increase in the marginal propensity to consume (MPC), then
the value of the expenditure multiplier will increase.
One advantage of using cryptocurrencies to buy and sell goods and services is that
there is no permanent record of the transaction, but they are unlikely to be widely used unless their values in terms of government issued money become more stable.
During the first oil shock
The U.S. Federal Reserve increased money supply to accommodate the fall in GDP and Japan just waited for the SRAS to shift back left
How do banks create money?
by making loans
Disposable Income
consumption + savings
The most important determinant of consumption is
current disposable income.
The U.S. dollar can best be described as
fiat money
It is possible for people to continue to use a currency when the government that issued it has replaced it with another currency because
it is still accepted as legal tender for transactions.
When sellers are willing to accept money in exchange for goods and services, money is acting as a
medium of exchange
Functions of Money
medium of exchange, unit of account, store of value, standard of deferred payment
Fiat Currency
money issued by a central bank that has no value except as money, such as paper currency.
Marginal propensity to consume (MPC)
the slope of the consumption function = The amount by which consumption spending changes when disposable income changes.
A stagflation happens when
- Inflation increases and GDP decreases - SRAS shifts left - Oil prices increase
Hyperinflation
- It can be hundreds—even thousands—of percentage points per year. - In the presence of hyperinflation, firms and households avoid holding money. - It is caused by central banks increasing the money supply at a rate much greater than the growth rate of real GDP.
The relationship between the marginal propensity to consume (MPC) and the marginal propensity to save (MPS) can best be described as:
- MPC = 1-MPS - MPC + MPS = 1 - MPS = 1 - MPC
The long run effect of a 50% increase in money supply is:
- Price level will increase by 50% - Nominal wage (W) will increase by 50% - Real Wage will not change - Employment and GDP will not change
Which of the following conditions make a good suitable for use as a medium of exchange?
- The good should be of standardized quality so that any two units are identical. - The good must be acceptable to (that is, usable by) most buyers and sellers. - The good should be durable, valuable relative to its weight, and divisible.
(examples) included in the calculation of total government purchases:
- The salaries of high school teachers paid for by state government - A new interstate highway purchased by the federal government - A local government installs a new stop sign
When the economy is in macroeconomic equilibrium:
- actual GDP = potential GDP - total unemployment = frictional unemployment + structural unemployment - SRAS = AD = LRAS
Explain the short-run effect of monetary policy that causes an increase in interest rates. As a result of higher interest rates, the The new equilibrium will be
- aggregate demand curve will shift left. - where the new aggregate demand curve intersects the original short-run aggregate supply curve.
The use of money
- allows for greater specialization. - reduces the transaction costs of exchange. - eliminates the double coincidence of wants.
An asset would be usable as a medium of exchange for all of the following reasons:
- the asset should be divisible since goods are valued at different amounts - the asset must be generally accepted by most people. - the asset should be durable and not lose value due to spoilage.
The sum of the marginal propensity to consume (MPC) and the marginal propensity to save (MPS) equals
1
Autonomous expenditure
An expenditure that does not depend on the level of GDP.
What can serve as money?
1. acceptable 2. standardized quality 3. durable 4. valuable 5. divisible
The formula for the multiplier is
1/(1-MPC)
Which of the following equalities is correct?
Disposable income is equal to national income minus net taxes.
Which of the following best explains the difference between commodity money and fiat money?
Fiat money has no value except as money, whereas commodity money has value independent of its use as money.
The Federal Reserve uses two definitions of the money supply, M1 and M2, because
M1 is a narrow definition focusing more on liquidity, whereas M2 is a broader definition of the money supply.
The Fed "takes the punch bowl when the party gets going" means that:
The Fed's main worry is that the economy is overheated and inflation will soon occur
How does the quantity theory provide an explanation about the cause of inflation?
The quantity equation shows that if the money supply grows at a faster rate than real GDP, then there will be inflation.
consumption function
The relationship between consumption spending and disposable income.
Suppose the economy enters a recession. If government policymakers-Congress, the president, and members of the Federal Reserve-do not take any policy actions in response to the recession, what is the likely result? Which of the following four possible outcomes best describes the likely effects on the unemployment rate and GDP in both the short run and the long run?
The unemployment rate will rise in the short run but return to the natural rate of unemployment in the long run, and real GDP will drop below potential GDP in the short run but return to potential GDP in the long run.
During the German hyperinflation of the 1920s, many households and firms in Germany were hurt economically; however, people with debt actually benefited some from the hyperinflation. T/F
True
If coins could have been easily used to purchase goods and services in other areas, the coins would also have some intrinsic value. T/F
True
Does Venmo fulfill the role of a medium of exchange? Does it matter for your answer that many retail stores won't accept it in payment for goods and services?
Yes, as long as some sellers are willing to accept it as payment for goods and services, even if other sellers are not.
bank run
a phenomenon in which many of a bank's depositors try to withdraw their funds due to fears of a bank failure
If the economy adjusts through the automatic mechanism, then a decline in aggregate demand causes
a recession in the short run and a decline in the price level in the long run.
Supply Shock
a sudden increase in the price of an important natural resource, resulting in a leftward shift of the SRAS curve. Increasing the price level and decreasing actual GDP.
if something is to be considered money, it has to fulfill
all 4 functions
Which of the following causes saving to increase?
an increase in the interest rate
If the economy is initially at full-employment equilibrium, then an increase in aggregate demand causes ____ in real GDP in the short run and _____in the price level in the long run.
an increase; an increase
Hyperinflation is caused by:
central banks increasing the money supply at a rate far in excess of the growth rate of real GDP
If government policymakers are more concerned with inflation than with unemployment, how would they react to stagflation? They would use monetary and fiscal policies that
decrease aggregate demand, thereby reducing prices but increasing unemployment.
Induced expenditure
depends on the level of GDP
If the government raises the amount of taxes, holding everything else constant, then
disposable income will decrease.
Very high rates of inflation are called
hyperinflation
Credit cards are
included in neither the M1 definition of the money supply nor in the M2 definition.
If government policymakers are more concerned with unemployment than with inflation, how would they react to stagflation? They would use monetary or fiscal policies that:
increase aggregate demand, thereby reducing unemployment but increasing prices.
Money is an imperfect standard of deferred payment because ___ causes the value of money to decrease over time.
inflation
Money serves as a standard of deferred payment when
payments agreed to today but made in the future are in terms of money.
Money serves as a unit of account when
prices of goods and services are stated in terms of money.
A baseball fan with a Mike Trout baseball card wants to trade it for a Giancarlo Stanton baseball card, but every one the fan knows who has a Stanton card doesn't want a Trout card. Economists characterize this problem as a failure of the
principle of a double coincidence of wants
Compared to the narrow definition of the money supply, M1, the broader definition of the money supply, M2, also contains
savings account deposits, small-denomination time deposits, and balances individual investors hold in money market mutual funds.
GDP declined in Greece
the aggregate demand curve will shift to the left
A business that "ditches cash" means
the business no longer accepts currency as payment.
A double coincidence of wants refers to
the fact that for a barter trade to take place between two people, each person must want what the other one has.
The central bank of a country controls the money supply, which equals the currency held by
the public plus their checking acount balances.
The quantity theory of money is better able
to explain the inflation rate in the long run.
When money is acting as a store of value, it allows an individual to
transfer dollars, and therefore purchasing power, into the future.
Governments sometimes allow hyperinflation to occur because
when governments want to spend more than they collect in taxes, central banks increase the money supply at a rate higher than GDP growth, often resulting in hyperinflation.
Given the length of the economic expansion in 2019, should households and firms have expected that a recession would start soon? Briefly explain.
No, real GDP is typically equal to potential GDP, so unless the economy experiences a shock to aggregate demand or aggregate supply, there is no reason for an economic expansion to end and a recession to begin.