Econ 202 Final

Suppose that lenders want to receive a real rate of interest of 5% and that they expect inflation to remain steady at 2% in the coming years. Based on this, lenders should charge a nominal interest rate of

7%

Which of the following increases the real interest rate

A decrease in the inflation rate, holding the nominal interest rate constant

A stock is

A financial asset that represents partial ownership of a company

The process of deciding on and passing fiscal policy legislation creates:

A formulation lag

Consider the following two events: Event I. Because interest rates fall from 5% to 4%, the local bakery decides to borrow more money and buy a new oven Event II. Because a local bike shop is optimistic about the future of the economy, the shop decides to borrow money and build a new store In the loanable funds market, Event I is ________ and Event II is _________

A movement along the demand for loanable funds curve; a shift of the demand for loanable funds curve

Which of the following is consistent with the graph depicted above?

A recession decreases the profitability of new investment spending

Assuming the economy is represented by the graph shown, if the government were to enact a partially successful expansionary fiscal policy, it would be most likely to move from equilibrium

A to B

Suppose the economy is in short-run equilibrium below potential GDP and Congress and the president lower taxes to move the economy back to long-run equilibrium. Using the AD-AS model in the figure above, this would be depicted as a movement from

A to B

Suppose the economy is in short-run equilibrium below potential GDP and no fiscal or monetary policy is pursued. Using the static AD-AS model in the figure above, this would be depicted as a movement from

A to E

Which of the following actions is considered as "saving" from a macroeconomic perspective

All of the above ( depositing money in the bank, buying stock, buying a bond)

which of the following would increase public saving (other things equal)

All of the above would increase public saving ( Increase in taxes; decrease in government purchases; decrease in government transfer payments)

Keynesian Policy:

All of these are true (refers to policies that actively shift aggregate demand in an effort to reach full employment. Promotes spending more and taxing less to boost economic activity to potential GDP. Refers to fiscal policy)

Refer to figure 16-4 In the graph above, suppose the economy is initially at point A. The movement of the economy to point B as shown in the graph illustrates the effect of which of the following policy actions by Congress and the president

An increase in income taxes

Which of the following would increase public saving (other things equal)

An increase in taxes

Suppose a transaction changes a bank's balance sheet as indicated in the following T-account, and the reserve ratio os 10%

$1800

With a reserve ratio of 50%, an increase in reserves of $10,000 could lead to a maximum increase in checking account deposits in the entire banking system of

$20,000

If table 12.2 represents all of the investments available to the economy, the interest rate is 6%, what will be the level of investment in the economy

$200

Suppose you have $100 to invest for a year and the nominal interest rate is 7% if the inflation rate during the year is 4% at the end of the year your real gain from the investment is approximately

$3

If table 12.2 represents all the investments available to the economy, the interest rate is 4.5% what will be the level of investment in the economy

$300

Gabriela deposits $1,000 in a saving account that pays an annual interest rate of 6%. Over the course of a year the inflation rate is 2%. at the end of the year Gabriela has

$40 more in her account, and her purchasing power has increased about $40

First Union has no excess reserves when a new deposit of $20,000 is made. The reserve ratio is 5%. how much can the banking system create in checking account balances

$400,000

If in a closed economy real GDP is $30 billion, consumption is $20 billion, and government purchases are $5 billion, what is the total savings in the economy

$5 billion

With a reserve ratio 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

Suppose you have $100 to invest for a year and the nominal interest rate is 7%. If the inflation rate during the year is 4%, at the end of the year your nominal gain from the investment is

$7

Mary has $1,000 and is considering purchasing a $1,000 bond that pays 7% interest per year. Mary decided not to buy the bond and holds the $1,000 as cash. If the inflation rate is 4%, the opportunity cost of holding the $10,000 as money is

$70

Most economists agree that the best rate of inflation for a stable economy would be around

2 - 3 %

Consider an economy where the growth rate of real GDP is 6% and the growth rate of money supply is 8% if the quantity theory of money holds, the inflation rate in the economy will be

2%

Ms bankson has saved $100000 for her retirement. She earned 6% interest on that money during the year 2001. If the rate of inflation was 4% in 2001. What was Ms. Banksons real interest rate

2%

Suppose the potential GDP grows by 3% a year and the money growth is 5% a year. In the long run, what will be the inflation rate

2%

sticky wages reduce the ability of free market forces to help the economy recover from a recession. Which of the following inflation rates would make real wages less sticky, and thus allow for a quicker adjustment process

2%

Assume that deposits in a bank equals $200,00 the bank has issued loans equal to $140,000 its actual reserves are $60,000 and of the $60,000 of actual reserves, $20,000 are excess reserves. What is the required reserve ratio

20%

According to the quantity theory of money, if the money supply grows at 6%, real GDP grows at 2% and the velocity of money is constant, then the inflation rate will be

4%

Bank of America charges a 9.5% interest rate on all new car loans. If the inflation rate is 4%, Bank of America receives a real interest rate of

5.5%

Suppose the economy is at point D. Which of the following is a possible fiscal policy stabilization option? (That is, the policy option must be fiscal and must be stabilizing)

Decrease government spending

Increasing the amount of consumption spending and reducing the amount of savings ____ investment expenditures, and _____ long-run economic growth in the economy

Decreases; decreases

If technological change increases the profitability of new investment for firms, then the ______ curve for loanable funds will shift to the _____ and the equilibrium real interest rate will ______

Demand; right; rise

Suppose the economy is at point B. Which of the following is a possible fiscal policy stabilization option? (That is, the policy option must be fiscal and must be stabilizing.)

Increase government spending

Consider the following actions and determine whether each is a source of "saving", "consumption", or "investment" from a macroeconomic perspective I. Google issues new bonds II. Janet buys a new bond issued by Google III. Janey buys a new computer

I is investment, II is savings, III is consumption

consider the movement from point A to point B in the money market. Which of the following is true

If the Ged is effectively employing stabilization policy in this graph, then it must have believed that there was an inflationary gap in the macroeconomy

If the government changed the tax code in a way that simultaneously increased the profitability of investment spending and reduce the incentive to save, then which of the following will happen with certainty

Increase in the real interest rate

Suppose the economy is at point D. Which of the following is a possible fiscal policy stabilization option? (That is, the policy option must be fiscal and must be stabilizing.)

Increase taxes

Refer to Figure 12-1 Suppose the economy is at point B. If the Fed engages in open market purchases, we would expect to see output____, prices_____, and unemployment ______

Increase; Increase; Decrease

An increase in government spending causes interest rates to _____ which causes investment spending to _____ this is known as "Crowding out"

Increase;decrease

Keynes argued that the economy could get stuck at a point like point A in the above graph. What did Keynes advocate in order to get the economy "unstuck"?

Increases in government spending

in the short run, expansionary fiscal policy _____ the price level and _____ equilibrium real GDP

Increases; increases

Which of the following would definitely increase public savings in the economy

a combination of higher taxes and lower government spending

Which of the following would you expect to increase the equilibrium interest rate

a decrease in the percentage of income that households save

a decrease in taxes should be applied in a situation with

a recessionary gap

What is a benefit of giving the government freedom to spend more than they receive in taxes and run a deficit

It allows the government to be flexible if something unexpected happens

You buy a bond issued by General Mills Corporation. You are the _____ and General Mills is the ______

Lender; Borrower

If rob deposits $300 in currency into his savings account at Bank of America

M1 decreases

In the figure above, the movement from point A to point B in the money market could be caused by

More than one of the above is correct

Good current economic conditions incent people to save _____ and a good outlook on future economic conditions incent people to save______

More; less

The demand for loanable funds has a _____ slope because the lower the interest rate, the ______ number of investment projects are profitable, and the ______ the quantity of loanable funds demanded

Negative; greater; greater

According to money neutrality, if the money supply increases, then (in the long run)

Nominal GDP will increase

The ideas that if governments cut taxes but not spending, people will not change their behavior, and expansionary policy will have little expansionary effects is known as

Ricardian equivalence

If banks do not loan out all their excess reserves then the real-world money multiplier is (R is the reserve ratio)

Smaller than 1/R

The loanable funds market is in equilibrium, as shown in the figure above. Suppose that there is a cultural change in society and people begin to be more frugal than before and thus increase their desire to save money. The _______ loanable funds will ______ thereby _______ the equilibrium interest rate and ______ the equilibrium quantity of loanable funds.

Supply of; rise; decreasing; increasing

During a recession, what automatically (due to "automatic stabilizers") happens to the government's budget situation

Tax revenues fall, government spending increases, and the budget deficit gets larger

how does the Federal Reserve increase the Federal Funds Rate

The Fed engages in open market sales which makes reserves more scarce, thus causing the Federal Funds Rate to rise

The velocity of money is

The average number of times a dollar of money is used in a year to by goods and services in GDP

It is estimated that the tornadoes in Alabama earlier this year caused $645 million of damage in Jefferson County, Alabama alone. Suppose that Ben Gleck, a news analyst on the Coyote News Network, argues that the tornado, while tragic, will have a positive impact on the U.S. economy as it will create jobs for those involved in the clean-up and reconstruction, and thus increase the amount of employment in the U.S.. Mr. Gleckʹs argument is an example of

The broken window fallacy

Consider a technological advance which makes capital more productive. In the loanable funds framework, this ill lead to an increase in the equilibrium quantity of savings. Which of the following best explains this increase

The demand for loanable funds shift to the right, putting upward pressure on the real interest rate. This higher real interest rate causes the quantity of loanable funds supplied to increase

How does the Federal Reserve increase the Federal Funds Rate

The fed engages in open market sales which makes reserves more scarce, thus causing the Federal Funds Rate to rise

Which of the following is correct

The federal reserve has 12 regional banks. The board of Governors has 7 members who serve 14 year terms

A period when overall inflation rates are positive but falling is called

disinflation

When a central bank aggressively tries to contain inflation via contractionary monetary policy, which condition is most likely to occur

disinflation

The fact that there are fewer and fewer potential investments that will generate returns high enough to make the cost of paying back a loan worthwhile is reflected in the

downward-slope of the demand curve in the market for loanable funds

An economy is a short-run equilibrium is illustrated in the figure (AS is our SRS curve) An appropriate fiscal policy option to move the economy to full employment is to increase

government spending and move the economy to a full employment equilibrium at point B

other things equal, which of the following would increase the size of the real world money multiplier

banks choose to hold less excess reserves than before

if inflation is higher than expected, then lenders will ______ and borrowers will ______

be harmed ; benefit

Assume that a bank's initial balance sheet is as above and that the reserve ratio is 10%. If someone deposits $100,000 into this bank it ill

be in a position to make a maximum of $150,000 of new loans

When real rates of interest are negative, borrowers

benefit, because the value of their debt declines

If income is equal to total spending, then in a closed economy, it is equal to

consumption plus investment spending

Oil prices increased significantly in 2008. According to the Keynesian model. this increase in oil prices should have caused which of the following to occur

cost-push inflation

If households in the economy decide to take money out of checking account deposits and put this money into savings accounts this will

decrease M1 and not change M2

If the government reduces expenditures by $30 billion, aggregate demand will

decrease and real GDP will decrease

When an economy faces an inflationary gap, an appropriate policy would be to

decrease government purchases

In the short run, contractionary monetary policy on the part of the Fed results in

decrease in the money supply, an increase in interest rates, and a decrease in GDP

which of the following would you expect to decrease the equilibrium interest rate

decrease in the profitability of investment projects firms are considering

If expectations about the future don't change at all, then an economic downturn will generally

decrease savings at a given interest rate and shift the supply curve for loanable funds to the left

The nation of Hyperbole is in a recession, and the government decides to increase taxes and reduce government spending to reduce the growing deficit. This will ________ aggregate demand and will likely ________ real GDP and employment.

decrease; decrease

An economic expansion tends to cause the federal budget deficit to ______ because tax revenues _____ and government spending on transfer payments _______

decrease;rise;falls

In the nineteenth century when there were often bank runs caused by crop failures, banks would make relatively fewer loans and hold relatively more excess reserves. by itself, these actions by the banks should have

decreased both the money multiplier and the money supply

Which of the following can cause inflation

decreases in short-run aggregate supply

The opportunity cost of holding money

decreases when the interest rate decreases, so people desire to hold more of it

An increase in individual income taxes______ disposable income, which _____

decreases; decreases

Decreasing government spending______ the price level and ______ equilibrium real GDP in the short run

decreases;decreases

Which of the following is not one of the key services provided by the financial system

decreasing taxes

The loanable funds market is in equilibrium, as shown in the figure above. If the government begins to run a budget deficit, the _____ loanable funds will ______ thereby _______ the equilibrium interest rate

demand for; rise; increasing

Inflation is caused by an increase in aggregate demand which is not matched by an increase in aggregate supply is called

demand-pull inflation

if the government's budget deficit increases, then the ______ curve for loanable funds will shift to the _____ and the equilibrium interest rate will ____

demand; right; rise

A fractional reserve banking system is one in which banks gold less than 100% of ______ in reserves

deposits

fiat money

has no or very little value expect as money

Assume that a bank's initial balance sheet is as above, and that the reserve ratio is 10%, if someone deposits $100,000 into this bank it will

have $120,000 in excess reserves

Unpredictable inflation can cause businesses to

have a hard time planning future production

In financial markets, sellers are people who

have cash on hand and are willing to let others use it, for a price

When the economy experiences inflation, people demand a

higher quantity of money, shifting the money demand curve rightward

A net capital inflow occurs in open economics where investment is

higher than national savings

expansionary fiscal policy to prevent real GDP from falling below potential real GDP would cause the inflation rate to be _____ and real GDP to be______

higher; higher

If the Fed buys US treasury bonds, then this

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

The opportunity cost of holding money

increases when the interest rate increases, so people desire to hold less of it

A decrease in individual income taxes______ disposable income, which _______ consumption spending

increases; decreases

the idea that aggregate price levels do not affect real outcomes in the economy is called the

neutrality of money

Suppose the nominal interest rate is 7% annually, and you deposit $1000. Inflation in the economy throughout the year is 7%. At the end of the year you have earned:

no increase in your purchasing power

Tax distortion happen because tax laws take into consideration only

nominal income

Which of the following is likely to occur if there is 10% inflation over the next year and it is perfectly anticipated

nominal wages will increase by 10%

If households in the economy decide to take money out of savings accounts and put this money into checking accounts this will

non of the above is correct

The national debt is the amount

of debt outstanding that arises from past budget deficits

Adverse selection refers to when

one party to a transaction has more information than the other and transactions occur less frequently due to the information asymmetry

automatic stabilizers are defined as

policy that stabilizers without the need for action by the government

In the early 1920s, Germany experienced hyperinflation because Germany's

quantity of money was growing too rapidly

in the figure above, if the economy is at point A, the appropriate stabilizing monetary policy by the Federal Reserve would be to

raise interset rates

Which of the following is an appropriate policy for the Federal Reserve to pursue if it wants to decrease the money supply

raise the reserve requirment

public savings in the economy can be increase by

raising taxes

Government budget deficits are most likely to increase during economic______

recessions

The goal of expansionary monetary policy is to

reduce interest rates to stimulate the economy

If the Fed raises the interest rate, this will ______ prices and ______ real GDP in the short run

reduce; lower

in the market for loanable funds the law of supply

reflects that more people will choose to save the higher is the interest rate

During recessions, government expenditure automatically

rises, because of programs such as unemployment insurance and Medicaid

When real rates of interest are positive, it is better to be a

saver than a borrower, because the value of savings and debts are increasing

The market for loanable funds is a market in which

savers supply funds to those who want to borrow for their investment spending needs

The US government generally finances its debt by

selling US securities

Saving is like

selling the right to use your money for a time

Expansionary fiscal policy will

shift the aggregate demand curve to the right

The larger is the reserve ration the:

smaller is the money multiplier, and the less money will be created in the economy

If the government uses fiscal policy to close a recessionary gap, government

spending can be increased by less than the gap because of the government expenditure multiplier

A Farm worker gets paid today in money, but plans to spend the money next week. This illustrates which function of money

store of value

If the Fed buys Treasury bills, this will shift the money __________, which causes interest rates to ________

supply curve to the right; decrease

The fact that US citizens expect to receive retirements benefits through social security and medicare pushes their

supply of loanable funds further left than it would otherwise be

Which of the following policies/events results in an increase in the equilibrium quantity of loanable funds

technological progress makes capital more productive

Which of the following best describes how monetary policy affects the macroeconomy

the Fed changes the money supply which affects interest rates which shifts the AD curve which changes the price level and real GDP

Which of the following policies/ events result in an increase in the equilibrium quantity of savings

the economy enters an expansion making firms more likely to expand their operations

Assume the inflation rate falls from 4% to 2%. This means that

the economy is experiencing disinflation

As we move from the initial equilibrium to the final equilibrium, which of the following occurs

the equilibrium level of investment spending falls

Which of the following is not a tool the Federal Reserve can use to manage the money supply

Changing tax rates

Refer to the diagrams which represent short-run equilibrium changes. The AS curve is our SRS curve. Suppose the government undertakes a fiscal policy designed to increase aggregate demand from AD1 to AD2 and thereby increase GDP from X to Z. In terms of graph B, which of the following might explain why GDP increases to Y rather than Z?

Crowing-out effect

In 2010, the city of Canfield Collected $500,000 on taxes and spent $450,000. In 2010, the city of Canfield had a

Budget Surplus of $50,000

Suppose the economy is in short-run equilibrium above potential GDP and automatic stabilizers move the economy back to long-run equilibrium. Using the static AD-AS model in the figure above, this would be depicted as a movement from

C to B

Which of the following would you expect to decrease the equilibrium interest rate

an increase in the percentage of income that households save

in the figure above, the movement from point A to point B in the money market would be caused by

an increase in the price level

A lack of understanding regarding the current state of the economy creates:

an information lag

In the figure above suppose the economy is initially at point A. The movement of the economy to point B as shown in the graph illustrates the effect of which of the following policy actions by the Federal Reserve

an open market purchase of treasury bonds

In the figure above, the movement from point A to point B in the money market would be caused by

an open market sale of treasury bonds by the Federal Reserve

Unexpectedly high inflation causes of the following

lenders receive a lower real interest rate than they expected

Which model shows us the interaction of savers and borrowers

loanable funds model

The quantity theory of money predicts that in the ______ a 10% increase in the quantity of money leads to a 10% increase in ______

long run; price level

The quantity theory of money addresses the

long-run effect the quantity of money has on the price level

A bank will charge a higher interest rate the

longer is the length of the loan, and the higher the risk of repayment

Sarah is able to take out a loan for $5000 for one year at an annual interest rate of 10 percent. After calculating her return to be $450, Sarah will:

lose $50 on net, and should not take out the loan

In the figure above, if the economy is at point A, the appropriate stabilizing monetary policy by the Federal Reserve would be to

lower interest rates

The money demand curve has a negative slope because

lower interest rates cause households and firms to switch from financial assets (bonds) to money

In a closed economy, national savings will be

lower than private savings if the government runs a deficit

an economy is in a recession, discretionary fiscal policy would call for ______, and the automatic stabilizers would______.

lowering tax rates; lower tax revenues

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

medium exchange

When LL bean decides to increase its price due to general inflation, it must reprint millions of catalogs they produce and distribute. The costs associated with doing so in response to inflation are called

menu costs

A capital outflow occurs when

money saved domestically is invested in another country

if there are multiplier effects, then an increase in government purchases of $200 billion will shift the aggregate demand curve to the right by

more than $200 billion

As we move from the initial equilibrium to the final equilibrium, which of the following occurs

more than one of the above

bonds are a _____ liquid asset than other loans because they _____

more; are standardized

In general stocks are ____ risky than bonds and have a ____ rate of return

more; higher

The demand for loanable funds has a ____ slope because the lower the interest rate, the ____ number of investment projects are profitable, and the _____ the quantity of loanable funds demanded

negative; greater; greater

Unexpected high inflation redistributes wealth from

those who save to those who borrow

the "shoe-leather costs" of inflation are the costs from

time spent trying to spend money quickly

The primary function of a nation's financial system is

to channel the funds saved by savers to those who wish to borrow those funds

The statement "This Dell laptop costs $2500" illustrates which function of money

unit of account

Hyperinflation is defined as

very high inflation rates

If the real interest rate is 4%, then savings is equal to $ _____ million, investment is equal to $_____, and the equilibrium quantity of loanable funds is equal to $______ million

120; 120; 120

If the real interest rate is 4%, then savings is equal to $_____ million, investment is equal to $_____, and the equilibrium quantity of loanable funds is equal to $______ million

120; 120; 120

You want to make a 10% real return on a loan that you are planning to make, and the expected inflation rate during the period of the loan is 4%. You should charge a nominal interest rate of

14%

Assume you have a credit card balance of $2000 at 15% and the inflation rate is 3% what are the nominal and real interest rates

15% nominal and 12% real

Consider an economy where the growth rate of money supply is 2% and the inflation rate is 2%. if the quantity theory of money holds, the growth rate of real GDP in the economy will be

0%

you borrow $10,000 from a bank for one year at a nominal interest rate of 5%. the CPI over that year rises from 200 to 210. What is the real interest rate you are paying

0%

Suppose the money growth rate is 3%, velocity is constant, and the real GDP is growing at 2%. What is the inflation rate

1%

you borrow $10,000 from a bank for one year at a nominal interest rate of 5%. The CPI over that year rises from 150 to 155. What is the approximate real interest rate you are paying

1.67%

If the real interest rate is 6% and the inflation rate if 4%, then the nominal interest rate is

10%

According to the quantity theory of money, if the money supply grows at 10%, real GDP grows at 2%, and the velocity of money is constant, then the inflation rate will be

8%

Suppose that for a given year money growth is 12% real GDP growth is 4% and velocity is constant. According to the growth version of the quantity equation, the inflation rate would

8%

Suppose the economy is at point B. The automatic mechanism will take the economy to point ____, while expansionary policy (either monetary of fiscal) will take the economy to point ____

A; C

Fiscal policy most directly affects the economy by increasing or decreasing

Aggregate demand

Unexpectedly low inflation causes which of the following

Borrowers pay a higher real interest rate than they expected

Suppose that this economy begins at E1 and the central bank engages in expansionary monetary policy. According to the classical theory of inflation, in the long run, the economy will move to ______ and price level will be _____

E3; P3

Suppose you deposit $2000 into Bank of America and that the reserve ratio is 10%. How does this affect the banks balance sheet

Excess reserves rise by $1800

An example of automatic fiscal policy is

Expenditures for unemployment compensation increasing as economic growth slows

In the figure above, if the economy is at point A and the Fed engages in the appropriate stabilizing monetary policy, real GDP will _____ and the price level will _____

Fall; Fall

In class we maintained that the biggest problem with inflation in the long run is that it means that the paychecks of typical people will have less buying power, and thus people become poorer in real terms.

False

An example of a buyer in a financial marker would be

Families buying new houses

Monetary policy refers to the actions the

Federal reserve takes to manage the money supply and interest rates to pursue its macroeconomic policy objectives

The level of savings comes from _____ curve. The level of investment spending comes from _____ curve

The supply; the demand

Which of the following policies/events results in a decrease in the equilibrium quantity of savings?

The uncertainty of savers about the future decreases

The board of Governors of the Federal Reserve is

a seven member board, each one serving a 14 year term

Eliza wants to borrow $100 from Sandy. Sandy wants to make 4% real return on his money, so they both agree on a 4% interest rate paid next year. Eliza and Sandy did not anticipate any inflation, yet the actual inflation turned out to be -5% next year. In this case,

all of the above ( Sandy is better off ; Eliza will pay a 4% nominal interest rate; Eliza will pay an 9% real interest rate)

in a closed economy, national savings is

all of these are true ( The sum of the public savings plus private savings; equal to national investment; the sum of the savings of individuals and corporations plus the savings of the government)

Most economists agree that modest inflation is desirable over zero inflation because

all of these statements are true ( It allows a margin of error for those deciding on the money supply; it helps firms to more easily adjust real wages; it allows the Fed to more easily engage in expansionary monetary policy)

The issuer of a bond is a ______ and the purchaser of a bond is a _____

borrower; lender

the amount by which government expenditures exceed revenues during a particular year is the

budget deficit

To evaluate the size of the federal budget deficit or surplus over time, it would be best to look at the

budget deficit or surplus as a percentage of GDP

in comparison to a government that runs a balanced budget, when the government runs a budget deficit,

business investment will fall

Which of the following is an appropriate policy for the Federal Reserve to pursue if it wants to increase the money supply

buy US treasury bonds

The primary tool the Federal Reserve uses to increase the money supply is

buying Treasury securities

The primary toll the Federal reserve uses to increase the money supply is

buying treasury securities

One reason the government enacts fiscal policy instead of waiting for the economy to correct itself is the automatic adjustment

can take a very long time

If money demand is extremely sensitive to changes in the interest rate, the money demand curve becomes almost horizontal. If the Fed expands the money supply under these circumstances, then the interest rate will

change very little and investment and consumer spending will change very little

By making exchanges_____ money allows for _____ and higher______

easier; specialization; productivity

To stop hyperinflation, a nation must

eliminate the budget deficit

Suppose that today the actual Federal Funds rate is 0.40% and the Federal Reserve Bank's target for the Federal Funds rate is 0.25%. What is the Federal Reserve Bank likely to do

engage in open market purchases, which will increase the amount of reserves in the banking system and put downward pressure on the Federal Funds Rate

In the absence of inflation, the nominal interest rate is

equal to the real interest rate

Increased government spending is an example of

expansionary fiscal policy

The stimulus strategy behind tax cuts will only be effective if Ricardian equivalence:

fails to hold, and people increase their spending

during hyperinflation the value of money

falls rapidly

If inflation is completely anticipated

firms lose because they incur menu costs

The reduction in aggregate demand caused by deflation

further reduces prices, causing a deflationary spiral

A financial market is where people trade

future claims on funds or goods

If the federal government has a budget deficit, then

government expenditures exceed tax receipts

Which of the following is the best explanation of "moral hazard"

if is the prospect that a party insulated from risk may behave differently from the way it would behave if it were fully exposed to the risk

If the demand for loanable funds increases at the same time that the supply of loanable funds increases, then which of the following will happen with certainty

increase in the equilibrium quantity of loanable funds

Based on the quantity theory of money, hyperinflations are most likely caused by a rapid

increase in the growth of the money supply

If the reserve ratio is 10%, and banks do not hold excess reserves, when the Fed buys $10 million dollars of bonds from the public, bank reserves

increase initially by $10 million and the money supply eventually increases by $100 million

Cost-push inflation is

inflation caused by decreases in aggregate supply that are not matched by decreases in aggregate demand

Kim is paid $50,000 per year, and pays an annual income tax of 10%. Due to an inflation rate of 10%, her pay increases to $55,000, which puts her in a higher tax bracket where she must pay 20%. Which of the following can be said of kim

inflation caused her to be taxed more heavily and decreased her purchasing power

The difference between the nominal interest rate and the real interest rate is the

inflation rate

The portion of income that is present on productive inputs, such as factories, machinery, and inventories, is called

investment

Contractionary fiscal policy is so named because it

is aimed at reducing aggregate demand

Which of the following is true of "fiat money"

it has no intrinsic value

Which of the following is not a problem with deflation

it reduces the value of savings that savers have accumulated over time

why is deflation such a problem for consumption and investment

it slows both

When a government runs a deficit

its debt increases

one of the costs not associated with predictable inflation is

labor costs

The presence of automatic stabilizers means that the federal budget deficit is ____ than it otherwise would be in a recession and ____ than it otherwise would be in an expansion

larger;smaller

Which of the following statements about the Federal Reserve is incorrect

the member of the board of governors are also presidents of the Federal Reserve's regional banks

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

the money supply and interest rate to pursue its economic objectives

If the Fed pursues an expansionary monetary policy then

the money supply will increase, interest rates will fall and GDP will rise

Menu costs refer to

the money, time. and opportunity used to change prices to keep pace with inflation

According to the quantity theory of money, if there are fewer dollars available to spend on the same number of goods and services then

the price level will fall

The quantity theory of money asserts that inflation is the result of growth in

the quantity of money

The loanable funds market is in equilibrium, as shown in the figure above. An increase in business confidence about the future could result in which of the following

the real interest rate is 5% and the quantity of loanable funds is $150 million

Assuming all else equal, if there is an increase in the interest rate

there will be movement up and to the left along the demand for loanable funds curve

Which of the following is cost of anticipated inflation

there will be tax distortion

which of the following is INCORRECT regarding tax revenues

they increase during recessions