ECON-2301 Nervo TCC Final

When the Federal Reserve increases the Federal Funds target rate, it achieves this target by

selling government securities to decrease the excess reserves available for overnight loan.

In order to understand how the economy works in the short run, we need to

study a model in which real and nominal variables interact.

Monetary policy is determined by

the Federal Reserve and involves changing the money supply.

Liquidity preference refers directly to Keynes' theory concerning

the effects of changes in money demand and supply on interest rates.

In recent years, the Fed has chosen to target interest rates rather than the money supply because

the money supply is hard to measure with sufficient precision.

If the investment accelerator from an increase in government purchases is larger than the crowding-out effect, then

the multiplier is probably greater than one.

According to the interest-rate effect, an increase in the price level will

will lead to a reduction in total real spending on interest-rate-sensitive goods.

Which of the following policies would Keynes's followers support when an increase in business optimism shifts the aggregate demand curve away from long-run equilibrium?

None of the above is correct.

Refer to Figure 33-9. Suppose the economy starts where LRAS = AD1 = SRAS1. A decrease in short-run aggregate supply would be consistent with the movement to

P2, Y1

According to the classical model, an increase in the money supply causes

the price level, nominal GNP, nominal wage. I, II, and III.

When there is an excess supply of money,

there is an excess demand for bonds, so those looking to borrow by selling bonds can do so at a lower interest rate.

In the short run, open-market purchases

will decrease the nominal interest rate and increase short-run equilibrium output.

If the multiplier is 6, then the MPC is

1/(1-MPC)=6 MPC = 5/6 = .83

Which among the following assets is the most liquid?

Funds in a checking account. Deposits that can be withdrawn using ATMs.

During the last half of 2012, the U.S. unemployment rate was just under 8 percent. Historical experience suggests that this is

above the natural rate, so real GDP growth was likely low.

A surplus or shortage in the money market is eliminated by adjustments in the price level

according to classical theory, but not liquidity preference theory.

When the price level falls the quantity of

consumption goods demanded and the quantity of net exports demanded both rise b/c interest rate falls.

People will buy more if the price level

falls, because falling prices increase the real value of a dollar.

Other things the same, if the money supply rises by 2% and people were expecting it to rise by 5%, then some firms have

higher than desired prices which depresses their sales.

Other things the same, the aggregate quantity of goods demanded decreases if

real wealth falls, the interest rate rises, and the dollar appreciates.

Assuming no crowding-out, investment-accelerator, or multiplier effects, a $100 billion increase in government

right by $100 billion.

According to liquidity preference theory, if the price level increases, then the equilibrium interest rate

rises and the aggregate quantity of goods demanded falls.

If the MPC = 4/5, then the government purchases multiplier is

Is 5, NOT 5/4.

If the MPC is 0.8 and there are no crowding-out or accelerator effects, then an initial increase in aggregate demand of $120 billion will eventually shift the aggregate demand curve to the right by

$600 billion.

During the 2008-2009 unemployment rose from about 4.4% to about

10.1%

During recessions declines in investment account for about

2/3 of the decline in real GDP.

Which of the following shifts aggregate demand to the left?

A decrease in the money supply.

Which of the following events would shift money demand to the left?

A decrease in the price level.

Refer to Financial Crisis. Suppose the economy reaches long-run equilibrium without the Fed responding. Now suppose the financial crisis ends and the ability of banks to lend returns to normal. In which case is the price level lower compared to its value prior to the crisis?

After the economy reaches long-run equilibrium during the crisis but not in the long-run equilibrium after the crisis is over.

For the U.S. economy, which of the following helps explain the slope of the aggregate-demand curve?

An increase in the price level increases the interest rate.

In the long run, an increase in the stock of human capital

An increase in the size of the labor force plus knowledge and skill.

Refer to Figure 33-10. If the economy starts at point C, stagflation would be consistent with point

D.