Econ Exam 2 (HW 3)
Historically speaking, a one dollar decrease in household wealth will cause consumer spending to fall by:
$0.03 to $0.07.
Fred purchases a bond, newly issued by the Big Time Corporation, for $10,000. The bond pays $400 to its holder at the end of the first, second, and third years and pays $10,400 upon its maturity at the end of four years. The principal amount of this bond is ___, the coupon rate is ____, and the term of this bond is _____.
$10,000; 4%; four years
If the marginal propensity to consume equals 0.75, then a $100 increase in after-tax disposable income leads to a ______ increase in consumption.
$75
Data on after-tax income and consumption spending for the Adam Smith family are given below: After tax income: 9000, 14000, 19000, 24000 Consumption spending: 18100, 22600, 27100, 31600 Based on these data, the Adam Smith family has a marginal propensity to consume of:
0.9
If the money supply equals 2,000, velocity equals 3, and real GDP equals 4,000, then the price level equals:
1.5
The Federal Reserve consists of ______ regional Banks, ______ governors on the Board of Governors, and ______ voting members of the Federal Open Market Committee.
12; 7; 12
One year before maturity the price of a bond with a principal amount of $1,000 and a coupon rate of 5% paid annually fell to $981. The one year interest rate must be:
7.0%.
The increase in unemployment during a recession is associated with which type of unemployment?
Cyclical unemployment
The M2 measure of money consists of the sum of:
M1, savings deposits, small time deposits, and money market mutual funds.
A depression is:
a particularly severe and protracted recession.
An expansion is:
a period in which the economy is growing at a rate significantly above normal.
Contrary to the behavior that would be required to eliminate output gaps, many firms in the economy:
adjust their prices only periodically.
The marginal propensity to consume (mpc) is the:
amount by which consumption increases when disposable income increases by $1.
The bursting of the housing bubble in 2006 caused ______ to cut back on their spending, thereby shifting the PAE line _____.
businesses and households; downward
Stockholders receive returns on their financial investment in the form of ______ and _____.
capital gains; dividends
Bank reserves are:
cash and similar assets held to meet depositor withdrawals or payments.
Menu costs are the costs of:
changing prices.
Indicators of economic activity that move at the same time as the overall movement of the economy are called ______ indicators.
coincident
The most important, most convenient, and most flexible way in which the Federal Reserve affects the supply of bank reserves is through:
conducting open-market operations.
Which of the following workers is most likely to lose his/her job during a recession?
construction worker
The M1 measure of money consists of the sum of:
currency, checking deposits, and travelers' checks.
According to Okun's Law, each extra percentage point of ______ unemployment is associated with a ______ percentage point increase in the output gap.
cyclical; 2
When the coupon rate on newly-issued bonds increases from 5% to 6%, the prices of existing bonds:
decrease.
The aging of the labor force in the U.S. is likely to ______ the natural rate of unemployment; an increase in the efficiency of the labor market is likely to ______ the natural rate of unemployment.
decrease; decrease
In the short-run, if the Federal Reserve increases interest rates, then consumption and investment ______, planned aggregate expenditure ______, and short-run equilibrium output _______.
decrease; decreases; decreases
Higher nominal interest rates ______ the amount of money demanded and a higher price level ______ the amount of money demanded.
decrease; increases
Higher nominal interest rates ______ the amount of money demanded and higher real income ______ the amount of money demanded.
decrease; increases
To close a recessionary gap, the Federal Reserve must ______ real interest rates by ______ the money supply.
decrease; increasing
Innovations in the United States, such as credit cards, debit cards, and ATMs have:
decreased the demand for money.
When the interest rate on newly issued bonds increases, the price of existing bonds:
decreases.
When Argentines increase their savings in U.S. dollars, the U.S. money:
demand curve shifts right.
The ______ is the interest rate commercial banks pay to the Fed; the ______ is the interest rate commercial banks charge each other for short-term loans.
discount rate; federal funds rate
In the Keynesian model, consumption depends on:
disposable income.
All of the following are characteristics of short-term economic fluctuations EXCEPT:
durable-goods industries are less sensitive to short-term fluctuations than service and non-durable industries.
Economic activity moves from a trough into a period of ______ until it reaches a ______ and then into a period of _______.
expansion; peak; recession
The interest rate that commercial banks charge each other for very short-term loans is called the:
federal funds rate.
Recessions tend to be ______ by ______ in the rate of inflation.
followed; a decline
Compared to older workers, younger workers change jobs more frequently, so they are more prone to ______ unemployment and have fewer skills, so they are more prone to ______ unemployment.
frictional; structural
Pat pays $10,000 for a newly issued two-year government bond with a $10,000 face value and a 6 percent coupon rate. One year later, after receiving the first coupon payment, Pat sells the bond. If the current one-year interest rate on government bonds is 5 percent, then the price Pat receives is:
greater than $10,000.
In the long run, countries with higher rates of money growth usually have:
higher rates of inflation.
One of the serious drawbacks of the deposit insurance system instituted in the United States is that:
if insured intermediaries make bad loans, the taxpayers may be responsible for covering the losses.
During the Christmas shopping season, the demand for money increases significantly. If the Fed takes no actions to offset the increase in money demand, then nominal interest rates will ____.
increase
A fiscal policy action to close a recessionary gap is to:
increase government purchases.
You originally required a risk premium of 6 percent in addition to the rate of return on safe assets before you would purchase shares of Techno Company stock. If you and other investors reduce the risk premium you require to 4 percent, the price of Techno Company stock will:
increase.
You own shares in a well-managed and diversified company. If a booming economy decreases investors' concerns about market risk, then the price of your shares will _____, holding other factors constant.
increase.
Stock prices increase when expected future dividends ____, interest rates _____, and/or the risk premium ______.
increase; decrease; decreases
The recession of 2007-2009 happened in part because, after the housing bubble burst in 2006, the ensuing financial crisis:
increased the level of uncertainty about the future.
During the Great Depression in the United States between 1929 and 1933, banks' reserve/deposit ratio ______ and the amount of currency held by the public ____, while the money supply ______.
increased; increased; decreased
The increasing availability of temporary job placement agencies and online job services has ______ the efficiency of matching workers and jobs and ______ the natural rate of unemployment in the United States.
increased; reduced
A higher real interest rate ______ saving and ______ consumption spending.
increases; decreases
An increase in the perceived riskiness of the stock of Company A ______ the risk premium investors require to purchase Company A stock and ______ the price of Company A stock.
increases; decreases
Automatic stabilizers are provisions in the law that imply automatic ______ in government spending or ______ in taxes when real output declines.
increases; decreases
An economic expansion in the U.S. ______ the demand for exports from Mexico resulting in an increase in Mexican autonomous expenditures and a(n) ______ output gap in Mexico.
increases; expansionary
Higher real income ______ the demand for money and a higher price level ______ the demand for money.
increases; increases
When commercial banks borrow reserves from the Fed, the quantity of reserves in the banking system ______ and, ultimately, the money supply _____.
increases; increases
The Federal Reserve can decrease the money supply by:
increasing reserve requirements.
A rapidly growing supply of money will lead to:
inflation.
The current price of a stock increases when:
interest rates decrease.
According to Okun's Law, when cyclical unemployment is positive, then the output gap:
is negative.
Firms do not change prices frequently because:
it is costly to do so.
Extremely rapid rates of money growth are usually the result of:
large government budget deficits.
Chris pays $10,000 for a newly issued two-year government bond with a $10,000 face value and a 6 percent coupon rate. One year later, after receiving the first coupon payment, Chris sells the bond. If the current one-year interest rate on government bonds is 7 percent, then the price Chris receives is:
less than $10,000.
If the nominal interest rate is above the equilibrium value, then the quantity demanded of money is ______ than the quantity supplied of money, bond prices will ____, and the nominal interest rate will ____.
less; rise; decrease
The coupon rate on newly issued bonds is usually higher for bonds with ______ terms and ______ risk that the borrower will go bankrupt
longer; greater
The coupon rate on newly issued bonds is usually ______ for bonds with favorable tax treatment, such as municipal bonds, and ______ for bonds that are very risky, such as junk bonds.
lower; higher
One problem with using monetary policy to address "bubbles" in asset markets is that:
monetary policy is not a very good tool for addressing the problem of inappropriately high asset prices.
The quantity equation states that:
money x velocity = nominal GDP.
The Federal Reserve can:
only set a money supply target that is consistent with a nominal interest rate target, and vice versa.
If the Federal Reserve sets a target nominal interest rate, it can:
only set a money supply target that is consistent with the target nominal interest rate target.
Velocity is determined by:
payments methods and technology.
Economic activity moves from a period of expansion to a ______ and then moves into a period of ______ until it reaches a _____.
peak, recession; trough
Which of the following workers is least likely to lose his/her job during a recession?
police officer
A recession occurs when either ______ or _______, or both.
potential output grows slowly; actual output falls below potential output
In the long run, output gaps are eliminated by:
price changes.
In the past, some governments' budget deficits became so large that they could not raise sufficient taxes to finance the spending, so they ______, which led to ______.
printed large quantities of paper money; hyperinflation
If the Fed wishes to reduce nominal interest rates, it must engage in an open market ______ of bonds that ______ the money supply.
purchase; increases
The money demand curve will shift to the right if:
real income increases.
When actual output is less than potential output there is a(n):
recessionary gap.
If short-run equilibrium output equals 20,000 and potential output (Y*) equals 25,000, then this economy has a(n) ______ gap that can be closed by _________.
recessionary; increasing government purchases
In the short run with predetermined prices, when output is greater than planned aggregate expenditure, firms will:
reduce production.
Savers may prefer to use financial intermediaries rather than lending directly to borrowers because financial intermediaries:
reduce the cost of gathering information about borrowers
In the basic Keynesian model, a tax increase:
reduces short-run equilibrium output.
When the Fed sells government securities, the banks':
reserves will decrease and lending will contract, causing a decrease in the money supply.
The three functions of money are:
serving as a medium of exchange, unit of account, and store of value.
In the United States since 1929 the duration of recessions on average has been:
shorter than the duration of expansions.
Because an increase in the nominal interest rate raises the opportunity costs of holding money, the money demand curve:
slopes downward.
The natural rate of unemployment is the unemployment rate when there is only:
structural and frictional unemployment.
One potential problem with using fiscal policy to close recessionary output gaps is that:
sustained government deficits can be harmful to long-run economic growth.
Two examples of governments that printed large quantities of paper currency to finance massive budget deficits, causing hyperinflation, are ______ and ______.
the Confederacy during the American Civil War; Germany after World War I
The Federal Reserve discount rate is the rate of interest charged on loans from ______ to _____.
the Federal Reserve; commercial banks
If actual GDP equals potential GDP, then:
the actual unemployment rate equals the natural rate of unemployment.
Which of the following is most likely to occur in the labor market during a recession?
the growth rate of real wages declines.
The link between the money supply and prices is strongest in:
the long run.
According to the quantity equation, if velocity and output are constant, then an increase in the money supply leads to ______ in inflation.
the same percentage increase
If the output gap equals -3.2 percent, then
there is a recessionary gap.
If the output gap equals 1.8 percent, then
there is an expansionary gap.
During recessions, the change in real GDP is:
usually negative, but can be positive.
Nominal GDP divided by the money stock equals:
velocity.
For policymakers the problem with a recessionary gap is ______ and the problem with an expansionary gap is _____.
wasted resources; a tendency for inflation to develop
The tendency of changes in asset prices to affect spending on consumption goods is called the ______ effect.
wealth
