Econ Exam(10/30/18)
11) - If the reserve ratio is 20%, then $100 of new reserves can create
$500 of new money in the economy
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
7) - A banks reserve ratio is 8% and the bank has $1000 in deposits it's reserve amount to
$80
Refer to Figure 34-4. Which of the following events could explain a shift of the money- demand curve from MD1 to MD2?
a decrease in the price level
Suppose the economy is in long-run equilibrium. If there is an increase in the supply of labor as well as an increase in the money supply, then we would expect that in the short- run,
real GDP will rise and the price level might rise, fall, or stay the same.
Tax increases
a. and increases in government expenditures shift aggregate demand right. b. and increases in government expenditures shift aggregate demand left. c. shift aggregate demand right while increases in government expenditures shift aggregate demand left. d. shift aggregate demand left while increases in government expenditures shift aggregate demand right.
Suppose investment spending falls. To offset the change in output the Federal Reserve could
increase the money supply. This increase would also move the price level closer to its value before the decline in investment spending
The principle of monetary neutrality implies that an increase in the money supply will
increase the price level, but not real GDP.
Open-market purchases by the Fed make the money supply
increase, which makes the value of money decrease.
The economic boom of the early 1940s resulted mostly from
increased government expenditures.
In response to the sharp decline in stock prices in October 1987, the Federal Reserve
increased the money supply and decreased interest rates.
When the money market is drawn with the value of money on the vertical axis, an increase in the money supply
increases the price level and decreases the value of money.
When the price level rises, the number of dollars needed to buy a representative basket of goods
increases, and so the value of money falls.
When there is inflation, the number of dollars needed to buy a representative basket of goods
increases, and so the value of money falls.
If businesses and consumers become pessimistic, the Federal Reserve can attempt to reduce the impact on the price level and real GDP by
increasing the money supply, which lowers interest rates.
When the money supply increases
interest rates fall and so aggregate demand shifts right.
Keynes argued that
irrational waves of pessimism cause decreases in aggregate demand and increases in unemployment.
In the early 1930s in the United States, there was a
large decrease in output. In the early 1940s there was a large increase in output.
If the discount rate is raised then banks borrow
less from the Fed so reserves decrease.
A situation in which the Fed's target interest rate has fallen as far as it can fall is sometimes described as a
liquidity trap.
The price level rises if either
money demand shifts leftward or money supply shifts rightward; this rise in the price level is associated with a fall in the value of money.
If the discount rate is lowered banks borrow
more from the Fed so reserves increase
19) - When the Consumer Price Index increases from 100 to 120
more money is needed to buy the same amount of goods, so the value of money falls.
If the government cuts the tax rate, workers get to keep
more of each additional dollar they earn, so work effort increases, and aggregate supply shifts right.
During recessions, automatic stabilizers tend to make the government's budget
move toward deficit
20) - When the money market is drawn with the value of money on the vertical axis, an increase in the price level causes a
movement to the right along the money demand curve.
Real GDP
moves in the opposite direction as unemployment.
If the inflation rate is zero, then
neither the nominal interest rate nor the real interest rate can fall below zero.
When the dollar appreciates, U.S.
net exports fall, which decreases the aggregate quantity of goods and services demanded.
When the dollar depreciates, U.S.
net exports rise, which increases the aggregate quantity of goods and services demanded.
In the 1970s, in response to recessions caused by an increase in the price of oil, the central banks in many countries increased their money supplies. The central banks might have done this by
purchasing bonds on the open market, which would have lowered the value of money.
Other things the same, automatic stabilizers tend to
raise expenditures during recessions and lower expenditures during expansions.
In the fourteenth century, the Western African Emperor Kankan Musa traveled to Cairo where he gave away much gold, which was in use as a medium of exchange. We would predict that this increase in gold.
raised the price level, but decreased the value of gold in Cairo.
Refer to Figure 34-2. What does Y represent on the horizontal axis of the right-hand graph?
real output
Assume the multiplier is 5 and that the crowding-out effect is $30 billion. An increase in government purchases of $20 billion will shift the aggregate-demand curve to the
right by $70 billion.
Suppose the economy is in long-run equilibrium. If the government increases its expenditures, eventually the increase in aggregate demand causes price expectations to
rise. This rise in price expectations shifts the short-run aggregate supply curve to the left.
Suppose that businesses and consumers become much more optimistic about the future of the economy. To stabilize output, the Federal Reserve could
sell bonds to raise interest rates.
6) - If the Federal open market committee decides to decrease the money supply it will
sell government bonds
21) - When the money market is drawn with the value of money on the vertical axis, if the Federal Reserve sells bonds, then the money supply curve
shifts left, causing the price level to fall.
Suppose that the MPC is 0.7, there is no investment accelerator, and there are no crowding- out effects. If government expenditures increase by $30 billion, then aggregate demand
shifts rightward by $100 billion.
22) - When the money market is drawn with the value of money on the vertical axis, if the Federal Reserve buys bonds, then the money supply curve
shifts rightward, causing the value of money measured in terms of goods and services to fall.
Supply-side economists believe that a reduction in the tax rate
shifts the aggregate supply curve to the right.
Other things the same, an increase in the expected price level shifts
short-run aggregate supply left.
Pessimism Suppose the economy is in long-run equilibrium. Then because of corporate scandal, international tensions, and loss of confidence in policymakers, people become pessimistic regarding the future and retain that level of pessimism for some time. Refer to Pessimism. In the long run, the change in price expectations created by pessimism shifts
short-run aggregate supply right.
Most economists use the aggregate demand and aggregate supply model primarily to analyze
short-run fluctuations in the economy.
The lag problem associated with monetary policy is due mostly to
the fact that business firms make investment plans far in advance.
Today, bank runs are not a major problem for the US banking system because
the federal government now guarantees the safety of deposits at most banks.
18) - Suppose that monetary neutrality and the Fisher effect both hold. An increase in the money supply growth rate increases
the inflation rate but not the growth rate of real GDP
18) - Suppose that monetary neutrality and the Fisher effect both hold. An increase in the money supply growth rate increases
the inflation rate, but not real interest rates.
Refer to Figure 34-5. What is measured along the vertical axis of the graph?
the interest rate
People choose to hold a smaller quantity of money if
the interest rate increases, which causes the opportunity cost of holding money to increase.
When the Fed lowers the growth rate of the money supply, it must take into account
the long-run effect on inflation as well as the short-run effect on production.
Consider the money market drawn with the value of money on the vertical axis. If money demand is unchanged and the price level rises, then
the money supply must have increased, perhaps because the Fed bought bonds.
The government buys new weapons systems. The manufacturers of weapons pay their employees. The employees spend this money on goods and services. The firms from which the employees buy the goods and services pay their employees. This sequence of events illustrates
the multiplier effect
17) - In which case below is the real interest rate the highest
the nominal interest rate = 2% and inflation = -1%
18) - Under the assumptions of the Fisher effect and monetary neutrality, if the money supply growth rate rises, then
the nominal interest rate rises, but the real interest rate does not
Imagine that in 2015 the economy is in long-run equilibrium. Then stock prices rise more than expected and stay high for some time. Refer to Stock Market Boom 2015. How is the new long-run equilibrium different from the original one?
the price level is higher and real GDP is the same.
Pessimism Suppose the economy is in long-run equilibrium. Then because of corporate scandal, international tensions, and loss of confidence in policymakers, people become pessimistic regarding the future and retain that level of pessimism for some time. Refer to Pessimism. How is the new long-run equilibrium different from the original one?
the price level is lower and real GDP is the same.
Suppose the economy is in long-run equilibrium. In a short span of time, there is a large influx of skilled immigrants, a major new discovery of oil, and a major new technological advance in electricity production. In the short run, we would expect
the price level to fall and real GDP to rise.
Suppose that the economy is at long-run equilibrium. If there is a sharp rise in the stock market combined with a significant increase in the minimum wage, then in the short run
the price level will rise, and real GDP might rise, fall, or stay the same.
Suppose the economy is in long-run equilibrium. Concerns about pollution cause the government to significantly restrict the production of electricity. At the same time, taxes fall. In the short-run
the price level will rise, and real GDP might rise, fall, or stay the same.
Suppose the economy is in long-run equilibrium. If there is an increase in government purchases at the same time there is a large increase in the price of oil, then in the short-run
the price level will rise, and real GDP might rise, fall, or stay the same.
If a country experienced deflation, then
the real interest rate would be greater than the nominal interest rate
Suppose the price level rises, but the number of dollars you are paid per hour stays the same. This means that your
the real wage is lower
The term crowding-out effect refers to
the reduction in aggregate demand that results when a fiscal expansion causes the interest rate to increase.
Bank capital is
the resources that owners have put into the bank.
2) - Refer to Table 29-1. What is the value of M1 in billions of dollars?
$1,915 billion
12) - If the reserve ratio is 4%, then $81,250 of new money can be generated by
$3250 of new reserves
In a certain economy, when income is $500, consumer spending is $375. The value of the multiplier for this economy is 5. It follows that, when income is $510, consumer spending is
$383
10) - If the reserve ratio is 12.5% then $1000 of additional reserves can create up to
$8,000 of new money
3) -Refer to Table 29-1. What is the value of M2 in billions of dollars?
$8,315 billion
If the MPC = 0.75, then the government purchases multiplier is about
4
13) - Refer to Table 29-8. This bank's leverage ratio is
50
Refer to Figure 30-3. At the end of 2009 the relevant money-supply curve was the one labeled MS 1 . At the end of 2010 the relevant money-supply curve was the one labeled MS 2 . Assuming the economy is always in equilibrium, what was the economy's approximate inflation rate for 2010?
50 percent
Refer to Figure 30-3. Suppose the relevant money-supply curve is the one labeled MS1; also suppose the economy's real GDP is 30,000 for the year. If the money market is in equilibrium, then the velocity of money is approximately
6.0
Refer to Figure 30-2. At the end of 2009 the relevant money-demand curve was the one labeled MD2. At the end of 2010 the relevant money-demand curve was the one labeled MD1. Assuming the economy is always in equilibrium, what was the economy's approximate inflation rate for 2010?
75 percent
According to the IGM poll, what percentage of economists polled agreed that the benefits of ARRA exceeded the costs?
75%
15) If the nominal interest rate is 5% and there is a deflation rate of 3%, what is the real interest rate?
8%
If M = 12,000, P = 3, and Y = 32,000, then velocity =
8. Velocity will rise if money changes hands more frequently.
According to the IGM poll, what percentage of economists polled agreed that the unemployment rate at the end of 2010 was lower with ARRA than without?
97%
Explain the Misperceptions Theory and how it relates to the short-run aggregate supply curve.
A lower price level causes misperceptions about the relative prices. These misperceptions may induce suppliers to respond to a lower price level by cutting back on production or the quantity of goods and services supplied. For example, a wheat farmer may notice a fall in the price of wheat (in their market) before they notice a fall in the price of many other goods in the markets. This will lead the farmers to decrease the quantity of wheat supplied.
16) - Which of the following combinations of nominal interest rates and inflation implies a real interest rate of 7%
A nominal interest rate of 8% and an inflation rate of 1%
Name at least 3 events that may shift the aggregate demand curve to the right.
A stock market boom, a tax cut, or increased government spending.
Name at least three events that may shift the aggregate demand curve to the left.
A stock market crash, a tax hike, or reduced government spending, or a recession abroad.
Treasury bonds are
A store of value but not a medium of exchange
The leverage ratio is calculated as
Assets divided by bank capital
During a bank run depositors decide to hold more currency relative to deposit and banks decide to hold more excess reserves relative to deposits
Both a decision to hold relatively more currency and a decision to hold relatively more excess reserves would make the money supply decrease
During a bank run, depositors decide to hold more currency relative to deposits and banks decide to hold more excess reserves relative to deposits
Both the decision to hold relatively more currency and the decision to hold relatively more excess reserves would make the money supply decrease.
Pessimism Suppose the economy is in long-run equilibrium. Then because of corporate scandal, international tensions, and loss of confidence in policymakers, people become pessimistic regarding the future and retain that level of pessimism for some time. Refer to Pessimism. In the short run what happens to the price level and real GDP?
Both the price level and real GDP fall.
If the federal funds rate were above the level the federal reserve had targeted, the Fed could've moved the right back towards its target by
Buying bonds, this buying would increase reserves
Why might the aggregate demand curve shift? List and describe at least three reasons.
Changes in government spending, taxes, investment, consumption or net exports may shift the aggregate demand curve.
And open market sale
Decreases the number of dollars in the hands of the public and increases the number of bonds in the hands of the public
Under a fractional reserve banking system banks
Generally lend out the majority of the funds deposited
All Fed purchases and sales of
Government bonds are conducted at the New York feds trading desk
Name two macroeconomic variables that decline when the economy goes into a recession.
Real GDP, or national income, and the employment rate. Investment may also decline.
To decrease the money supply the fed could
Sell government bonds Increase the discount rate Increase the reserve requirement
1 and 5) - To decrease the money supply the Fed could
Sell government bonds, lower the money multiplier, increase the reserve requirement
Explain the Sticky Price Theory and how it relates to the short-run aggregate supply curve.
The prices of some goods and services adjust slowly. This slow adjustment is attributable to the fact that there are costs to adjusting prices called menu costs. These menu costs include the cost of printing and the cost of distributing catalogs, and the time required to change price-tags. As a result, prices and wages may be stuck in the short-run.
13) - Refer to Table 29-8. The required reserve ratio is 12 percent. Which of the following is true?
This banks reserve ratio is 13.3 percent. Its excess reserves are $120.
The classical dichotomy argues that changes in the money supply
affect nominal variables, but not real variables.
In a system of 100% reserve banking
banks do not make loans, currency is the only form of money, deposits are banks' only assets.
The long-run effect of an increase in household consumption is to raise
both real output and the price level.
Suppose there is an increase in government spending. To stabilize output, the Federal Reserve would
decrease the money supply.
Suppose stock prices rise. To offset the resulting change in output the Federal Reserve could
decrease the money supply. This decrease would also move the price level closer to its value before the rise in stock prices.
If taxes
decrease, then consumption increases, and aggregate demand shifts rightward.
A decrease in government spending
decreases the interest rate and so investment spending increases.
To reduce the effects of crowding out caused by an increase in government expenditures, the Federal Reserve could
increase the money supply by buying bonds.
In the mid-1970s the price of oil rose dramatically. This
shifted aggregate supply left, the price level rose, and real GDP fell.
The velocity of money is
the average number of times per year a dollar is spent.
18) - The Fisher effect is crucial for understanding changes over time in
the nominal interest rate.
According to the classical dichotomy, which of the following increases when the money supply increases?
the nominal wage
The lag problem associated with fiscal policy is due mostly to
the political system of checks and balances that slows down the process of implementing fiscal policy.
According to the assumptions of the quantity theory of money, if the money supply increases 5 percent, then
the price level would rise by 5 percent and real GDP would be unchanged.
CASE 1: inflation = 0%, nom. interest rate = 10% CASE 2: inflation = 10%, nom. interest rate = 20% Refer to CASE 1 and CASE 2 above: You deposit $5000 in the bank for one year. Assume the tax rate is 25%. In which case does the real value of your deposit grow the most?
In case 1 the real value is 5,500 dollars. In case 2 the real value is 5,500 dollars. They are both equal.
Explain the logic according to liquidity preference theory by which a decrease in the money supply changes the aggregate demand curve.
Money supply falls (Fed sells government bonds to target a higher federal funds rate), interest rate rises, investment falls, and the aggregate demand shifts to the left. Real GDP falls and price level falls.
Banks are able to create money only when
Only a fraction of the deposits are held in reserve
Liquidity refers to
The ease with which an asset is converted to the medium of exchange
4) All US paper dollars read "this note is legal tender for all debts public and private" this statement represents which characteristic of US currency
US paper money is fiat money
Name one macroeconomic variable that rises during a recession.
Unemployment rises during a recession.
14) - Suppose a bank is operating with a leverage ratio of 10. A 6% increase in the value of assets
Will result in a 60% increase in owners equity
Imagine that in 2015 the economy is in long-run equilibrium. Then stock prices rise more than expected and stay high for some time. Refer to Stock Market Boom 2015. Which curve shifts and in which direction?
aggregate demand shifts right
Keynes used the term "animal spirits" to refer to
arbitrary changes in attitudes of household and firms.
Suppose the economy is in long-run equilibrium and the government decreases its expenditures. Which of the following helps explain the logic of why the economy moves back to long-run equilibrium?
as people revise their price-level expectations downward, firms and workers strike bargains for lower nominal wages.
Suppose that there is an increase in the costs of production that shifts the short-run aggregate supply curve left. If there is no policy response, then eventually
because unemployment is high, wages will be bid down and short-run aggregate supply will shift right.
Imagine that in 2015 the economy is in long-run equilibrium. Then stock prices rise more than expected and stay high for some time. Refer to Stock Market Boom 2015. In the short run what happens to the price level and real GDP?
both the price level and real GDP rise.
If the interest rate is above the feds target, the Fed should
buy bonds to increase the money supply
To increase the money supply the Fed could
decrease the discount rate
If households view a tax cut as temporary, then the tax cut
has less of an effect on aggregate demand than if households view it as permanent.
If monetary neutrality holds, then an increase in the money supply
increases nominal but not real variables. Most economists think that monetary neutrality is a good description of the long run.
If there are floods or droughts or a decrease in the availability of raw materials
output falls in the short run.
Assume the MPC is 0.625. Assume there is a multiplier effect and that the total crowding-out effect is $12 billion. An increase in government purchases of $30 billion will shift aggregate demand to the
right by $68 billion.
Imagine that in 2015 the economy is in long-run equilibrium. Then stock prices rise more than expected and stay high for some time. Refer to Stock Market Boom 2015. In the long run, the change in price expectations created by the stock market boom shifts
short-run aggregate supply left.
When the Fed buys bonds
the supply of money increases and so aggregate demand shifts right.
The economy of Mainland uses gold as its money. If the government discovers a large reserve of gold on their land
the supply of money increases and the value of money falls.
When the money market is drawn with the value of money on the vertical axis, if there is a shortage of money then
the value of money rises which will make people desire to hold less money.
During the economic downturn of 2008-2009, the Federal Reserve
took the unusual step of using open-market operations to purchase mortgages and corporate debt.
An example of an automatic stabilizer is
unemployment benefits
The money supply is 4,000, nominal GDP is 8,000, and real GDP is 2,000. Which of the following is 2?
velocity but not the price level.
If output is above its natural rate, then according to sticky-wage theory
workers and firms will strike bargains for higher wages. This increase in wages shifts the short-run aggregate supply curve left.
Reserves are
Deposits that banks have received but have not yet loaned out
Which of the following has been suggested as a cause of the Great Depression?
All are correct... a decline in the money supply b. a decrease in stock prices c. the collapse of the banking system
Refer to Figure 34-4. Suppose the current equilibrium interest rate is r3. Which of the following events would cause the equilibrium interest rate to decrease?
All are correct... a. The Federal Reserve increases the money supply. b. Money demand decreases. c. The price level decreases.
Refer to Figure 34-5. A shift of the money-demand curve from MD1 to MD2 could be a result of
All are correct... a. a decrease in taxes. b. an increase in government spending. c. an increase in the price level.
Critics of stabilization policy argue that
All are correct... a. there is a lag between the time policy is passed and the time policy has an impact on the economy. b. the impact of policy may last longer than the problem it was designed to offset. c. policy can be a source of, instead of a cure for, economic fluctuations.
6) - If the Federal open market committee decides to increase the money supply then the federal reserve
Creates dollars and uses them to purchase government bonds from the public
In a certain economy, when income is $100, consumer spending is $60. The value of the multiplier for this economy is 4. It follows that, when income is $101, consumer spending is
$60.75
In a certain economy, when income is $1000, consumer spending is $800. The value of the multiplier for this economy is 2.5. It follows that, when income is $1020, consumer spending is
$812. For this economy, an initial increase of $100 in consumer spending translates into a $250 increase in aggregate demand.
23) - Refer to Figure 30-2. If the relevant money-demand curve is the one labeled MD1, then the equilibrium value of money is
0.5 and the equilibrium price level is 2.
Scenario 34-1. Take the following information as given for a small, imaginary economy: • When income is $10,000, consumption spending is $6,500. • When income is $11,000, consumption spending is $7,250. Refer to Scenario 34-1. The marginal propensity to consume for this economy is
0.750
If the multiplier is 6, then the MPC is
0.83
List and discuss three facts about economic fluctuations
1) economic fluctuations are irregular and unpredictable 2) Most macroeconomic quantities fluctuate together 3) As output falls unemployment rises
If real output in an economy is 1,000 goods per year, the money supply is $300, and each dollar is spent an average of 4 times per year, then according to the quantity equation, the average price level is
1.20
19) - If P denotes the price of goods and services measured in terms of money, then
1/P represents the value of money measured in terms of goods and services.
1) - The manager of the bank where you work tells you that your bank has $6 million in excess reserves she also tells you that the bank has $400 million in deposits and $362 million in loans given this information you find that the reserve requirement must be
32/400
Scenario 34-1. Take the following information as given for a small, imaginary economy: • When income is $10,000, consumption spending is $6,500. • When income is $11,000, consumption spending is $7,250. Refer to Scenario 34-1. The multiplier for this economy is
4.00
Based on the quantity equation, if M = 8,000, P = 3, and Y = 12,000, then V =
4.5
For each of the events below explain the short-run effects on real GDP and price level and provide detailed diagrams to support your explanations. A. Congress tries to balance the budget by cutting government spending. B. A stock market boom increases household wealth. C. War breaks out in the Middle East, causing oil prices to soar.
A. This event would reduce aggregate demand and output. B. This event would increase aggregate demand, raising output above its natural rate.. C. This event would reduce aggregate supply, causing output to fall.
Suppose the economy is in long-run equilibrium. In a short span of time, there is a sharp increase in the supply of labor, a major new discovery of oil, and new environmental regulations that raise the cost of electricity production. In the short run
All are true... the price level will rise and real GDP will fall. the price level will fall and real GDP will rise. the price level and real GDP will both stay the same.
A bank loans Greg's ice cream $250,000 to remodel a building near campus to use as a new store on their respective balance sheets this loan is
An asset for the bank and a liability for Greg's ice cream, the loan increases the money supply
Refer to Figure 34-2. A decrease in Y from Y1 to Y2 is explained as follows:
An increase in P from P1 to P2 causes the money-demand curve to shift from MD1 to MD2; this shift of MD causes r to increase from r1 to r2; and this increase in r causes Y to decrease from Y1 to Y2.
Which of the following correctly explains the crowding-out effect?
An increase in government expenditures increases the interest rate and so reduces investment spending.
Name at least three events that may shift the long-run aggregate supply curve to the left or right.
An increase in labor, capital, a technological advancement, or the discovery of a natural resource.
In addition, explain how the Fed should adjust the money supply and interest rates to stabilize output and provide a detailed diagram to support your explanations. D. Congress tries to balance the budget by cutting government spending. E. A stock market boom increases household wealth. F. War breaks out in the Middle East, causing oil prices to soar.
D. To stabilize output, the Fed should increase MS and reduce r to increase aggregate demand. E. To stabilize output, the Fed should reduce MS and increase r to reduce aggregate demand. F. To stabilize output, the Fed should increase MS and reduce r to increase aggregate demand
Bank regulators impose capital requirements in order to
Ensure banks can pay off depositors
9) - If the reserve ratio increased from 10% to 20% the money multiplier would
Fall from 10 to 5
4) - Currently US currency is
Fiat money with no intrinsic value
The claim that increases in the growth rate of the money supply increase Nominal interest rates but not real interest rates is known as the
Fisher effect
Refer to Figure 33-15. Suppose the economy begins at point A. Decreases in what four variables could result in a movement to point D? G, NX, I, and C
G, NX, I, and C
The Soviet government in the 1980s never abandoned the ruble as the official currency however the people of Moscow preferred to except
Goods such as cigarettes or American dollars in exchange for goods and services reminding us of the fact that government decree by itself is not sufficient for the success of a commodity money
CASE 1: inflation = 0%, nom. interest rate = 10% CASE 2: inflation = 10%, nom. interest rate = 20%
In case 1 the nominal income earnings equal 500 dollars and in case 2 the nominal income earnings equal 1,000 dollars. If the tax rate is 25 percent, case 1 taxes are 125 dollars and case 2 taxes are 250. Case 2 pays more in taxes based on the nominal value of the incomes.
Explain why the long-run aggregate-supply curve is vertical.
In the long-run the quantity of output supplied depends on the economy's quantity of labor, capital, natural resources and technology for turning these inputs to outputs. Because the quantity supplied does not depend on the overall price level(P), the long-run aggregate-supply curve is vertical.
The Federal deposit insurance Corporation (FDIC)
Protects depositors in the event of bank failures
If the Fed had raised the reserve requirement, the demand for reserves for would
Increase, so the federal funds rate would rise
The fed can reduce the federal funds rate by
Increasing the money supply. To increase the money supply it could buy bonds
8) - A bank has a 5% reserve requirement $5000 in deposits and has loaned out all that can given the reserve requirement
It has $250 in reserves and $4750 in loans
1 and 5) - To increase the money supply the Fed could
Purchase government bonds Increase the money multiplier Decrease the reserve requirement
Explain the logic according to liquidity preference theory by which an increase in the money supply changes the aggregate demand curve.
Money Supply increases, interest rates fall, investment rises, and aggregate demand shifts to the right. Real GDP and price level rises.
Refer to Figure 34-4. Suppose the current equilibrium interest rate is r1. Which of the following events would cause the equilibrium interest rate to increase?
Money demand increases.
Explain the Sticky Wage Theory and how it relates to the short-run aggregate supply curve.
Nominal wages are slow to adjust in the short-run. They are temporary stuck and this attributable to long-term contracts between workers and firms that fix nominal wages, sometimes as long as three years.
Refer to Figure 33-16. Suppose the economy starts at P3 and Y2. If there is a decrease in government purchases, identify the price and output levels that the economy would move to in the short run.
P2,Y
If the federal funds rate were below the level the federal reserve Had targeted, the Fed could move the rate back towards its target by
Selling bonds. This selling would reduce reserves(money supply)
When conducting an open market sale, the fed
Sells government bonds and in doing so decreases the money supply
A decrease in the money supply might indicate that the Fed had
Sold bonds in an attempt to increase the federal funds rate
6) - The Fed has the power to increase or decrease the number of dollars in the economy through the decisions of
The FOMC
Which of the following did not happen during the onset of the Great Depression?
The Fed conducted expansionary monetary policy.
Which of the following entities actually executes open market operations
The New York federal reserve bank
Suppose that an election of a popular presidential candidate suddenly increases people's confidence in the future. Use the model of aggregate demand and aggregate supply to analyze the effect on the economy.
The aggregate demand curve shifts to the left. The economy deviates temporarily away from its natural level of output and unemployment rate. Real GDP increase and the overall price level increase in the short-run
List and define at least three costs of high inflation.
The costs include: Shoeleather costs: the resources wasted when inflation induces people to reduce their money holdings. Menu costs: the cost of more frequent price changes at higher inflation rates. Relative Price Variability: because prices change infrequently, higher inflation causes relative prices to vary more. Decisions based on relative prices are then distorted so that resources may not be allocated efficiently. Inflation Induced Tax Distortions: the income tax is not completely indexed for inflation; an increase in nominal income created by inflation results in higher real tax rates that discourage savings. Confusion and Inconvenience: inflation decreases the reliability of the unit of account making it more complicated to differentiate successful and unsuccessful firms thereby impeding the efficient allocation of funds to alternative investments. Unexpected Inflation: inflation decreases the real value of debt thereby transferring wealth from creditors to debtors.
Describe the exchange rate effect and how it relates to the aggregate demand curve.
The exchange rate effect- suppose the price level P declines -decrease in the interest rate -U.S dollar depreciates -stimulates US net exports,NX -increase in quantity demanded of goods and services
Pessimism Suppose the economy is in long-run equilibrium. Then because of corporate scandal, international tensions, and loss of confidence in policymakers, people become pessimistic regarding the future and retain that level of pessimism for some time. Refer to Pessimism. What happens to the expected price level and what's the result for wage bargaining?
The expected price level falls. Bargains are struck for lower wages.
Imagine that in 2015 the economy is in long-run equilibrium. Then stock prices rise more than expected and stay high for some time. Refer to Stock Market Boom 2015. What happens to the expected price level and what impact does this have on wage bargaining?
The expected price level rises. Bargains are struck for higher wages.
Refer to Figure 34-5. A shift of the money-demand curve from MD2 to MD1 is consistent with which of the following sets of events?
The government reduces government spending, resulting in a decrease in people's incomes
Describe the interest rate effect and how it relates to the aggregate demand curve.
The interest rate effect- suppose the price level P declines -buying goods and services requires fewer dollars -people buy bonds and other assets -decrease in the interest rate -increase spending on investment goods, I -increase in quantity demanded of goods and services
6) - At the federal reserve
The nations monetary policy is made by the Federal open market committee (FOMC) which meets about every six weeks
The money supply in Muckland is $100 billion. Nominal GDP is $800 billion and real GDP is $200 billion. What are the price level and velocity in Muckland?
The price level is 4 and velocity is 8
Describe the wealth effect and how it relates to the aggregate demand curve.
The wealth effect- suppose the price level P declines -increase in the real value of money -Consumers are wealthier -Increase in consumer spending C -Increase in the quantity demand of goods and services
Refer to Figure 34-4. Which of the following events could explain a decrease in the equilibrium interest rate from r1 to r3?
a decrease in the price level
An increase in the price level and a reduction in output would result from
a decrease in the supply of an important resource.
Pessimism Suppose the economy is in long-run equilibrium. Then because of corporate scandal, international tensions, and loss of confidence in policymakers, people become pessimistic regarding the future and retain that level of pessimism for some time. Refer to Pessimism. Which curve shifts and in which direction?
aggregate demand shifts left
Policymakers who control monetary and fiscal policy and want to offset the effects on output of an economic contraction caused by a shift in aggregate supply could use policy to shift
aggregate demand to the right.
In 1986, OPEC countries increased their production of oil. This caused
aggregate supply to shift right.
The multiplier effect
amplifies the effects of an increase in government expenditures, while the crowding-out effect diminishes the effects.
Refer to Figure 34-2. Assume the money market is always in equilibrium. Under the assumptions of the model,
an increase in r from r1 to r2 is associated with a decrease in Y from Y1 to Y2.
Refer to Figure 30-3. Which of the following events could explain a shift of the money-supply curve from MS 1 to MS 2 ?
an open-market purchase of bonds by the Federal Reserve
Suppose there is a tax increase. To stabilize output, the Federal Reserve will
increase the money supply.
Which of the following is correct? a. The classical dichotomy separates real and nominal variables. b. Monetary neutrality is the proposition that changes in the money supply do not change real variables. c. When studying long-run changes in the economy, the neutrality of money offers a good description of how the world works. d. All are correct
d. all are correct
As the price level rises, the value of money
decreases, so people must hold more money to purchase goods and services.
Permanent tax cuts shift the AD curve
farther to the right than do temporary tax cuts.
When the price level falls
households want to lend more, so the interest rate falls, making the quantity of goods and services demanded rise.
Keynes explained that recessions and depressions occur because of
inadequate aggregate demand.
Keynes believed that economies experiencing high unemployment should adopt policies to
increase aggregate demand. (the total demand for goods and services within a particular market)
The price of imported oil rises. If the government wanted to stabilize output, which of the following could it do?
increase government expenditures or increase the money supply
Suppose an increase in interest rates causes rising unemployment and falling output. To counter this, the Federal Reserve would
increase the money supply.
Suppose households attempt to increase their money holdings. To stabilize output by countering this increase in money demand, the Federal Reserve would
increase the money supply.
