Econ Final Exam Study Guide
in the above figure, at the price level of 140 and real GDP of
$15 trillion, firms will not be able to sell all their output
In the above figure, the aggregate demand curve is AD2, so the short-run equilibrium level of real GDP is
$18.5 trillion
Suppose the velocity of circulation increases by 2 percent and potential GDP grows by 2 percent. The trend inflation rate will equal zero if the quantity of money grows by
0 percent
In the above figure, suppose that the economy is at point D. Which of the following occurs as a result of an open market purchase of government securities by the Fed?
A decrease, in the real interest rate an increase in exports, an increase in investment
An initial increase in aggregate demand that is NOT followed by an increase in the quantity of money results in a long-run equilibrium with
A higher price level but the same real GDP
Assuming that GDP currently equals potential GDP, a cost-push could result from which of the following?
A large crop failure that boosts the prices of raw food materials
Moving along the short-run phillips curve indicates
A tradeoff between inflation and unemployment so that higher inflation is related to lower unemployment
Demand-pull inflation starts with
An increase in aggregate demand
If real GDP is less than potential GDPm which of the following fiscal policies would increase real GDP?
An increase in government expenditure and/or a decrease taxes
Suppose the economy is at a short-run equilibrium with real GDP greater than potential GDP. Which of the following fiscal policies would decrease real GDP and the price level?
An increase in taxes
Which of the following is not a potential start of a demand-pull inflation?
An increase in taxes
When the output gap is positive, it represents ____ gap, and when it is negative, it represents ___ gap
An inflationary; a recessionary
Checks _____ money and checking deposits _____ money.
Are not; are
In the above figure, if the economy initially is at point A and government expenditure increases, in the short run the economy will move to point
B
Bank reserves include
The cash in the bank's vault; the bank's deposits at the Federal Reserve
Barter is
The exchange of goods and services directly for other goods and services
An individual holds $10,000 in a checking account and the price level rises significantly. Hence
The individual's real wealth and consumption expenditure decrease
Which of the following best describes the chain of events in the money creation process?
The monetary base increases. Banks acquire unplanned reserves which they loan out, increasing deposits and also the quantity of money. The new deposits then create additional unplanned reserves.
In response to the financial crisis of 2007 and the ensuing recession, the Fed announced three rounds of "quantitative easing," where the Fed purchased billions of dollars of securities. What impact would quantitative easing have on the monetary base?
The monetary base would increase
A change in _____ creates a movement along the aggregate demand curve but does not shift the aggregate demand curve
The price level
The quantity theory of money asserts that inflation is the result of growth in
The quantity of money
The quantity theory of money predicts how changes in
The quantity of money affect the price level
The monetary base
currency and reserves of depository institutions
The use of fiscal policy is limited because
time lags associated with fiscal policy may cause the policy to take effect too late to solve the problem it was supposed to address
Fiscal policy includes
Decisions related to government expenditure on goods and services, the value of transfer payments, and tax revenue
To end a deflation, the government must
Decrease government expenditures
A decrease in government expenditure on goods and services
Decreases aggregate demand
In the aggregate supply-aggregate demand model, raising the federal funds rate initially
Decreases aggregate demand
Increases in the quantity of money can start a ________ inflation and an increase in government expenditure can start a ________ inflation
Demand-pull; demand-pull
The stimulus package passed by congress in 2009 to combat the recession is an example of
Discretionary fiscal policy
The short-run phillips curve and the long-run phillips curve intersect at the ___ and ____
Expected inflation rate; the natural unemployment rate
The equation of exchange states that the price level is equal to
The velocity of circulation multiplied by the quantity of money divided by real GDP
Which of the following are limitations of fiscal policy?
There is a lag between recognizing that fiscal policy might be needed and when it actually takes effect; monetary policy might counter fiscal policy
When the AD and SAS curves intersect at a level of real GDP which exceeds potential GDP and there is no government policy undertaken, which of the following will occur?
The SAS curve shifts leftward because the money wage rate rises
Social security benefits and expenditures on Medicare and Medicaid are classified as
Transfer payments
The largest item of government outlays is
Transfer payments
The Federal Reserve's monetary policy goals include
Price level stability
All of the following are part of fiscal policy except
Controlling the money supply
In the above figure, suppose point C is the original equilibrium. If the Fed increases the federal funds rate and engages in quantitative tightening, the new equilibrium is given by point
A
The figure above illustrates the effect of
A decrease in real GDP.
In the short run, which of the following actions lower the interest rate
A decrease in the demand for money
In the United States today, money consists of
Currency and deposits at banks and other depository institutions
The largest source of government revenues is
Personal income taxes
Federal Reserve open market operations directly influence
Banks
The federal funds rate is the interest rate
Banks charge each other on overnight loans
If an economy has no money, then all transactions must be conducted through the use of
Barter
In the short run, when the Fed decreases the quantity of money
Bond prices fall and the interest rate rises
In the short run, when the Fed increase the quantity of money
Bond prices rise and the interest rate fails
When tax revenues exceed outlays, the government has a ________, and when outlays exceed tax revenues, the government has a ________.
Budget surplus; budget deficit
The factor that leads to business cycle events within real business cycle theory is represented by
Changes in the growth rate in productivity
When the economy is hit by spending fluctuations, the government can try to minimize the effects by
Changing government expenditures on goods, changing taxes, changing government expenditures on services
If the government has a balanced budget, the total amount of government debt is
Constant
Demand-pull inflation persists because of
Continuing increases in the quantity of money
If the Fed responds to repeated decreases in the short-run aggregate supply with repeated increases in the quantity of money, the economy will be faced with
Continuous inflation
Which of the following is the central bank of the United States?
Federal Reserve System
In the above, which figure shows the start of a cost-push inflation?
Figure C
Prior to the great depression, the purpose of the federal budget was to
Finance the activities of the government
Suppose a country has been running a persistent government budget deficit. If the deficit is reduced, but remains positive
Government debt will increase
The U.S. government's budget
Has mostly been in deficit during the past 30 years
Long-term interest rates are ________ than short-term interest rates because long-term loans are ________ than short-term loans.
Higher;riskier
Which of the following can start an inflation?
Increase in aggregate demand and a decrease in aggregate supply
The government budget deficit tends to decrease during the expansion phase of a business cycle because of tax revenues ________ and government transfer payments ________.
Increase;decrease
An open market purchase of securities by the FED?
Increases banks' reserves and decreases banks' securities
A decrease in short-run aggregate supply ________ the equilibrium price level and ________ the equilibrium quantity of real GD
Increases;decreases
If the government runs a surplus, the total amount of government debt is
Increasing
In the short run, the Federal Reserve faces a tradeoff between
Inflation and unemployment
A recessionary gap that the level of real GDP at the short-run macroeconomic equilibrium
Is less than full-employment GDP
An inflationary gap means that the level of real GDP at the short-run macroeconomic equilibrium
Is more than full-employment GDP
If real GDP decreases, the demand for money curve will shift
Leftward and the interest rate will rise
An increase in the money wage rate shifts the SAS curve ________ and an increase in the money prices of raw materials shifts the SAS curve ________.
Leftward;leftward
When the Federal Reserve fights inflation, the supply of loanable funds curve shifts ________ and the aggregate demand curve shifts ________.
Leftward;leftward
Long-term interest rates fluctuate _____ short-term interest rates
Less than
In the above figure, curve A is the ________ curve, curve B is the ________ curve, and curve C is the ________ curve.
Long-run aggregate supply; short-run aggregate supply; aggregate demand
The FED buys U.S. government securities from banks in order to
Lower the federal funds rate
Which of the following describes the chain of events the fed uses to fight recession?
Lower the federal funds rate target, buy government securities, increase reserves and loans, increase aggregate demand
In the short run, an increase in the federal funds rate ________ the real interest rate and ________ investment.
Lowers; increases
Commercial banks are able to create money by
Making loans
The functions of money are
Medium of exchange, unit of account, and store of value
The main sources of cost-push inflation are increases in
Money wage rates and the cost of raw materials
In the above figure, if the economy is initially at point B and taxes are raised while potential GDP does not change, then the economy will
Move to point A
In the long run, when the Fed increases the quantity of money
No real variable changes
Which aggregate supply-aggregate demand diagram above shows the effect on real GDP and the price level of monetary policy when it is used to fight a recession?
Only figure A
In the above figure, the economy experiences an increase in aggregate demand so that the aggregate demand curve shifts from AD0 to AD2. If the Fed wants to offset this change, it would
Raise the federal funds rate and engage in quantitative tightening
If the fed is concerned with inflation it will ___ the federal funds rate in order to ____ aggregate demand
Raise; decrease
Suppose the economy is in a recession and the fed lowers the federal funds rate. Then
Real GDP and the price level will both increase
The quantity of money
Real GDP equals potential GDP
The Federal Reserve System
Regulates the nation's financial institutions; conducts the nation's monetary policy
Changing which of the following is a Federal Reserve monetary policy tool?
Required reserve ratios
A discretionary fiscal policy is a fiscal policy that
Requires action by the congress
One characteristic of automatic fiscal policy is that it
Requires no legislative action by congress to be made effective
An increase in government expenditure shifts the AD curve ________ and an increase in taxes shifts the AD curve ________.
Rightward; leftward
Stagflation is the combination of a _____ and _____.
Rising price level; a decreasing real GDP
If the fed wants to decrease the quantity of money, it can
Sell U.S. government securities
A change in the full-employment quantity of labor ________ the short-run aggregate supply curve and ________ the long-run aggregate supply curve.
Shifts; shifts
A change in the capital stock ________ the short-run aggregate supply curve and ________ the long-run aggregate supply curve
Shifts;shifts
A technological advance ________ the long-run aggregate supply curve and ________ the short-run aggregate supply curve
Shifts;shifts
The short-run phillips curve
Slopes downward
Changes in which of the following is included as part of fiscal policy?
Tax rates
Monetary policy is controlled by
The Federal Reserve
Which of the following government bodies does not participate directly in formulating U.S. fiscal policy?
The Federal Reserve Board
An open market operation involves
The Federal Reserve's purchase or sale of securities
A change in the money wage rate shifts
The SAS curve but not the LAS curv
Phillips curve show the relationship between the
Unemployment rate and the inflation rate
An open market sale of securities by the FED
decreases banks' reserves and increases banks' securities
