Econ test review

Suppose P denotes the price of goods and services measured in terms of money.

A decrease in the value of money is associated with an increase in P. If P is the price of goods and services measured in terms of money, then 1/P is the value of money measured in terms of goods and services. If P decreases, the value of money increases. And vice versa.

Which of the following would not explain why the aggregate demand curve slopes downward?

A higher price level increases real wealth, which stimulates spending on consumption. If a higher price level leads to greater spending on consumption, then aggregate demand slopes upward.

Suppose P is the price level (the GDP deflator), Y the quantity of output (real GDP), and M the quantity of money. If M = 1,000, P = 2, and Y= 3,000, what is velocity (V)?

6 The velocity of money is calculated by dividing the nominal value of output (nominal GDP) by the quantity of money. If P is the price level (the GDP deflator), Y the quantity of output (real GDP), and M the quantity of money, then V = (P x Y)/M = (2 x 3,000)/1,000 = 6.

An increase in the value of money decreases the price of goods and services measured in terms of money.

True If P is the price of goods and services measured in terms of money, then 1/P is the value of money measured in terms of goods and services. If P decreases, the value of money increases. And vice versa.

Which of the following increases in response to the interest-rate effect from a decrease in the price level?

both investment and consumption Because of a fall in the price level, interest rates fall, which stimulates the demand for investment goods and for big-ticket consumption goods and services financed through borrowing.

A increase in a supply of oil could ____

decrease LRAS An economy's overall productive capacity, or long-run aggregate supply, depends on its natural resources, including its land, minerals, and weather. Oil is also considered a natural resource. Thus, if the supply of oil decreases, the long-run aggregate supply curve will shift left, representing a decrease in overall production.

The sticky-wage theory of the short-run aggregate-supply curve says that when the price level is higher than expected,

relative to prices wages are lower and employment rises. If the price level is higher than expected, wages are lower relative to prices. In response, firms hire more workers.

Suppose a bank has total assets of $1,000, capital of $50, and liabilities of $950; the leverage ratio for this bank is ____.

20 The leverage ratio is the ratio of assets to bank capital, or in this case, $1,000/$50, or 20.

If $200 of new reserves generates $1,000 of new money in the economy, then the reserve ratio is

20 percent The formula for the money multiplier is 1/R, where R represents the reserve ratio of all banks in the economy. If $1,000 of new money is created from $200 of new reserves, the money multiplier must be 5. In order for the money multiplier to be 5 the reserve ratio must be 0.2 or 20 percent. Then 1/R would be 1/0.2 = 5. This would lead to $1,000 in new money generated by $200 in new reserves since $200 X (1/0.2) = $1,000 in new money in the economy.

Which of the following reforms would allow for the taxation of only real interest earnings?

Indexing the tax system to take into account the effects of inflation. The tax laws could be reformed to adjust the purchase price using a price index and assess the tax only on the real gain. In the case of interest income, the government could tax only real interest income by excluding that portion of the interest income that merely compensates for inflation.

In the short run a decrease in the cost of production makes

Output rise and prices fall A decrease in the costs of production causes the short-run aggregate-supply curve to shift to the right. Holding the aggregate-demand curve constant, the new equilibrium will have higher output and a lower price level.

Which of the following describes how inflation can be measured?

Percentage change in the GDP deflator. Inflation is measured as a percentage change in the consumer price index (CPI), the GDP deflator, or some other index of the overall price level.

U.S. dollars are an example of fiat money and alcohol used to make trades is an example of commodity money.

True Commodity money is money that takes the form of a commodity with intrinsic value while fiat money is money without intrinsic value that is used as money only because of government decree. In this case, paper dollars have no intrinsic value, but are used as currency because the United States government has decreed that its dollars are valid money. You can verify this by checking your currency for the following message: "This note is legal tender for all debts, public and private." Meanwhile, alcohol used to make trades would be an example of commodity money, as alcohol has intrinsic value in that it can be used for a variety of purposes, including drinking in order to induce inebriation.

Because some economists do not understand what things change GDP, they cannot predict recessions with a fair amount of accuracy.

True Economic fluctuations are not at all regular, and they are almost impossible to predict with much accuracy.

An increase in the money supply causes output to rise in the short run.

True In the short run, changes in the money supply can temporarily push real GDP away from its long-run trend. For example, an increase in the money supply causes short-run output to rise.

Which of the following adjusts to bring aggregate demand and aggregate supply into balance?

both the price level and the quantity of output The price level and the quantity of output adjust to bring aggregate demand and aggregate supply into balance.

When U.S. net exports rise, which increases the aggregate quantity of goods and services demanded, the dollar must have

depreciated A lower price level causes U.S. interest rates to fall, the real value of the dollar to depreciate in foreign exchange markets, U.S. net exports to rise, and the aggregate quantity of goods and services demanded to rise.

The separation of real and nominal variables is referred to as the classical

dichotomy

One reason that the Fed's control of the money supply is not precise is because ____

households' decisions, which are out of the Fed's control, impact the money supply. Households choose to hold deposits in banks. This decision of how much a household decides to hold depends on some factors that are outside of the Fed's control, such as confidence in the banking system.

In a 100-percent-reserve banking system, if an individual withdraws money from their checking account, currency would

increase, but demand deposits would decrease by the same amount and M1 would not change. Banks in a 100-percent-reserve-banking system accept deposits, but do not loan out the reserves. The deposits are held until the depositor accesses the account. Each deposit in a bank reduces currency, since the money will no longer be in the hands of the public, and increases the demand deposit portion of M1 by the same amount.

When the price level rises less than expected, a firm with a sticky price will sell its output at a price that is

more than the firm desires and decrease its production. According to sticky-price theory, after an unexpected fall in the price level, some firms may temporarily lag behind in reducing their prices. Because these lagging firms have prices that are more than the firms desire, their sales decline and the firms cut back on production.

Assume banks hold no excess reserves. If the Fed decreases the reserve ratio from 20 percent to 10 percent, then the money multiplier

ncreases from 5 to 10. The money multiplier is equal to 1/R, where R is the reserve ratio. Initially, if the reserve requirement is 20 percent, the money multiplier is 1/0.2 = 5. After the reserve requirement is decreased to 10 percent, the money multiplier is 1/0.1 = 10. Therefore, the money multiplier increases from 5 to 10.

The inflation tax is not exactly like other taxes because ____

no one receives a bill from the government for the tax. When the government raises revenue by creating money, it is taxing everyone who holds money, but nobody receives a bill for the tax.

When the Fed buys U.S. government bonds, it has conducted

open market purchases, which increase the money supply. When the Fed purchases government bonds, it is conducting open market purchases. Because the Fed purchases government bonds in the public bond market, the currency used to make the purchases ends up in the hands of the general public. Because currency is included in M1, M1 increases and the money supply is larger than before. Further, because individuals may deposit this new money in a bank account, bank reserves and lending will also increase.

The amount of reserves banks must hold against deposits is known as

reserve requirement. Reserve requirements are regulations on the minimum amount of reserves that banks must hold against deposits. The Fed can influence the reserve ratio of banks in the economy by changing reserve requirements. This strategy is employed infrequently by the Fed.

People will want to buy fewer bonds and the interest rate will rise, as the price level

rises When the price level rises, households try to increase their holdings of money by reducing their willingness to lend some of it out. A household would buy fewer bonds and the interest rate would rise.

During a recession, unemployment typically

rises. When real GDP falls in a recession, the unemployment rate rises substantially.

When production costs fall,

the short-run aggregate-supply curve shifts to the right. When production costs fall, firms are able to produce more output at any given price level. The short-run aggregate-supply curve shifts to the right.

Which of the following will both make people buy less?

wealth falls and interest rates rise If consumers are less wealthy, demand for consumption goods falls. If interest rates rise, demand for investment goods also falls.

If 1/R is the money multiplier in an economy, what must R represent?

the reserve ratio for all banks in the economy The formula for the money multiplier is 1/R, where R is represents the reserve ratio of all banks in the economy.

If the reserve ratio is 5 percent, then $500 of new reserves can generate

$10,000 of new money in the economy. The formula for the money multiplier is 1/R, where R represents the reserve ratio of all banks in the economy. If the reserve ratio is 5 percent, the money multiplier is 1/0.05=20. Therefore, $500 in new reserves can generate 20 X $500 =$10,000 in new money in the economy.

Which of the following most closely fits an economist's definition of "money"?

the set of assets in an economy that people regularly use to buy goods and services. Economists have a more specific definition of the word "money" than the general public. Economists use the word "money" to refer to the set of assets in an economy that people regularly use to buy goods and services from other people. This is different than an asset, such as a large house or car, which might be valuable but are not regularly exchanged directly. These assets would contribute to one's wealth, but you could not purchase a sandwich with your car unless you first sold your car for cash.

The classical view that money does not matter is sometimes described by the saying, "Money is a

veil"

Bertha bought 10 shares of iSnack stock for $1 per share. In one year, she sold 5 shares for $5 a share. During this year, the price level increased from 140 to 147. What is Bertha's before-tax real capital gain?

$19 The inflation rate is 100 x ((147 - 140)/140) = 5%. Bertha paid $5 for five shares last year. Now, she sold them for $5 per share, making 5 x $5 = $25 while gaining $25 - $5 = $20. Of her $20 gain, 5% is lost to inflation: $20 - $20 x 0.05 = $19.

A bank's reserve ratio is 20 percent and the bank has $1,000 in deposits. Its reserves amount to

$200. The reserve ratio of a bank is the fraction of deposits that banks hold as reserves. This means that if bank has $1,000 dollars in deposits, and a 20 percent reserve ratio, its reserves must be $1,000 X 20% = $200.

Bertha bought 10 shares of iSnack stock for $1 per share. In one year, she sold 5 shares for $5 a share. During this year, the price level decreased from 147 to 140. What is Bertha's before-tax real capital gain?

$21 The inflation rate is 100 x ((140 - 147)/147) = -5%. Bertha paid $5 for five shares last year. Now, she sold them making 5 x $5 = $25, gaining $25 - $5 = $20. However, since the price level has decreased, Bertha is actually gaining more: $20 - ($20 x (-0.05)) = $21.

Bertha purchased 100 shares of BestSnack, Inc. stock for $20 per share; in one year, she sold the 100 shares for $25 a share. Over the year, the inflation rate was 3%. If the tax rate on nominal capital gain is 50%, how much did Bertha earn?

$242.5. Bertha's capital gain is ($25 - $20) x 100 = $500, of which the government takes 50%, leaving her with $500 x (1 - 0.50) = $250. Of this amount, 3% is lost to inflation, which means that Bertha earns only $250 x (1 - 0.03) = $242.5.

Bertha purchased 100 shares of BestSnack, Inc. stock for $20 per share; in one year, she sold the 100 shares for $25 a share. Over the year, the inflation rate was 3%. If the tax rate on nominal capital gain is 50%, how much tax does Bertha pay on her gain?

$250 Bertha's capital gain is ($25 - $20) x 100 = $500, of which the government takes 50%, leaving her with $500 x (1 - 0.50) = $250. Note that the remaining 3% is taken by inflation, not the government.

If the reserve ratio is 20 percent, then $150 of new reserves can generate

$750 of new money in the economy. The formula for the money multiplier is 1/R, where R represents the reserve ratio of all banks in the economy. If the reserve ratio is 20 percent, the money multiplier is 1/0.2=5. Therefore, $150 in new reserves can generate 5 X $150 =$750.

Bertha purchased 10 shares of BestSnack, Inc. stock for $200 per share; in one year, she sold the 10 shares for $220 a share. Over the year, the inflation rate was 3%. If the tax rate on nominal capital gain is 50%, how much does Bertha earn?

$97 Bertha's capital gain is ($220 - $200) x 10 = $200, of which the government takes 50%, leaving her with $200 x (1 - 0.50) = $100. Of this amount, inflation takes another 3%: $100 x (1 - 0.03) = $97.

Suppose the nominal interest rate is 8%, the inflation rate is 3% and the tax rate is 45%. What is after-tax real rate of interest? 11%

1.4% The government takes 45% of the nominal rate of 8%, leaving an after-tax nominal interest rate of only 8% - (8% x 0.45) = 4.4%. Thus the after-tax real interest rate is 4.4% - 3% = 1.4%.

Suppose the Consumer Price Index has increased from 105 to 107. What is the inflation rate?

1.9% Inflation is measured as a percentage change in the overall price level: 100 x ((107 - 105)/105) = 1.9%.

Under what reserve ratio is a bank unable to create money

100% When banks hold only a fraction of deposits as reserves, the banking system creates money. When banks hold only a fraction of deposits as reserves, they loan out the remaining money into the economy with the intention of earning a profit when the loan is repaid with interest. Demand deposits remain constant, because depositors still have access to those funds. However, because money has been loaned out by the bank, currency in the hands of the general public has increased. Because M1 includes both demand deposits and currency, M1 has increased. Therefore, at any reserve ratio that is less than 100%, banks will lend money and the money supply will be increased.

The real interest rate is 4%, inflation is 2%, and the marginal income tax rate is 25%. What is after-tax real rate of interest?

2.5% The income tax treats this entire nominal interest of 4% + 2% = 6% as income, the government takes 25% of it, leaving an after-tax nominal interest rate of only 6% - (6% x 0.25) = 4.5%. The after-tax real interest rate is 4.5% - 2% = 2.5%.

The nominal interest rate is 10%, inflation is 4%, the marginal income tax rate is 25%. What is after-tax real rate of interest?

3.5% The government takes 25% of the nominal rate of 10%, leaving an after-tax nominal interest rate of only 10% - (10 x 0.25) = 7.5%. Thus the after-tax real interest rate is 7.5% - 4% = 3.5%.

Suppose the nominal interest rate is 6% and the inflation rate is 2%. What is the real interest rate?

4% The nominal interest rate is the interest rate you hear about at your bank, whereas the real interest rate corrects the nominal interest rate for the effect of inflation: Real interest rate = Nominal interest rate - Inflation rate = 6% - 2% = 4%.

The nominal interest rate is 8%, inflation is 1%, the marginal income tax rate is 10%. What is after-tax real rate of interest?

6.2% The government takes 10% of the nominal rate of 8%, leaving an after-tax nominal interest rate of only 8% - (8% x 0.10) = 7.2%. Thus the after-tax real interest rate is 7.2% - 1% = 6.2%.

The nominal interest rate is 12%, inflation is 3%, the marginal income tax rate is 10%. What is after-tax real rate of interest?

7.8% The government takes 10% of the nominal rate of 12%, leaving an after-tax nominal interest rate of only 12% - (12% x 0.10) = 10.8%. Thus the after-tax real interest rate is 10.8% - 3% = 7.8%.

Which GDP growth rates and unemployment rates is not realistic? Answer: A

A) -2 percent, 2 percent B) 10 percent, 5 percent C) -1 percent, 8 percent D) 3 percent, 6 percent

Which of the following describes monetary neutrality?

Changes in the supply of money affect nominal variables but not real ones. Changes in the supply of money affect nominal variables but not real ones. When the central bank doubles the money supply, the price level doubles, the dollar wage doubles, and all other dollar values double. Real variables, such as production, employment, real wages, and real interest rates, are unchanged. The irrelevance of monetary changes for real variables is called monetary neutrality.

Bertha lends $1,000 to Danko for 2 years and charges an annual interest rate of 6%. Bertha had anticipated the inflation rate of 2%, but it actually turned to be 2.5%. In two years, as a result of the higher-than-expected inflation,

Danko is better off at the expense of Bertha. Higher than expected inflation makes borrowers better off at the expense of the lenders because it diminishes the real value of the debt: Danko can repay the loan in dollars that are less valuable than anticipated. Therefore Danko is better off at the expense of Bertha. This is because the real interest rate is the difference between the nominal interest rate and the inflation rate.

Which classical economist observed that, when the money supply expanded after gold discoveries, it took some time for prices to rise, and in the meantime, the economy enjoyed higher employment and production?

David Hume In 18th-century England, David Hume realized that classical theory did not hold in the short run when he observed the effects of gold discoveries.

True or False: The Fed most often influences the money supply by changing reserve requirements for banks.

False The Fed most frequently influences the money supply using open market operations. This is because open market operations are easy to carry out, on either a smaller or larger scale, and typically do not require changes in laws or regulations.

The immediate effect of a monetary injection increases the economy's ability to supply goods and services.

False The immediate effect of a monetary injection is an excess supply of money. The economy's ability to supply goods and services, however, does not change as it is determined by the available labor, physical capital, human capital, natural resources, and technological knowledge. None of these is altered by the injection of money.

Ashley owns a home worth $500,000 and owes $100,000 in student loans. If you asked an economist, she would say Ashley has $400,000 worth of money.

False Economists define "money" as the set of assets in an economy that people regularly use to buy goods and services from other people. This is different than wealth, which is based on assets, such as a house, and liabilities, such as a loan you have to pay back. The key difference is that assets and liabilities are not commonly used to purchase goods and services from other individuals. In this case, you have information on Ashley's assets and liabilities, but you have no information on the actual amount of money Ashley holds. Therefore, by definition used by economists, you cannot say that Ashley has $400,000 worth of money without more information.

Increased optimism about the future leads to falling prices and falling unemployment in the short run.

False Increased optimism shifts the aggregate-demand curve to the right. At the new equilibrium, the price level and real GDP rise. Rising real GDP implies falling unemployment.

True of False: The Fed most often influences the money supply by changing reserve requirements for banks.

False The Fed most frequently influences the money supply using open market operations. This is because open market operations are easy to carry out, on either a smaller or larger scale, and typically do not require changes in laws or regulations.

In the U.S., people are required to pay taxes on real capital gains irrespective of their nominal capital gains.

False One example of how inflation discourages saving is the tax treatment of capital gains-the profits made by selling an asset for more than its purchase price. In the U.S., people are required to pay taxes on nominal capital gains, irrespective of their real capital gains.

Under what system do banks generally lend out the majority of the funds deposited?

Fractional reserve banking. A fractional reserve banking system is a banking system in which banks keep only a fraction of the deposits they receive as reserves. This allows banks in this system to loan out a portion of the deposits they receive, and earn an accounting profit when the loan is repaid with interest. This gives banks the incentive to loan out much of the money it receives as deposits, as allowable by law. In a 100-percent-reserve banking system, banks keep all deposits they receive as reserves. This prohibits banks from lending out their deposits as loans.

The two primary tasks of the Federal Reserve are

Monetary policy and bank regulation The Federal Reserve serves two primary purposes. The first is to regulate banks in order to ensure the health of the banking system. This includes making loans to distressed banks as part of the "lender of the last resort" role of the Fed. Second, the Fed controls the quantity of money in the economy, called the money supply, through the use of monetary policy. This monetary policy is made by the Federal Open Market Committee (FOMC), which meets every 6 weeks in Washington D.C.

Why do people believe in the inflation fallacy?

People tend to forget that inflation in prices goes hand in hand with inflation in incomes. When prices rise, buyers of goods and services are worse off but at the same time, sellers are better off. Because most people earn their incomes by selling their services, such as their labor, inflation in incomes goes hand in hand with inflation in prices. Thus, inflation does not in itself reduce people's real purchasing power.

Which of the following explains why the demand curve for money is downward sloping?

People want to hold a larger quantity of money when each dollar buys less. Suppose the horizontal axis shows the quantity of money and the vertical axis shows the price level on a graph. Then the demand curve for money is downward sloping because people want to hold a larger quantity of money when each dollar buys less, since the value of money increases when the price level decreases. Note that the supply curve for money is vertical because the quantity of money supplied is fixed by the Federal Reserve.

Which of the following describes how inflation can be measured?

Percentage change in the GDP deflator. Inflation is measured as a percentage change in the consumer price index (CPI), the GDP deflator, or some other index of the overall price level.

Which of the following describes how inflation is usually measured?

Percentage change in the consumer price index. Inflation is measured as a percentage change in the consumer price index (CPI), the GDP deflator, or some other index of the overall price level.

How does the aggregate-demand curve shift when increased uncertainty and pessimism about the future of the economy lead firms to desire less investment spending which shifts the aggregate-demand curve to the left?

The curve shifts to the left. Because of the uncertainty and pessimism, households and firms now want to buy a smaller quantity of goods and services for any given price level. The aggregate-demand curve shifts to the left.

Which of the following describes the effect of a decrease in the money supply?

The money supply curve shifts to the left, the price level decreases causing the value of money to increase. A decrease in the money supply shifts the money supply curve to the left, the value of money and the price level adjust to bring supply and demand back into balance. Now there are fewer dollars chasing the same number of goods and services. The price level decreases, making each dollar more valuable.

Which of the following describes the effect of an increase in the money supply?

The money supply curve shifts to the right, the price level increases causing the value of money to decrease. An increase in the money supply shifts the money supply curve to the right, the value of money and the price level adjust to bring supply and demand back into balance. An increase in the money supply makes dollars more plentiful, the price level increases, making each dollar less valuable.

Which of the following is the immediate effect of a monetary injection?

The money supply increases, whereas the economy's ability to supply goods and services does not change. The immediate effect of a monetary injection is to create an excess supply of money. The economy's ability to supply goods and services, however, does not change as it is determined by the available labor, physical capital, human capital, natural resources, and technological knowledge. None of these is altered by the injection of money.

Which of the following describes the Fisher effect?

The nominal interest rate adjusts to the inflation rate. When the Fed increases the rate of money growth, the long-run result is both a higher inflation rate and a higher nominal interest rate. The adjustment of the nominal interest rate to the inflation rate is called the Fisher effect, after Irving Fisher (1867-1947), the economist who first studied it.

Which of the following explains why the supply curve for money is vertical?

The quantity of money supplied is fixed by the Federal Reserve. If the horizontal axis shows the quantity of money and the vertical axis shows the price level, the supply curve for money is vertical because the quantity of money supplied is fixed by the Federal Reserve. Note that the demand curve for money is downward sloping because people want to hold a larger quantity of money when each dollar buys less.

Which of the following theories can explain both inflation and hyperinflation?

The quantity theory of money. The quantity theory of money asserts that the quantity of money available determines the price level and that the growth rate in the quantity of money available determines the inflation rate.

Suppose the money multiplier has increased. Which of the following is most likely the cause?

The reserve ratio decreases The formula for the money multiplier is 1/R, where R represents the reserve ratio of all banks in the economy. This means that as R gets smaller, the denominator of the fraction 1/ R gets smaller. This means the fraction 1/R gets larger. In short, if the money multiplier gets bigger it must be because the reserve ratio has gotten smaller.

Other things the same, a government regulation that prevents using a current technology raises the price level.

True If the government passes new regulations preventing firms from using some production methods, the result is a leftward shift in the long-run aggregate-supply curve. Holding the aggregate-demand curve constant, the new equilibrium will have a higher price level.

Aggregate-demand curve shifts to the left if the money supply decreases.

True A decrease in the money supply raises the interest rate, discourages investment spending, and thereby shifts the aggregate-demand curve to the left.

The recessions associated with the business cycle come at irregular intervals.

True Economic fluctuations are not at all regular, and they are almost impossible to predict with much accuracy.

When inflation turns out to be higher than expected, wealth is redistributed from lenders to borrowers.

True Higher than expected inflation makes borrowers better off at the expense of the lenders because it diminishes the real value of the debt: Borrowers can repay the loan in dollars that are less valuable than they anticipated as the real interest rate is the difference between the nominal interest rate and the inflation rate.

Which of the following describes the meaning of the demand for money?

Wealth that people want to hold in liquid form. The demand for money reflects how much wealth people want to hold in liquid form. For example, the amount of cash that people hold in their wallets depends on how much they rely on credit cards and on whether an automatic teller machine is easy to find.

Which of the following is not an example of currency?

a $1,000 balance stored in a checking account. Currency includes only the paper bills and coins in the hands of the public, while demand deposits are balances in bank accounts that depositors can access on demand by writing a check. Therefore, a $20 bill, a $100 bill, and a nickel would all be considered currency while a $1,000 bank account balance would be considered a demand deposit.

Which of the following both shift aggregate-demand curve to the right?

a decrease in taxes and at a given price level consumers feel more wealthy When the government cuts taxes and when people feel wealthier, it encourages people to spend more, so the aggregate-demand curve shifts to the right.

Which of the following does the Federal Reserve do?

act as a lender of last resort to banks When financially troubled banks find themselves short of cash, the Fed acts as a lender of the last resort. In other words, the Fed lends to those banks who cannot borrow anywhere else. The Fed makes such loans to maintain stability in the banking system.

An increase in the availability of an important major resource such as oil shifts the:

aggregate-supply curve to the right. An increase in the supply of oil lowers the price of oil, a major production cost. The short-run aggregate-supply curve shifts to the right.

Suppose a change in the stock market makes people feel wealthier, increases consumption, and shifts the aggregate-demand curve right. The change in the stock market must have been

an increase in stock prices A stock market boom makes people wealthier and less concerned about saving. The resulting increase in consumer spending means a greater quantity of goods and services demanded at an

Which of the following shifts the short-run but not the long-run aggregate-supply curve left?

an increase in the expected price level An increase in the expected price level reduces the quantity of goods and services supplied and shifts the short-run aggregate-supply curve to the left. On the other hand, the price level does not affect the long-run aggregate-supply curve.

An increase in the capital stock shifts

both short-run and long-run aggregate-supply curve to the right. A shift to the right in the long-run aggregate-supply curve can be caused by an increase in the capital stock. The same change shifts the short-run aggregate-supply curve to the right.

Which of the following are used to defer payments and are therefore not money?

credit cards Credit cards are excluded from all measures of the quantity of money. This is because credit cards are not really a form of payment, but rather are a method of deferring payment. When you use a credit card, the bank that issued the card is actually making the payment and you must pay the bank back at a later date. When you pay the bank back, you will likely do so using funds from M1.

A decrease in the supply of oil could

decrease long run aggregate-supply An economy's overall productive capacity, or long-run aggregate supply, depends on its natural resources, including its land, minerals, and weather. Oil is also considered a natural resource. Thus, if the supply of oil decreases, the long-run aggregate supply curve will shift left, representing a decrease in overall production.

To increase the money supply the Fed can conduct open-market purchases. Alternatively, the Fed can

decrease the discount rate The discount rate is the interest rate on the loans the Fed makes to other banks. When the Fed decreases the discount rate, banks will tend to borrow more money from the Fed since the interest they have to pay back has decreased. This will lead to increased borrowing from the Fed, and therefore more money will end up in bank reserves. This will enhance the ability of banks to make loans as well. In the end, the money supply will increase if the fed decreases the discount rate.

People hold less money and lend more and the interest rate falls when the price level

decreases When the price level decreases, households try to reduce their holdings of money by lending some of it out. A household would buy more bonds and the interest rate would fall.

Assume banks hold no excess reserves. If the Fed increases the reserve ratio from 5 percent to 10 percent, then the money multiplier

decreases from 20 to 10. The money multiplier is equal to 1/R, where R is the reserve ratio. Initially, if the reserve requirement is 5 percent, the money multiplier is 1/0.05 = 20. After the reserve requirement is increased to 10 percent, the money multiplier is 1/0.1 =10. Therefore, the money multiplier decreases from 20 to 10.

Which type of money has no intrinsic value?

fiat money Fiat money is money without intrinsic value that is used only because of government decree. For example, most paper money used around the world is fiat money. These paper currencies have no intrinsic value in and of themselves, but are used as money because the government in each respective country has ordered that the currency be accepted as legal tender for debt. Gold is an example of commodity, which is money that has intrinsic value.

Suppose the Fed purchases $50,000 worth of government bonds from the public. You know that eventually the money supply will

increase by more than $50, 000 If the Fed purchases $50,000 worth of government bonds from the public, the $50,000 of currency ends up in the hands of the public. When the public deposits this money into banks in the United States, bank reserves increase by $50,000. When these banks make loans with these new reserves, new money is created on top of the initial $50,000 increase. Therefore, the money supply increases by more than $50,000 in this case.

In the context of the aggregate-demand curve, when the price level increases, households increase their holdings of money, interest rates increase, and spending on investment goods decreases because of the ________ effect.

interest-rate When the price level rises, households try to increase their holdings of money by reducing their willingness to lend some of it out. A household would buy fewer bonds and the interest rate would rise. A higher interest rate motivates firms and households to spend less on investment.

If the economy is initially at long-run equilibrium and aggregate demand expands, then in the long run the price level

is higher and output is the same as the original long-run equilibrium. An expansion in aggregate demand is represented with a rightward shift in the aggregate-demand curve. In the short run, output and the price level rise, but over time, as the expected price level adjusts, the short-run aggregate-supply curve shifts to the left. In the long run, the price level rises and output returns to the natural level.

First Bank of Zogua, a fictional bank, has just received a $100 deposit from an individual. This deposit appears on what part of T-account of the First Bank of Zogua?

liabilities. Deposits are liabilities and are noted as such in the T-account of the bank. The deposits are liabilities because they represent money owed by the bank to the depositors who initially deposited the funds.

You purchase a beer at a bar using cash. The fact that the bar accepts your cash for the beer best illustrates which function of money?

medium of exchange A medium of exchange is an item that buyers give to sellers when they want to purchase goods and services. Money, in most industrialized countries, is the commonly accepted medium of exchange. This function of money allows you to exchange money for goods, like beer, because both you and the bar have accepted money as a medium of exchange, making the transaction possible. Therefore, the bar will give you beer for your money. This is an example of how money is a used as a medium of exchange.

You sell your old smartphone online for cash. The fact that you accept cash for your old smartphone best illustrates which function of money?

medium of exchange A medium of exchange is an item that buyers give to sellers when they want to purchase goods and services. Money, in most industrialized countries, is the commonly accepted medium of exchange. This function of money allows individuals to exchange money for goods, like smartphones, because they know others have also accepted money as the medium of exchange. In other words, this transaction is possible because both you and the potential buyers of your phone have accepted money as the medium of exchange. This is an example of how money is a used as a medium of exchange.

As inflation rises,

menu costs and shoeleather costs of inflation increase. The shoeleather costs of inflation can be substantial as people do not have the luxury of holding cash as a store of value but have to quickly convert cash into goods or keep it in the bank and earn some interest. The time and effort expended to reduce money holdings are a waste of resources. Menu costs include the costs of deciding on new prices, printing new price lists and catalogs, sending these new price lists and catalogs to dealers and customers, advertising the new prices, and even dealing with customer annoyance over price changes. Inflation increases the menu costs that firms must bear as prices change more frequently.

Which of the following is not included in M1?

money maker mutual funds M1 includes demand deposits, traveler's checks, other checkable deposits and currency. In general, M1 includes the most liquid assets, while M2 includes everything in M1 plus a few additional assets which are less liquid. These assets include savings deposits, small time deposits, money market mutual funds and a few other minor categories. In summary, Money market mutual funds are included in M2 but not M1.

According to classical macroeconomic theory, nominal variables, but not real variables, are affected by changes in the

money supply According to classical macroeconomic theory, changes in the money supply affect nominal variables but not real variables.

When the Fed sells U.S. government bonds, it has conducted

open market sales, which decrease the money supply. When the Fed sells government bonds, it is conducting open market sales. Because the Fed sells government bonds in the public bond market, individuals give currency to the Fed and the currency is no longer in circulation in the general public. Because currency is included in M1, M1 decreases and the money supply is reduced. Additionally, since individuals may withdraw money from their banks to make these purchases, the reserves at banks decrease along with lending.

In the short run a decrease in the costs of production makes

output rise and prices fall A decrease in the costs of production causes the short-run aggregate-supply curve to shift to the right. Holding the aggregate-demand curve constant, the new equilibrium will have higher output and a lower price level.

We depart from the assumptions of classical economics when we focus on the relationship between the quantity of output and the ________ level.

price By focusing on the relationship between the quantity of output as measured by real GDP and the average level of prices as measured by the CPI or the GDP deflator, we are departing from the classical assumption that real and nominal variables can be studied separately.

In response to the credit crunch in 2008 and 2009, the U.S. Treasury ____

put public funds into the banking system to increase the amount of bank capital. The crisis created a shortage in capital. The U.S. Treasury, with the Federal Reserve, put billions of dollars of public funds into the banking system to increase the amount of bank capital.

During the 1770s, the United States ____

relied heavily on the inflation tax. The government relied heavily on the inflation tax to fund military spending because the new government was limited in its ability to raise revenues.

If the interest rate rises and the supply of dollars in the market for foreign currency exchange shifts left, then the price must have

risen A higher price level causes U.S. interest rates to rise, the real value of the dollar to increase in foreign exchange markets, U.S. net exports to decline, and the supply of dollars in the foreign currency exchange to decrease or shift left.

One reason that the Fed's control of the money supply is not precise is because ____

the Fed does not control the amount that banks choose to lend. The Fed can provide incentives to lend more or less, but it does not directly control a bank's profit-maximizing decision of how much money to lend.

Which of the following is not true regarding the Federal Reserve?

the Fed was created to facilitate the federal government's collection of taxes as well as its expenditures. Correct. The Fed, the central bank of the United States, was created in 1913 after a series of bank failures caused Congress to establish the Fed to ensure the health of the banking system in the U.S, and not to facilitate the collection of taxes. Today the Fed also controls the money supply.

Which of the following is not true regarding the Federal Reserve?

the Fed was created to facilitate the federal government's collection of taxes as well as its expenditures. The Fed, the central bank of the United States, was created in 1913 after a series of bank failures caused Congress to establish the Fed to ensure the health of the banking system in the U.S, and not to facilitate the collection of taxes. Today the Fed also controls the money supply.

The rate charged at the Fed's "discount window" is known as the

the discount rate. The discount rate is the interest rate on the loans the Fed makes to other banks. Traditionally, these loans are made from the Fed's discount window.

The interest rate at which banks lend reserves to each other overnight is known as

the federal funds rate. The federal funds rate is the short-term interest rate that banks charge one another for loans. Quite often these loans are overnight loans made in order to comply with reserve requirements.

Imagine two economies that are identical except that, for a long time, economy A has had a money supply of $1,000 billion while economy B has had a money supply of $1,500 billion. It follows that

the price level, but not real GDP is higher in country B. If two economies were identical except that one had more money in circulation, real GDP would be identical in both economies, but the price level would be higher in the economy with more money.

One cost of deflation is ____

the redistribution of wealth toward creditors and away from debtors. Deflation causes the value of debts to increase in real terms, transferring money from debtors to creditors.