Economics final

If lenders are seeking a 4% real interest rate, the inflation rate is expected to be 8%, and real GDP is growing at 2%, what nominal interest rate will lenders ask for? (assume no money illusion).

12%

If the reserve requirement is 20%, what will be the change in the money supply form the Federal Reserve adding 100,000 in new money to the banking system.

500,000

Suppose the economy has nominal GDP of 480 billion, a money supply of 80 billion, an interest rate of 10%, and an unemployment rate of 8%. What is its velocity?

6

How did mercantilists determine if a policy was a good policy?

A good policy caused bullion to flow into the country

What did Keynes (and later, Keynesians) argue that government should do during a recession?

Actively use expansionary fiscal an monetary policies to end the recession

Suppose that you are asked what caused the german hyperinflation? Your best answer would be that the extraordinary increase in prices was cause by

An extraordinary increase in demand for goods and services by germans following rationing (that is, limited food availability) during world war 1.

According to both Mercantilists and neo-Mercantilists, one countrys gain resulted in

Another countries loss

Why did Classical Economists expect some business leaders to invest even during the worst recession or depression.

Because they thought that most business leaders were very entrepreneurial and could see beyond the recession.

According to Keynesian economists,, an increase in the money supple will cause nominal interest rates to.

Decrease

Automatic stabilizers cause government revenues to _____ during a recession and cause government expenditures to _____ during a recession.

Decrease/increase

What is the difference between a deficit and debt?

Deficits are flow, that is, the amount that expenditures exceed revenues in a single year; debt is a stock, that is, the accumulation of past deficits.

Which European country in the mercantilist period was generally considered to be the most successful?

England

Fractional reserve Banking is a very valuable financial innovation, but it has an inherent flaw or weakness.

Fractional Reserve banking is inherently at risk of a run on the bank

What is the main difference between commodity money and flat money.

Gold and Silver or something else of value will back commodity money, but fiat money has no such backing.

How did A.P Giannini handle a bank run at the Bank of Italy after 1906 San Fransisco

He happily offered to give all bank depositors their money back, even though he did not actually have enough cash to do it.

Keynes argued that business leaders made their investment decisions largely based on ______ and _____

Herding and Extrapolation

In a stationary (that is, non-growing) economy, the Quantity Theory argues that an eleven percent (+11%) increase in the money supply will cause prices to (be as specific as possible.)

Increase by 11%

What will crowding out do to real interest rates

Increase real interest rates

People often wonder what will happen to the economy if consumers reduce their spending. Will we go into a recession as a result? Classical economists argued that the decrease in consumer spending would amount to a(n)_____ in consumer savings. This would reduce real interest rates and thereby cause ________ to increase to make up for the reduced consumers spending.

Increase; and investment.

What is expansionary fiscal policy?

Increasing government expenditures for cutting taxes.

Was the kennedy-Johnson tax cut of 1964 a discretionary fiscal policy or an automatic fiscal policy?

It was a discretionary policy

What will happen to M1 if a bank customer takes 5,000 out of her savings account and puts it in her checking account? _____. What will happen to M2? ____

M1 will increase; M2 will not change

What would be the immediate effect on M1 of a bank customer withdrawing 500 from his checking account and keeping it as cash?

M1 will not change

Which measure of money (i.e, M1 or M2) contains forms of money that are less liquid?

M2

which measure of money (i.e, M1 or M2) is less susceptible (or affected by) disintermediation and therefore preferred as a measure of the money supply by monetary economists?

M2

According to classical economists, which type of fiscal policy financing produces inflation?

Monetizing debt

President Roosevelts "Pump Priming" was remarkably similar to Keynes'

Multiplier

According to Classical economists, if the money supply increases and there is no money illusion, what will happen to nominal interest rates.

Nominal interest rates would increase.

Based on Says law, Classical economists argued that a recession would not turn into a permanent depression as long as:

People continues to work and supply their labor in labor markets.

According to the Quantity Theory, what would happen to prices if the money supply was increasing at the rate of 6 percent per year and real GDP was growing at 10 percent.

Prices would decline by 4%

According to Milton Friedman and Anna Schwartz, what was the federal reserves "crime of omission" that occurred in the summer/ fall of 1931 that had a devastating effect on the course of the great Depression?

The Fed decided to support the gold standard and dramatically reduced the money supply and raised real interest rates.

Milton Friedman and Anna Schwartz looked at Federal Reserve policies in the first few years of the Great Depression. They found two cases where Federal Reserve policies amounted to "crimes of omission" identify the "crime of omission" that occurred in the spring of 1931.

The Federal Reserve did not comply with its primary mandate when it failed to deal with the bank crisis and runs created by the failure of a large foreign bank.

Which major macroeconomics event did the Laffer curve have an impact on?

The Reagan Tax Cut

The bank of the United States failed in December, 1930. Friedman and Schwartz argued that this failure had such a profound impact on the publics confidence in the banking system because a large part of the public mistakenly thought that the bank of the united states was.

The U.S Central bank.

What did (do) mercantilists and neo-mercantilists think is (or was) the proper role for government to play in the economy?

The believed that government should intervene in the economy to do whatever was necessary to promote our exports and minimize our imports.

Referring to the money, what does liquidity mean?

The ease or difficulty in using different types of money in transactions.

Which interest rate serves as the federal reserves interest rate target?

The federal funds rate

Keynes insisted that he was most interested in _____

The short run.

What was the point in Classical economists constantly reminding everyone that the business cycle was indeed a true cycle?

They wanted to make sure that people understood that the recession would correct itself even if government did nothing to correct it.

What were german firms doing in 1923 in order to keep wage increasing as fast as output prices?

They were paying their works more often, even hourly as the inflation worsened.

FDIC insures the accounts of bank depositors. What is the primary goal or purpose of FDIC?

To prevent bank runs.

According to classical economists, which type of fiscal policy financing produces "crowding out?"

True borrowing

Keynes argued that when it came to money illusion, people _________. Classical economists argued that when it came to money illusion, _______

Usually suffered from money illusion and learned very slowly; and never suffered from money illusion.

J.M Keynes and president Roosevelt met once in 1934. How did the meeting go?

Very poorly.

Many Individuals, companies, and countries have acquired debt. Unless it is excessive, debt is neither inherently good nor bad. The more interesting and relevant question relating to the merits of debt is:

What was the debt incurred for?

Milton Friedman argued that if the economy was left alone, it would tend to operate at or near

at or near full employment.

What policy action does the federal reserve almost always use to increase the money supply? (that is, which policy will they actually use?

buy bonds

Classical argued that laissez-faire was a _________ policy. Keynesian economists argued that laissez-faire was a _______ policy.

good; and bad

Arthur Laffer argued that a tax cut in the early 1980s in the U.S would cause the amount of tax revenues collected by the government to

increase

What is expansionary monetary policy?

increase the money supply

Did Keynes think that wages were flexible enough to cushion or correct a recession.

no

Regarding bank runs, are well-run and profitable banks immune or safe from a run on their bank.

no, bank runs are something that can happen to any bank during a time of a banking panic

Which of the following is an example of an automatic stabilizer?

unemployment compensation