Intermediate MacroEconomics

greater variability in relative prices

firms change prices infrequently then inflation causes greater variability in prices across firms. microeconomic inefficiences

shoeleather costs

higher expected inflation leads to higher nominal interest rates, which reduce the demand for real money balances. put wear on shoes going to back so often

Suppose the sudden death of a popular president reduces consumer confidence, inducing people to save more. To stabilize aggregate demand, the Fed should

increase the money supply to lower interests rates

Fed Buys Bonds

increase the money supply. money multiplier is not effected

If the Fed reduces the interest rate it pays on reserves, it will tend to ___ the money multiplier and ____ the money supply

increase, increase

If the Fed holds the interest rate constant in response to an increase in government purchases, the money supply will _ ____and the impact on income will be ______ than if the money supply were held constant.

increase, larger

If a computer glitch at credit card companies makes stores start accepting only cash payments, the demand for money will _____ If the money supply is held constant, the aggregate demand curve will shift to the _______

increase, left

Suppose that a change in transaction technology reduces the amount of currency people want to hold relative to demand deposits. If the Fed does nothing, the money supply will tend to _____ But the Fed can hold the money supply constant by ____ bonds in open-market operations.

increase, selling

An economy begins in long-run equilibrium, and then a change in government regulations allows banks to start paying interest on checking accounts. How does this change affect the demand for money?

increases the demand fro money because holding money becomes more attractive

In a system of fractional-reserve banking, lending by banks

increases the money supply

The lag is the time between when a shock hits the economy and when a policy responds to it. It is particularly long for policy.

inside lag is long for fiscal policy

fractional reserve banking

a banking system that keeps only a fraction of funds on hand and lends out the remainder

Which of the following changes would contribute to a decline in the index of leading indicators, suggesting that a recession is more likely?

a decline in the slope of the yield curve

crowding out

a decrease in investment that results from government borrowing

In the IS-LM model, which of the following causes income to decline and the interest rate to rise?

a decrease in the money supply

quantity theory of money

a theory about the connection between money and prices that assumes that the velocity of money is constant

Aggregate Supply

quantity of goods and services produce and the price level

Suppose the Fed reduces the money supply by 5 percent.what happens to unemployment in the short run and in the long run according to Okun's law?

the negative relationship between unemployment and real GDP. Short run when output falls, unemployment rises.

An economy produces 50 widgets, which sell for $4 each, and has a money supply of $100. The velocity of money is

2

According to the Keynesian cross model, if the marginal propensity to consume is 2/3, a cut in taxes of $120 billion increases equilibrium income by

240 mil 360 mil - 120 mil

According to the Keynesian cross model, if the marginal propensity to consume is 2/3, an increase in government purchases of $120 billion increases equilibrium income by

360 mil 1/(1-2/3)

An economy with constant velocity has real GDP growth of 3 percent, money growth of 7 percent, and a real interest rate of 2 percent. The nominal interest rate is

6

Money Demand

A relationship between the interest rate and the quantity of money that people are willing to hold at any given interest rate.

At the intersection of the IS and LM curves,

the goods market and money market are both in equilibrium

nominal interest rate

the interest rate as usually reported without a correction for the effects of inflation

open market operations

the purchase and sale of U.S. government bonds by the Fed

monetary base

the sum of currency in circulation and bank reserves

quantitative easing

the targeted use of open market operations in which the central bank buys securities specifically targeted in certain markets

outside lag

the time it takes for monetary policy to have an effect

Because most loans are specified in nominal terms, high _____inflation hurts______

unexpected, creditors

Suppose the Fed reduces the money supply by 5 percent.In what direction does the real interest rate move in the short run and in the long run? (

when y falls, s falls. marginal propensity to consume is less than one.

Suppose the Fed reduces the money supply by 5 percent.What happens to output and the price level in the short run and in the long run?

In the short run, prices are sticky so the output will decrease but the price level will remain the same. In the long run, prices will decrease and output will increase to go back to the original output level

The central bank increases the money supply

LM shifts down, income increases, price level falls. increase in consumption, increase in investment

Suppose the government wants to raise investment but keep output constant. In the IS-LM model, what mix of monetary and fiscal policy will achieve this goal

Loose monetary policy moves LM to right Fiscal Policy Tight IS left

Which of the following is not part of the money supply.

The balances in your retirement account

discount rate

The interest rate on the loans that the Fed makes to banks

If the demand for real money balances depends on the nominal interest rate, then higher inflation can

arise from the expectation of future money growth

central banks wants to increase the money supply it can ___ bonds in open market operations or ___ reserve requirements

buy, decrease

Hyperinflations tend to occur when

central banks finance large government budget deficits

C

consumption of goods and services

Rumors about a computer virus attack on ATM machines increase the amount of money people hold as currency rather than demand deposits

currency-desposit ratio increases reduces money multiplier. money supply decreases but monetary base increases

The severity of the Great Depression may be partly explained by an increase in expected

deflation, which raised real interest rates above nominal interests rates

inside lag

delay in implementing monetary policy

According to the Fisher effect, an increase in _____ inflation causes an equal increase in the _____ interest rate.

expected, nominal

International evidence indicates that countries with more independent central banks

experience lower average inflation

The time inconsistency of discretionary policy arises because policymakers

fail to fully anticipate all shocks to the economy

In a typical recession, consumption .______ Investment moves in the same direction but proportionately ________

falls, more

Stagflation—lower output and higher prices—is caused by _______

favorable shock in aggregate supply

G

governments spending on newly produced goods and services

The LM curve slopes upward because income increases the of money and thereby the interest rate.

higher income increases the demand of money

Menu Costs

higher inflation induces firms to change their posted prices more often

The IS curve slopes downward because a _____ interest rate reduces _____ and thereby income.

higher interest rate reduces the planned investment

According to the Lucas critique, traditional methods of macroeconomic policy evaluation are flawed because they fail to take into account

how changes in policy influence expectations

arbitrary redistributions of wealth

in inflation is higher than expected debtors gain and creditors lose. Fixed pensions can buy fewer goods

The Fed increases interest rates for banks holding reserves

incentivizes banks to hold more reserves. increase the reserve-deposit ratio. Decrease in the money supply

An economy begins in long-run equilibrium, and then a change in government regulations allows banks to start paying interest on checking accounts. What happens to the velocity of money?

increase in demand for money means a decrease in velocity of money M/P=kY interest on checking accounts encourages people to hold money, so the dollar circulates less frequently.

In the IS-LM model, which of the following causes both the interest rate and income to decline?

increase in taxes

The Fed flies a helicopter over 5th Avenue in New York City and drops newly printed $100 bills.

increases monetary base and money supply. money multiplier falls.

Since the 1980s, many central banks around the world have adopted a policy of targeting

inflation rate

If the Fed responds to an adverse supply shock by expanding the money supply, it will _______

keep the economy closer to its natural levels of output and employment

The lag is the time between when a policy action is taken and when it influences the economy. It is particularly long for policy.

outside lag is long fro monetary policy

P

price level

If output is above its natural level, over time the price level will ____ shifting the curve and moving the economy toward its long-run equilibrium.

price level increases and LM shifts

An expansion in aggregate demand increases in the short run _____ In the long run, however, it increases only the ______

real GDP, price level

Fischer Equation

real interest rate = nominal interest rate + expected inflation

M/P

real money supply

Y

real output or real income

Hyperinflation

reflect monetary policy. government must reduce money growth.

reserve requirement

regulations imposed by Fed that require banks to maintain minimum reserve- deposit ratio

altered tax liabilities

tax code does not take into account the effect of inflation

T

taxes disposible income

In the early 1980s, the U.S. government cut taxes and ran a budget deficit while the Fed pursued a tight monetary policy. What effect should this policy mix have?

Contractionary monetary policy moves LM left Fiscal Policy moves IS right increase real interest decrease investment

government increases government purchases

IS curve shifts right by 1/1-mpc income and interest rate increase. consumption rises and investment falls

An economy begins in long-run equilibrium, and then a change in government regulations allows banks to start paying interest on checking accounts. If the Fed keeps the money supply constant, what will happen to output and prices in the short run and in the long run?

decrease in velocity shifts the AD curve down. Short-run prices are sticky so the output will decrease, but in the long-run prices are flexible so the output will go back and the price level will decrease.

The Fed reduces its lending to banks through its Term Auction Facility

monetary base decreases decreases the money supply. Money multiplier not affected.

inconvenience of a changing price level

money is a less useful yardstick when its value is always changing

M

nominal money supply

Aggregate Demand

output demanded and price level

An economy begins in long-run equilibrium, and then a change in government regulations allows banks to start paying interest on checking accounts. f the goal of the Fed is to stabilize the price level, should the Fed keep the money supply constant in response to this regulatory change? If not, what should it do? Why?

Fed can increase money supply to shift AD curve back to equilibrium.

government increase in taxes

IS curve shifts to the left by mpc/1-mpc income and interest fall. consumption falls, investment rises

the government increases government purchases and taxes by equal amounts

IS curve shifts to the right because gov spending increases output increases, price level increases consumption falls due to tax rising and investment falls due to rise in interest

an increase in taxes

IS curve to right b/c reduces disposable income, so lowering consumption LM curve will increase to adjust for real money balances to have interest rates fall to stimulate investment and increase income. ends at same output but lower price level

An increase in government purchases

IS curve to the right short run: output increases interest increases long run: rise in prices shifts LM curve to the left to reach equilibrium

Because of leverage, a 5-percent decline in the value of a bank's assets will cause the value of the bank's _____ to fall by _____ than 5 percent.

capital, more

Suppose the Fed reduces the money supply by 5 percent.What happens to the aggregate demand curve?

if the money supply goes down 5% then the output will go down as well. this will shift the AD curve down

According to the theory of liquidity preference, the central bank can increase the of money and the interest rate

increase supply of money and lower interest rate

Costs of Inflation

shoe leather costs, menu costs, unit of account costs

An increase in the money supply

shortrun: LM curve to the right increases investment and output longrun: prices rise until returns to equilibrium and everything goes back