Macro Exam 2

Which shifts FE to the left

A decrease in the capital stock

Which will shift the AD curve up and to the right?

An increase in consumer confidence

Which of the following changes shifts SRAS up

An increase in firms costs

Money supply is $6m, currency held by nonbank public is $2m, reserve-deposit is .1, monetary base is

$2.4m

The money supply is $10m, currency held by the nonbank public is $2m, and the reserve deposit ratio is .2, bank deposits are equal to

$8m

Assume the currency-deposit ratio is .5. The Federal Reserve carries out open-market operations, purchasing $1m worth of bonds from banks. Increasing money supply by $2m, what is the reserve-deposit ratio?

.25

Vault cash is $8m, deposits are $2m, monetary base is $40m, bank deposits are $90m, money multiplier equals

3.0

AD, LRAS, and SRAS show relationship between

Aggregate price level and output

You want to invest in a firm whose profits show small fluctuations throughout the business cycle. What should you incest in?

A corporation that depends heavily on consumer nondurables

In classical IS-LM analysis, the effects of a decline in desired investment include

A decline in the real interest rate

Suppose the intersection of the IS and LM curves is to the right of the FE line. What would most likely eliminate a disequilibrium among the asset, labor, and goods markets?

A rise in the price level, the LM curve up and to the left

An increase in consumer spending caused by an increase consumer confidence would cause

AD curve to shift up and to the right

Three components of AD/AS model

AD, SRAS, LRAS

Friedman-Phelps analysis shows that a negative relationship between inflation and unemployment holds

As long as expected inflation rate and the natural rate of unemployment are approximately constant

The Lucas Critique is an objection to the assumption that

Historical relationships between macroeconomic variables will continue to hold after new policies are in place

A decrease in money supply would cause IS curve to ____ and the LM curve to ____

Be unchanged; shift up and to the left

With fixed interest rates, unanticipated deflation hurt ___ because ___

Borrowers; they repay the loan in more valuable dollars

Classic and Keynesian economists agree that policy makers

Cannot keep unemployment below natural by running high inflation rates

If money is neutral, increase in money supply would

Cause increase in nominal wages

What is not a policy implemented by the Fed

Changing federal government budget deficit

Variable that moves the same as aggregate economy

Coincident Variable

Degree to which country believes central bank

Credibility

People increase labor supply in response to increase in government purchases because

Current or future taxes will increase, making them financially worse off

Most likely to cause recession?

Decrease in money supply

In an economy where most firms are monopolistically competitive, firms would produce ____ products and have a ____ share

Differentiated; large

Increase of effective tax on capital makers IS curve ____ and LM curve ____

Down to the left; unchanged

Which variable could not be used as leading economic indicator

Employment

Difference in monetary and fiscal policy

Expansionary monetary policy would put economy at a lower interest rate than expansionary fiscal policy

Unemployment rises in recession due to an increase in ____ unemployment, not ____ unemployment

Frictional and structural; cyclical

The widespread decline in the volatility of many macroeconomic variables after 1984 led economists to term this period the

Great Moderation

Suppose the government decided to tighten monetary policy and decrease government expenditures. IN SR Keynesian models, the effect of these policies would be to ____ real interest rate and ____ the level of output

Have an ambiguous effect on; decrease

Tight monetary policy and easy fiscal policy lead to

High real interest rates

Decline in oil prices leads to ____ output and ____ interest rate

Higher; lower

What shifts FE to the right?

Increase in capital stock

Which causes SRAS curve to shift up?

Increase in firms costs

The Fed announced that it plans to lower the rate of monetary growth from 10% to 2% per year. You would expect this announcement to directly

Increase money demand, shifting LM curve up and to the left

In the Keynesian model, suppose the Fed sets a target for the money supply. If the IS curve shifts to the left, and the Fed wants to keep output unchanged, what should the Fed do?

Increase money supply

In the Keynesian model, effect of decrease in tax rate on capital would cause ____ in interest rate and ____ in output in SR

Increase; increase

Suppose the Federal Reserve wanted to reduce the money supply without using open-market operations. It could try to get the public to ____ their currency-deposit ratio and ____ banks reserve requirements.

Increase; raise

During bank crisis, money supply would shrink by the greatest amount if the public ____ increased currency-deposit ratio and if banks ____ reserve-deposit ratio

Increased; increased

Firm's high menu cost cause

Price stickiness

A change that increases real money supply relative to real money demand causes

LM curve to shift down and to the right

Because of price stickiness, decline in investment will not cause

LM curve to shift down and to the right in the short run

When plotted with aggregate price level on y-axis and output on x-axis, which curve is vertical

LRAS

The idea that firms retain some workers in a recession, whom they would otherwise lay off, to avoid the costs of hiring and training is called

Labor hoarding

Variable that movies in advance of aggregate economy?

Leading variable

Easy monetary policy and tight fiscal policy leads to

Low real interest rates

What does the Fed rely on as intermediate target?

M2

In the Keynesian model in the long run, an increase in money supply will raise

The price level but not the level of output

Theory that says firms are slow to change price because there are costs of changing price

Menu cost theory

Keynesians believe in the SR

Money neutrality does not exist and prices do not adjust rapidly

Zero lower bounds mean

Nominal interest rate cannot fall below zero

Which of the following is true?

Nominal interest rate is pro cyclical and real interest rate is acyclical

What would the Federal Reserve do to change nations money supply

Open-market operations

Expected inflation is 3% because the Fed is up 3%, the Fed actually goes up 5% what happens to output and price

Output is above full employment Price increase by more than 3%

When Fed alters its assets what is it called?

Quantitative easing

Recession caused by decline in aggregate demand, increase in money supply would

Rase aggregate demand, returning country to FE

Decrease in money supply causes real interest rate to ____ and the price level to ____

Remain unchanged; fall

An increase in money supply causes the real interest rate to ____ and the price level to ____ in general equilibrium

Remain unchanged; rise

What is procyclical and leads the business cycle?

Residential investment

Decrease in taxes causes real interest rate to ____ and price level to ____

Rise; rise

Natural rate of unemployment in the US generally ____ from 1960 to 1980 and ____ from 1980 to 2000

Rose; fell

If producers have imperfect information about the general price level sometimes misinterpret changes in the general price level as changes in relative prices, then

SRAS slopes upwards

If expected inflation rate is unchanged, a rise in nominal unemployment would

Shift SR and LR Phillips curves to the right

Decrease in wealth would cause IS curve to

Shift down and to the left

A decrease in the effective tax rate on capital would cause the IS curve to

Shift up and to the right

According to misperceptions theory, after an unanticipated increase in money supply has occurred, SRAS must ____ to restore general equilibrium, as it does so, price level will ____

Shift upward; rise

A decline in the stock market, which makes consumers, poorer, would cause

The AD curve to shift to the left

What adjusts to restore general equilibrium after a shock to the economy?

The LM curve

Most common supply shock

The Solow Residual

The sacrifice ratio is

The amount of output lost when the inflation rate is reduced by one percentage point

The IS curve will shift down and to the left when

The expected future marginal product of capital declines

Changes in reserve requirements directly and immediately

The money multiplier

Which of the following statements would Milton Friedman agree with concerning the conduct of monetary policy?

There are long and variable lags between monetary policy actions and their results.

According to the efficiency wage model, during a recession, firms will not reduce real wages because

This would reduce worker effort and productivity

Cost of unanticipated inflation

Transfers wealth from lenders to borrowers

Peaks and Troughs in business cycle are known as

Turning points

If money supply falls by 10% output is ____ and price levels ____

Unchanged; falls

A bank run is

a large scale, panicky withdrawal of deposits from a bank

High powered money consists of

bank reserve plus currency held by nonpublic bank

Industries that are extremely sensitive to the business cycle are the

capital goods and durable goods

An economic variable that movies the opposite direction as aggregate economic activity is

countercyclical

Main determinant of how quickly expected inflation adjusts to change in monetary policy is

credibility of central bank

The likely effect of introducing an increased number of automatic teller machines is to

decrease money demand, shifting LM down and to the right

Keynesians say SR Phillips curve ____ represent usable tradeoff for policy makers because ____

does; prices are sticky

Increase in effective tax rate on capital causes interest rate to ____ and price level to ____

fall; fall

Keynesians believe in a recession government should

increase money supply

Keynesians think the short run increase in money supply

increases output, decrease in real interest rate

Classic economists think that supply shocks are ____ than demand shocks and government intervention is ____

more important; usually unwarranted

Friedman would eliminate the destabilizing effect of the Federal Reserve's monetary policy by

requiring that the Federal Reserve choose a monetary aggregate and increase it at a fixed % each year

A decrease in wealth would cause is IS curve to

shift down and to the left

The distinguishing feature that determines whether an analysis is classical or Keynesian is

speed of price adjustment

LR increase of consumer spending would cause output to ____ and price level to ____

stay constant; rise

The AD curve shows the combinations of output and the price level that put the economy on

the IS curve and LM curve

SRAS is greater than LRAS in the misperceptions theory if

the actual price level is greater than the expected price level

A difficulty faced by policymakers who wish to use the unemployment rate as a guide to whether the economy is weak or strong is that

the natural rate of unemployment is hard to measure

Keynesian economists think general equilibrium is not attained quickly because

the price level adjusts slowly

When actual inflation is greater than expected inflation

there are transfers from lenders to borrowers

No stable relationship between inflation and unemployment but should be between

unanticipated inflation and cyclical unemployment

Firms do not lower wage during recession because

would reduce worker effort and productivity