Macro Exam #4 Dr. Nath
Suppose the price level rises, but the number of dollars you are paid per hour stays the same. This means your
Real wage is lower
The aggregate quantity of goods and services demanded changes as the price level rises because
Real wealth falls, interest rates rise, and the dollar appreciates
On bank's T-Account
Reserves are assets and deposits are liabilities
Stagflation exists when prices
Rise and output falls
Other things the same, if the price level rises, then domestic interest rates
Rise, so domestic residents will want to hold fewer foreign bonds
Other things the same, when the price level rises, interest rates
Rise, so firms decrease investment
Based on the quantity equation, if M=150, V=4, and Y=200, then P=
3
If M=10,000, P=2, and Y= 20,000, then velocity=
4. Velocity will rise if money changes hands more frequently
If money is neutral and velocity is stable, an increase in the money supply creates a proportional increase in
Both the price level and nominal output
The interest rate that the Fed charges banks that borrow reserves from it is the
Discount Rate
The prices of a Honda Accord
Is a nominal variable and the price of a Honda Accord divided by the price of a Honda Civic is a real variable
Suppose a bank has a 10% reserve requirement, $4,000 in deposits, and has loaned out all it can, given the reserve requirement
It has $400 in reserves and $3,600 in loans
The banking system currently has $100 billion of reserves, none of which are excess. People hold only deposits and no currency, and the reserve requirement is 10%. If the Fed lowers the reserve requirement to 8% and at the same time buys $10 billion of bonds, then by how much does the supply change?
It rises by $375 billion
In a fractional-reserve banking system, a bank
Keeps only a fraction of its deposits in reserve
Other things the same, if the Fed raises the discount rate, then banks choose to borrow
Less from the Fed so reserves decrease
Other things the same, an increase in the price level makes consumers feel
Less wealthy, so the quantity of goods and services demanded falls
Which of the following lists two things that both increase the money supply?
Make open market purchases, lower the reserve requirement
The costs of changing price tags and price listings are known as
Menu costs
The effect of an increase in the price level on the aggregate-demand curve is represented by a
Movement to the left along a given aggregate-demand curve
Economic variables whose values are measured in monetary units are called
Nominal variables
According to the classical dichotomy, which of the following is affected by monetary factors?
Nominal wages
A decrease in the expected price level shifts
Only the short-run aggregate supply curve right
Which tool of monetary policy does the Federal Reserve use most often?
Open-Market Operations
Inflation can be measured by the
Percentage change in the consumer price index
Which of the following is not included in aggregate demand?
Purchases of stock and bonds
If the Fed wanted to increase the money supply, it would make open market
Purchases or lower the discount rate
The aggregate demand and aggregate supply graph has
Quantity of output on the horizontal axis. Output can be measured by real GDP
The model of short-run economic fluctuations focuses on the price level and
Real GDP
If the reserve ratio for all banks is 20%, then $100 of new reserves can generate
$500 of new money in the economy
You put money into an account that earns a 5 percent nominal interest rate. The inflation rate is 3 percent, and your marginal tax rate is 20 percent. What is your after-tax real rate of interest?
1.0 percent
Last year, Tealandia produced 50,000 bags of green tea, and tea was the only good Tealandia produced. Each bag sold at 4 units each of Tealandia's currency -- the Leaf. Tealandia's money supply was 40,000. What was the velocity of money in Tealandia?
5
If the nominal interest rate is 5 percent and there is a deflation rate of 2 percent, what is the real interest rate?
7 percent
If the reserve ratio is 12.5%, the money multiplier is
8
Which of the following shifts aggregate demand to the left?
A decrease in the money supply
Which of the following combinations of real interest rates and inflation implies a nominal interest rate of 7 percent?
A real interest rate of 6 percent and an inflation rate of 1 percent
The long-run aggregate supply curve shifts right if
A. Immigration from abroad increases B. The capital stock increases C. Technology advances D. All of the above are correct Answer: D
Suppose that banks desire to hold no excess reserves. If the reserve requirement is 5% and a bank receives a new deposit of $400, it
A. Must increase required reserves by $20 B. Will initially see reserves increase by $400 C. Will be able to use this deposit to make new loans amounting to $380 D. All of the above are correct. Answer. D
Which of the following is included in the aggregate demand for goods and services?
A. Net exports B. Consumption demand C. Investment demand D. All of the above are correct Answer: D
According to the classical dichotomy, when the money supply doubles, which of the following also doubles?
A. Nominal GDP B. The price level C. Nominal wages D. All of the above are correct Answer: D
The inflation tax
A. Transfers wealth from the government to households B. Is the increase in income taxes due to lack of indexation C. Is a tax on everyone who holds money D. All of the above are correct Answer: D
When deciding how much to save, people care most about
After-tax real interest rates
Interest rates adjusted for the effects of inflation
Are real variables; inflation is a nominal variable
In a system of 100% reserve banking,
Banks do not make loans
According to the quantity theory of money, a 2% increase in the money supply
Causes the price level to rise by 2 percent
If inflation is higher than what was expected,
Creditors receive a lower real interest rate than they had anticipated
When the Fed conducts open market purchases, reserves
Decrease and banks must decrease lending
Suppose a fall in stock prices makes people feel poorer. The decrease in wealth would induce people to desire
Decreased consumption, shifting the aggregate-demand curve to the left
During recessions, banks typically choose to hold more excess reserves relative to their deposits. This action
Decreases the money multiplier and decreases the money supply
A sale of government bonds by the Fed
Decreases the money supply and increases the federal funds rate
When taxes increase, consumption
Decreases, so aggregate demand shifts left
Other things the same, if reserve requirements are decreased, the reserve ratio
Decreases, the money multiplier increases, and the money supply increases.
Other things the same, when the price level falls, interest rates
Fall, so firms increase investment
During recessions investment
Falls by a larger percentage than GDP
If V and M are constant, and Y doubles, the quantity equation implies that the price level
Falls to half its original level
Wealth is redistributed from borrowers to lenders when inflation was expected to be
High and it turns out to be low
Other things the same, if the price level rises by 2% and people were expecting it to rise by 5%, then some firms have
Higher than desired prices which depresses their sales
Shoe leather costs arise when higher inflation rates induce people to
Hold less money
Printing money to finance government expenditures
Imposes a tax on everyone who holds money
Monetary neutrality implies that an increase in the quantity of money will
Increase the price level
Which of the following is not a tool of monetary policy?
Increasing the government budget deficit
Which of the following would cause prices to fall and output to rise in the short run?
Short-run aggregate supply shifts right
Most economists use the aggregate demand and aggregate supply model primarily to analyze
Short-run fluctuations in the economy
The velocity of money is
The average number of times per year a dollar is spent
Menu costs refers to
The cost of more frequent price changes induced by higher inflation
As the price level falls
The exchange rate falls, so net exports rise
The discovery of a large amount of previously-undiscovered oil in the U.S. would shift
The long-run aggregate-supply curve to the right
The Fisher effect says that
The nominal interest rate adjusts one for one with the inflation rate
Which of the sentences concerning the aggregate demand and aggregate supply model is correct
The price level and quantity of output adjust to bring aggregate demand and supply into balance
The sticky-wage theory of the short-run aggregate supply curve says that the quantity of output firms supply will increase if
The price level is higher than expected making production more profitable
The aggregate demand and aggregate supply graph has
The price level on the vertical axis. The price level can be measured by the GDP deflator
According to the assumptions of the quantity theory of money, if the money supply increase 5 percent, then
The price level would rise by 5 percent and real GDP would be unchanged
Aggregate demand includes
The quantity of goods and services households, firms, the government, and customer abroad want to buy
Real and nominal variables are highly intertwined, and changes in the money supply change real GDP. Most economists would agree that this statement accurately describes
The short run, but not the long run
When production costs rise,
The short-run aggregate supply curve shifts to the left
Which of the following will both make people spend more?
Wealth rises and interest rates fall
Which of the following is correct?
When real GDP falls, the rate of unemployment rises
Policymakers who control monetary and fiscal policy and want to offset the effects on output of an economic contraction caused by a shift in aggregate supply could use policy to shift
aggregate demand to the right
The source of hyperinflations is primarily
increases in money-supply growth
Recession come at
irregular intervals. During recessions consumption spending falls relatively more than investment spending