Macro Final Test Questions

Refer to above graph. If the interest rate was 3 percent and the money supply decreased by $50 billion, the new interest rate would be

4 percent

The federal reserve could increase the money supply by

buying government bonds in the open market

The Philips Curve presents the argument that full employment can not be achieved without

causing inflation

Tastes (exchange rates)

change in preference for a product can impact exchange rates

An increase in nominal GDP will

increase the transactions demand and total demand for money

Monetary and fiscal policy aimed at lowering unemployment will cause

inflation

The Philips Curve

presents an inverse relationship between inflation and unemployment

Exchange rate

rate at which national currencies trade for one another

The primary responsibility of the Federal Open Market Committee (FOMC) is

setting the Fed's monetary policy and directing the buying and selling of government securities

Aggregate supply shocks

sudden unexpected changes in resource costs that shift the economy's AS curve

determinants of exchange rates

tastes, relative inflation rate change, relative interest rates, change in relative expected returns on stocks, real estate, and production facilities, relative income, speculation

The money multiplier can be calculated by dividing?

the change in real GDP by the initial change in spending

When the U.S has comparative advantage in soy producation

the competition for trade becomes very tight because the opportunity cost increases

A major concern with the social security trust fund is that

the fund will be insufficient to cover obligations in one or two decades

The Council of Economic Advisers gives economic advice to?

the president

A major reason a public debt cannot bankrupt the federal government is because

the public debt can be easily refinanced

If the Fed buys government securities from the public in the open market

the public gives the securities to the Fed; the Fed pays for the securities by check, which when deposited at commercial banks will increase their reserves at the Fed

Terms of trade are

the rate at which units of one product are exchanged for units of another product

As real GDP increases unemployment decreases thus

there is a trade off between lowering unemployment and rising inflation

To say that the federal reserve banks are quasi-public banks means that

they privately owned but managed in the public interest

The public debt is the

total of all past deficits minus all past surpluses

Comparative advantage and specialization promotes an increase in

total output for each individual nation

A consumer holds money to meet spending needs, this is an example of the

transactions demand for money

The Misery Index

unemployment rate + inflation rate

A graph of the short-term aggregate supply is

upsloping

A graph of the long-run aggregate supply curve is

verticle

The foreign exchange market

where foreign currencies are exchanged and exchange prices are set

A commercial bank has actual reserves of $1 million and checkable-deposit liabilities of $9 million, while the required reserve ratio is 10 percent. The excess reserves of the bank are

$100,000 (0.10*$9,000,000=9000,000. 1,000,000-900,000=100,000)

Assume that there is a 25 percent reserve ratio and that the Federal Reserve buys $4 billion worth of government securities. If the securities are purchased from the public, this action has the potential to increase bank lending by a maximum of

$12 billion, and also by $16 billion if the securities are purchased directly from the commercial banks (Money multiplier=1/Required reserve ratio=1/0.25=4. If the fed buys $4 of securities from the public, required serves are 0.25*$4=$1. Excess reserves=multiplier = $3*4=$12 billion. If the Fed buys securities directly from the commercial banks $4*4=$16

A bank has excess reserves of $5000 and deposit liabilities of $50,000 when the required reserve ratio is 20 percent. If the reserve ratio is raised to 25 percent, this bank can lend a maximum of

$2500.

Suppose that an economy produces 500 units of output. It takes 10 units of labor at $15 a unit and 4 units of capital at $50 a unit to produce this output. What is the per unit cost of production?

0.70

The value of the monetary multiplier is

1/Required reserve ratio

Suppose that real domestic output in an economy is 300 units, the quantity of inputs is 50, and the price of each input is $9. What is the level of productivity?

6

The major problem facing the economy is high unemployment and weak economic growth. The inflation rate is low and stable. Therefore, the Federal Reserve decided to pursue a policy to increase the rate of economic growth. Which policy changes by the Fed would reinforce each other to achieve that objective?

Buying government securities and lowering the discount rate

Which one of the following is a tool of monetary policy for altering the reserves of commercial banks?

Discount Rate

The conduct of monetary policy in the US is the main responsibility of the

Federal Reserve

Relative Interest Rate

If U.S. real interest rate increases and England's real interest rate is constant, the British will loan in U.S. or buy bonds , increases supply of pounds, pound depriciates

Which is the only state that has two Federal Reserve banks?

Missouri

A Federal Reserve official notes, "A restrictive monetary policy can force a contraction of the money supply, but an expansionary monetary policy may not achieve an expansion of the economy." The official has described the problem of the

The official has described the problem of the: cyclical asymmetry of monetary policy

A bank has $2 million in checkable deposits. In the bank's balance sheet, this would be an example of

a liability

Relative Income

U.S income increases and England's stays constant, U.S. consumers buy more domestic and foreign goods, increase demand for pounds, pound appreciates

Built-in stablity

When tax revenues change automatically and in countercyclical direction over the course of the business cycle

A contractionary fiscal policy can be illustrated by?

a decrease in aggregate demand

What would shift aggregate supply to the right?

a decrease in business taxes

A expanstionary fiscal policy can best be represented by

a shift in the aggregate demand curve from AD1 to AD2 (up from middle to bottom)

Staglfation

a simultaneous increase in the price level and unemployment

When a consumer wants to compare the price of one product with another, money is primarily functioning as

a unit of account

The fundamental objective of monetary policy is to assist the economy is

achieving a full-employment, noninflationary level of total output

Low marginal taxes induce work because

after tax income is higher and workers choose to substitute labor for leisure at the higher wage it encourages savings and investing

If the dollar appreciates in value relative to foreign currencies

aggregate demand increases

The major purpose of the Federal Reserve buying government securities in open-market operations is to

allow banks to increase their lending

An increase in consumer wealth and a decrease in interest rates would cause

an increase in aggregate demand

When does an operational lag occur

between the time fiscal action is taken and the time that the action has its effect on the economy

Discretionary fiscal policy refers to

changes in taxes and government expenditures made by congress to stabilize the economy

The money supply is composed of

checkable deposits and currency

An open economy goes hand in hand with

comparative advantage and specialization

A strict balanced budget amendment that would require the federal government to balance its budget during a recession would be

contractionary and worsen the effects of a recession

The federal backing for the money in the US comes from

control over the money supply designed to keep the value of money relatively stable over time

If the U.S. dollar deprecates in value relative to foreign currencies, then this will

decrease aggregate supply

A decrease in consumer wealth and an increase in interest rates would cause a

decrease in aggregate demand

An increase in personal income tax rates will cause a

decrease in aggregate demand

If the interest rates rise, there will be a

decrease in the total amount of money demanded

If the Board of Governors of the Federal Reserve System increases the legal reserve ratio, this change will

decrease the excess reserves of member banks and thus decrease the money supply

Crowding out is the notion that

deficit financing will increase the demand for money, increase the interest rate, and reduce the level of investment spending in the economy

High unemployment and inflation indicate

economic and social instability

Supply-side economics

emphasizes the importance of marginal tax rates and other factors that affect long-run AS

Low marginal taxes promotes

employment, price stability, and economic growth

Long run equilibrium in aggregate demand and supply model

equilibrium price and real GDP determined by aggregate demand curve and vertical aggregate supply curve, no cyclical unemployment (downturn in business cycle)

Trade surplus

exports > imports

If the transactions demand for money is $400 billion, and increase in the money supply from $800 billion to $900 billion would cause the equilibrium interest rate to

fall to 4 percent (the total demand for money would increase to $900, so the asset demand would now be $500 because $900-$400. This occurs at an interest rate of 4%)

When the federal government uses taxation and spending actions to stimulate the economy it is conducting?

fiscal policy

Goals of monetary and fiscal policy are

full employment, price stability, and economic growth

A government budget deficit occurs when government expenditures are

greater than government revenues

Relative Inflation rate changes (exchange rates)

high inflation and high price levels depreciate domestic currency, demand for pounds increases, British consumers purchase fewer U.S. goods at a higher price, supply of pounds decreases, pound appreciates, dollar deprecaiates

Laffer Curve suggests that

higher taxes give higher revenues to a point (goes up then goes quickly down)

Trade deficit

imports > exports

Economic Growth

improved technology leads to increased production possibilities which leads to long run aggregate supply and real GDP

Assume the required reserve ratio is 20 percent. If the Federal Reserve buys $80 million in government securities from the public, then the money supply will immediately

increase by $80 million and the max money-lending potential of the commercial banking system will increase by $400 million (money multiplier=1/Reserve Ration = 1/0.20 = 5. Max money-lending potential = $80 *5 = $400

Changes in Relative Expected Returns on Stocks, Real Estate, and Production Facilities

increase demand for pounds and pound appreciates

An increase in government spending will cause an

increase in aggregate demand

If US goods are in high demand in England

increase supply of pounds in exchange market, shift supply curve right, pounds depricate and dollars apprecate

Assume that Johnson deposits $350 of currency in his account in the XYZ Bank. Later the same day Swanson negotiates a loan for $2000 at the same bank. In what direction and by what amounts has the supply of money changed?

increased by 2,000

As one moves closer to the "natural" rate of unemployment

inflation rises more quickly

Long run aggregate supply

input and output prices flexible, verticle

Short run aggregate damand

input prices are fixed (wages and salaries), output prices flexible

Short run aggregate supply

input prices fixed and output prices flexible, slopes upward

Long-run aggregate demand

input prices flexible, output prices flexible

Aggregate demand curve shows the

inverse relationship between price level and real GDP

Speculation

investors speculate that the pound will appreciate and the dollar will depreciate, increase demand for pound, speculation of the change causes anticipated change, pound appreciates

An aggregate supply curve shows the

level of real domestic output that will be produced at each possible price level

Long-run vertical Phillips curve

lowering the unemployment rate by increasing aggregate demand beyond the full-employment level out output temporarily increases profits, employment and output (wage increase in nominal)