macro
Inflation rate equation
(Price Index New-PI old)/ Pi Old
Refer to the above table. The current account balance
(exports of goods) -(import of goods) +(export of services) -(import of services) +(net unilateral transfers(should be negative))
Tax rate multiplier
1/(1-MPC(1-t))
potential money multiplier
1/rr
If a bond dealer sells a government bond to the Fed for $70,000, and the reserve ratio is 20 percent, then the bank that receives a $70,000 deposit from the dealer can expand its loans by $_____ , and the money supply for the banking system can increase by as much as______ $
56,000 take the percent and multiple it till it gets to 100 and multiply that by the amount of $$ received on deposit 350,000
M1 is the sum of currency + Checkable (transaction) deposits + Traveler's checks not issued by banks. M2 is the sum of M1 + savings deposits + money market deposit accounts (MMDA) + small denomination time deposits (ex. CDs) + retail money market mutual funds.
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Which of the following will lead to a depreciation of the U.S. dollar against the British pound?
A decrease in British demand for U.S. assets
Which of the following is NOT a benefit of money when used as a medium of exchange?
Correct Answer Allowing individuals to pay off debts Providing economic growth Allowing individuals to specialize Allowing for some economic efficiencies
Suppose that initially there is no public debt. Using the above table, the public debt as a percentage of GDP in Year 4 is ______ percent.
Expenditures- tax Revenues for all four years deficits(-) or surplus (+) add them all up and divide that # #/last year GDP its asking
Some economists believe that deficit spending can impose a burden on future generations. Which of the following does NOT explain the burden?
Future generations will have a smaller capital stock that will reduce their wealth. Correct Answer Deficit spending that is allocated to purchases leads to long-term increases in real GDP. Future generations will have to be taxed at a higher rate. Investment will be crowded out by an increase in current consumption.
NDP
GDP-depcreiation
Which of the following would contribute to a surplus in the current account for a country?
Having tourists visit the country.
determinants of SRAS ONLY
INPUT PRICES oil natural gas rent wages interest profits inflationary expectations
How does the federal government finance a budget deficit?
It borrows funds by selling Treasury bonds.
Labor foce
LF= employed+unemployed
Lump sum tax multiplier
MPC/(1-MPC)
Private Investment
NI -Corporate Taxes -Social Security Contributions -Corporate retained earnings +Tax Revenue
Net Exports can also equal
Net Foreign Investment
Nominal vs Real
Nominal= P & Q change Real=q change
Disposable income
PI-T
Using the above table, if the reserve ratio for the banking system is 10 percent, the excess reserves are $______. Only enter the
Required reserves = Checkable deposits * reserve ratio Required reserves = ($2,100,000 * 0.10)=$210,000 Excess reserves = (Total) Reserves - Required Reserves Excess reserves = ($350,000(og) - $210,000)=$210,000
determinants of SRAS and LRAS
SPENT Saving Productivity Education(Human Capital) Number of Resources Technology
Public Saving
T-TR-G
Using the above table, if the reserve ratio for the banking system is 10 percent, and the Federal Reserve is trying to close a recessionary gap by using open market operations of $60,000. As a result, the money supply for the banking system would decreaseby $ 6,000 .
To close a recessionary gap the Fed would increase the money supply by buying bonds. The change in the money supply for the banking system = open market operations * money multiplier. The change in the money supply for the banking system = $600,000 ($60,000 * 10 (1/0.10))
Using the above table, if the reserve ratio for the banking system is 10 percent, and a $100,000 check is written and clears against this bank, the bank change the money supply by $_______.
When a check is written and clears a bank (withdraw), Checkable deposits and (total) Reserves fall buy the amount of the check ($100,000). Required reserves = Checkable deposits * reserve ratio As a result, Required reserves = ((new cp)$2,000,000 * 0.10)= 200,000 Excess reserves = (Total) Reserves - Required Reserves Excess reserves = ((new of reserves)$250,000 - $200,000) =$50,000
Private Saving
Y+TR-C-T
An increase in the inflation rate of one country relative to another country will probably cause
a balance of trade deficit for the inflating country.
inflationary gap
actual GDP > potential GDP
recessionary gap
actual GDP< potential GDP
If the Fed purchases U.S. government securities in the open market, all of the following would occur EXCEPT
an increase in investment. an increase in the inflation rate. Correct! a fall in bond prices. an increase in real Gross Domestic Product (GDP).
Suppose the Federal Reserve buys U.S. bonds . This change in U.S. interest rates will cause which of the following to occur?
an outflow of capital from the United States.
Fed increases money supply by aslo tools of fed
buy securities lower rr lower discount rate
The U.S. central bank performs all the following roles for the nation EXCEPT
conducting their nations' monetary policies. providing financial services for private banks. Correct! lending funds directly to the public. performing banking functions for their nations' governments.
People demand money for all of the following reasons EXCEPT
correct answer it generates a rate of return. it can meet unplanned expenditures. it is a medium of exchange to make payments. it is a store of value.
Bond price increases
cost of new external funds decreases
contractionary fiscal policy
decrease AD by increasing taxes or decrease spending decrease interest rate decrease price level decrease demand for US dollars US dollar deprecriates net exports increase
contractionary monetary policy
decrease MS by Selling bonds decrease in price of bonds increase interest rate decrease US business investment increase foreign investment in US US dollar appreciates decrease net exports GDP & inflation decrease
Public Debt
deficits +surplusses
Every transaction concerning the importation of U.S. goods constitutes a
demand for foreign currency and a supply of dollars.
crowding out effect
expansionary: increase gov spending w/o raising taxes gov increases interest rate to lure funds from savers decrease in investment from borrowers(private expenditures) due to the higher interest rate
Budget surplus Budget Deficit
gov expenditures< tax revenue gov expenditures> tax revenue
tools of fiscal policy
government expenditures and taxation
Net Public Debt
gross public debt -interagency borrowings
inflation
helps borrowers as it results in a lower real interest rate
Transaction demand
holding money as a medium of exchange to make payments (cash
asset demand
holding money as a store of value instead of other assets
precautionary demand
holding money to meet unplanned expenditures and emergencies
Suppose the actual real GDP is $15 trillion and potential real GDP is $16 trillion. The Federal Reserve engages in monetary policy to solve this problem. The impact of this monetary policy will be to [ Select ] ["decrease", "increase"] the [ Select ] ["short-run aggregate supply", "long-run aggregate supply", "aggregate demand"] curve. This causes the price level to [ Select ] ["decrease", "increase"] and real GDP to [ Select ] ["decrease", "increase"] .
increase ad increase increase
Suppose actual real GDP is $14 and potential real GDP is $13.5 and the Fed uses the proper monetary policy, then as a result of this monetary policy, interest rates [ Select ] ["decrease", "increase"] . , the U.S. dollar [ Select ] ["deprecaites", "apprecaites"] and domestic goods and services become [ Select ] "more expensive","less expensive" and, as a result net exports [ Select ] ["decrease", "increase"] .
increase appreciates more expensive decrease
Expansionary monetary policy
increase MS by buying bonds increase price of bonds decrease interest rate increase US business investment decrease foreign investment in US US dollar depreciates net exports increase increase GDP & inflation
expansionary fiscal policy
increase gov borrowing to increase AD increase interest rate increase price level & demand for dollars US dollar appreciates US net exports decrease
If actual real GDP is greater than potential real GDP. The Federal Reserve wants to bring the economy to a full employment level. The Fed should
increase the discount rate.
Even when people know the purchasing power of the currency is declining, they continue to use the currency because
its value is still predictable
An increase in the U.S. federal budget deficit will most likely
lead to an inflow of funds to the United States and an appreciation of the dollar.
If the interest rate increases, then there is a movement up along the money demand curve.
movement up along
new real GDP equation
old gap*(1+growth rate)^n
Suppose actual real GDP is $14 and potential real GDP is $14.5 and the budget is balanced. If government spending is changed to solve the gap, then the price level (inflation) [ Select ] ["decreases", "increases", "remains unchanged"] and real GDP [ Select ] ["remains unchanged", "decreases", "increases"] in the long run.
price level (inflation)- increases real GDP - remains unchanged
GDP deflator
price level= nominal GDP/Real GDP
If interest rates increase
price of bond decreases
Suppose that the federal government had a budget deficit of $80 billion in year 1 and $90 billion in year 2, but that it experiences budget surpluses of $40 billion in year 3 and $20 billion in year 4. Also assume that the government uses any budget surpluses to pay down the public debt. At the end of these four years, the Federal government's public debt would have [ Select ] ["decreased", "increased"] by $ [ Select ] ["230", "20", "110", "170"] billion.
public debt - increased by 110$ surplus-deficit if negative then public debt increased
If a check written on one bank is deposited in another bank, then the money supply remains unchanged .
remains unchanged
Suppose that each 0.1-percentage-point increase in the equilibrium interest rate induces a $4 billion decrease in real planned investment spending by businesses. In addition, the investment multiplier is equal to 3, and the money multiplier is equal to 4. Furthermore, every $10 billion decrease in the money supply brings about a 0.1-percentage-point increase in the equilibrium interest rate. Use this information to answer the following questions under the assumption that all other things are equal. If actual GDP is $500 billion and potential GDP is $440 billion, then the Fed should sell $ 12.5 billion in bonds.
sell 12.5 To close a $60 billion inflationary gap, then the Fed should sell bonds. Since the size of the gap is $60 billion, autonomous Investment spending (I) should change by $20 billion ($60 billion/3). Since Investment spending (I) should change by $20 billion, then the equilibrium interest rate should change by 0.5% (a 0.1% change in the equilibrium interest rate changes Investment spending by $4billion). Since the equilibrium interest rate should change by 0.5%, then the money supply should change by $50 billion (a $10 billion change in the money supply changes the equilibrium interest rate by 0.1%). Since the money supply should change by $50 billion, then the Fed should buy/sell bonds by $20 billion ($50 billion/4).
functions of the fed
supplies the economy with fiduciary currency, provides a clearing mechanism for checks, holds depository institutions reserves acts as the gov fiscal agency supervises member banks acts as a lender of last resort regulates money supply intervenes in foreign currency markets
Discount rate
the interest rate the Fed charges on discount loans
If proceeds from loans are NOT deposited back in the banking system, then
there is no effect on the magnitude of the multiplier process. Correct! the magnitude of the multiplier process is reduced. the magnitude of the multiplier process is increased. the Fed intervenes by selling more Federal government bonds.
When foreign residents buy U.S. Treasury securities to finance the budget deficit,
we can also anticipate an increase in the trade deficit.