Macroeconomics Exam 2

Why is price inflation sometimes good in a recession?

Price inflation makes it easier for real wages to fall.

What happens in the long run after an increase in government spending growth?

The AD curve shifts back to its original position.

How do we show the short-run impact of an increase in spending growth in our aggregate demand and aggregate supply model?

The AD curve shifts to the right, and inflation and real growth both increase along the SRAS curve.

Which of the following summarizes the limitations of monetary policy?

The Fed has a lot of control over just one interest rate, and interest rates influence economic activity in the short run only.

In the best case scenario, what is the Fed's response to a negative demand shock?

The Fed will increase the growth rate of the money supply to offset the negative demand shock.

How does the aggregate demand and aggregate supply model return to long-run equilibrium after an increase in spending growth?

The SRAS curve shifts up and to the left as inflation expectations adjust.

If consumers become less confident and begin to borrow and spend less, what will happen in the dynamic AD/AS model?

The aggregate demand curve will shift to the left.

In which case below would the owner's equity on a house definitely rise?

The buyer pays down the mortgage and the house's value goes up.

The short-run aggregate supply curve is:

an upward-sloping curve that intersects the aggregate demand curve and the long-run aggregate supply curve.

Economic data:

are sometimes revised months or years after their initial release.

Wages that are "sticky":

are stuck where they are and fail to adjust downwards in a recession.

A bubble happens when:

asset prices rise higher and faster than can be explained by the fundamentals.

Each of the following caused a real shock that contributed to the Great Depression

bad legislation, bank failures, bad weather.

The economy was fragile leading up to the Great Recession in part because:

both homeowners and banks were using more leverage.

If the interest rate increases, then:

both the quantity saved and the quantity supplied of loanable funds will increase.

If the Fed wants to increase the money supply, it will _____ Treasury securities.

buy

The Federal Reserve is the:

federal government's bank, central bank, and banker's bank in the United States.

A financial intermediary is an institution that:

helps bridge the gap between savers and borrowers.

you can think of velocity as:

how often money changes hands

The key to a country's economic growth is combining _______ with _______.

human and physical capital; ideas and good institutions

Bond prices and bond interest rates move:

in opposite directions.

In conducting quantitative easing, the Fed may decide to purchase mortgage securities to do all of the following:

increase the amount of bank reserves, reduce interest rates on home purchases, affect long-term interest rates.

in order to fight high unemployment the Fed should _______.

increase the growth rate of the money supply

Sticky wages and prices:

increase the impact of positive shocks.

When banks use the money they receive from deposits to make loans, they:

increase the money supply through the money multiplier.

Inflation

increases the costs associated with tax systems.

Inflation _______ the risk involved in _______ contracts.

increases; long-term

In a small economy, the money supply is $400,000, and the velocity of money is 3. The current average price level in the economy is 1. What is the level of real GDP in this economy?

$1.2 million

How would a negative real shock be represented in the AS/AD model?

As a leftward shift of the long-run aggregate supply curve that reduces growth and increases inflation.

In order to impact aggregate demand and the economy, the Fed needs to be able to influence:

M1 and M2.

Which of the following is true about M1 and M2?

M2 includes saving deposits and money market mutual funds, but M1 does not.

Do any of the fundamental factors depend on the rate of inflation?

No, at least not in the long run.

Which of the following summarizes the Fisher Effect?

Nominal interest rates will rise with expected inflation.

Wages for some workers do fall during a recession, but it is often

only after the worker is fired and gets rehired elsewhere at a lower wage.

Fighting inflation and fighting sluggish growth require:

opposite actions from policy makers.

four reasons why financial intermediaries might fail

politicized lending, insecure property rights, controls on interest rates, consumer panic

A real shock is any shock that increases or decreases the growth rate of:

potential GDP

When all prices are increasing due to inflation:

price signals become more difficult to interpret.

The data on U.S. nominal interest rates and inflation rates tends to:

provide support for the Fisher Effect, since nominal interest rates and inflation rates seem to move in the same direction.

In the 1920s, just prior to the start of the Great Depression:

real GDP per capita was growing at 3% per year, and there was no inflation.

An increase in spending increases nominal and real wages, but as prices rise:

real wages begin to fall.

Both households and businesses:

rely on credit to thrive.

The process in which bank loans are bundled together and sold on the market as financial assets is called:

securitization.

High inflation may

show up in economic data before sluggish growth, even if the two have the same cause.

Sticky wages:

slow the recovery process after a recession.

Which asset would you classify as being most liquid?

small-time deposits

People borrow, save, and dissave according to the lifecycle theory of savings in order to:

smooth their consumption.

Traditionally, the Fed lends to:

solvent but illiquid banks.

The tools of the Federal Reserve:

sometimes rely on other actors, such as banks, who can sometimes be unreliable.

Which of the following represents ownership in a corporation?

stocks

The adjustment back to a long-run equilibrium after a sudden decrease in aggregate demand:

takes a long time, during which the economy is not growing much and many people are unemployed.

In a "reverse repurchase agreement," the Fed:

takes on reserves in exchange for T-Bills.

If the AD curve shifts to the left as a result of a decrease in the money supply growth rate:

the economy will temporarily depart from its long-run growth rate.

The vertical axis in the AD-AS model shows:

the economy's inflation rate.

The AD curve will shift when there is a change in:

the money growth rate or the velocity growth rate.

The quantity theory of money predicts that the main cause of inflation is increases in:

the money supply.

Suppose the Fed carries out an open market purchase and credits the account of a bank by $160,000. Further suppose that the reserve ratio (RR) is 10%. By how much is the money supply expected to change?

$1.6 million

Suppose the nominal GDP of a country is $500 billion. If the velocity of money in the country is 10, then the country's money supply will equal:

$50 billion.

If the money supply is $375 million, the velocity of money is 5, and real GDP is $12.5 million, what is the average price level?

150

Jordan loaned Taylor $1,200 on March 15, 2009. Taylor returned $1,260 on March 14, 2010. Inflation was 2% over the 1-year period. What is the real interest rate that Taylor paid?

3%

If a homebuyer puts 20% down on the purchase of a home, then immediately after closing the buyer has a leverage ratio of:

4

If the average price level rises from 120 in year 1 to 130 in year 2, the inflation rate between years 1 and 2 will be:

8.33%.

What shifts the short-run aggregate supply curve?

A change in the expected rate of inflation

What would create simultaneous high inflation and high unemployment?

A negative real shock

If prices were rising at 5% per year during a recession, which of the following responses from firms would help facilitate the economic recovery, protect worker morale, AND reduce the firm's real labor costs?

A nominal wage increase of 3% (Worker morale would not fall because of money illusion; however, labor costs in this case would fall by 2%.)

Which of the following asset would be considered money?

An asset that can be easily converted into a widely-used means of payment with little loss in value.

Why didn't the huge increase in the money supply that resulted from quantitative easing lead to increases in inflation?

Because quantitative easing increased the monetary base, but not broader definitions of money like M1 and M2.

Why don't firms want to cut nominal wages?

Because they don't want to decrease worker morale

Which of the following correctly summarizes the three main stages of the lifecycle theory of savings?

Borrowing then saving then dissaving

In what way may the Fed have contributed to the housing bubble

By making credit cheaper with a low Federal funds rate

What role can confidence and fear play in the economy?

Confidence and fear can shift the AD curve outward and inward, respectively.

Changes in the growth rate of the velocity of money can't permanently shift the AD curve because:

In the long run, the inflation rate is determined by the money supply growth rate.

In the AD-AS model, what happens to the economy in the short run when consumer spending decreases?

Inflation is lower, and the real growth rate is lower.

If the growth rate of the money supply were 4% and the growth rate of the velocity of money were 2%, then which of the following could be a point on the aggregate demand curve?

Inflation of 3% and real growth of 3%

In what way does inflation redistribute wealth?

Inflation redistributes wealth from lenders to borrowers.

Which of the following is a problem with deflation?

It raises the real cost of debt repayment

When people mistake changes in nominal prices for changes in real prices, what has occurred?

Money illusion

In the long run, according to the quantity theory of money, if the Central Bank doubles the money supply:

Nominal GDP doubles, and real GDP growth is 0%.

explanation for the low quality of many mortgage securities

Outright fraud in the way these securities were explained ,The belief that American housing prices would not fall, Poor performance of rating agencies, nobody knew which mortgages were high-quality versus low-quality.

How long does it take for the rate to adjust when the Fed announces a change to its target for the federal funds rate?

Sometimes it adjusts before the Fed even takes any action.

Which of the following statements highlights the difference between the CPI (consumer price index) and the GDP deflator?

The CPI measures the average prices of goods and services consumed by typical consumers, whereas the GDP deflator measures the average prices of all goods and services in the economy.

the economy's long-run potential growth rate is also referred to as

The Solow Growth Rate

velocity of money

The average number of times a dollar is spent on final goods and services during a year

The most important measures of the money supply.

The monetary base(MB) , M1, and M2

Which of the following is a possible result of price confusion

The price system becomes a less effective way to coordinate economic action.

Which of the following is the dynamic version of the quantity theory of money?

The sum of the growth in the money supply and the growth in the velocity of money equals the sum of inflation and real growth.Growth in the money supply + growth in the velocity of money = inflation + real growth

the quantity theory of money to explain the aggregate demand curve:

The sum of the growth rate of M and the growth rate of V equals the sum of the inflation and real growth. The growth rate of M + the growth rate of V = inflation + real growth

What was troubling about the 2001 recession?

The unemployment rate remained high, even after the recession ended.

What is one problem with the use of government guarantees covering the shadow banking system?

These guarantees could exacerbate the problem of managers having an incentive to take big risks.

The national income spending identity can be expressed as:

Y equals the sum of C, I, G, and NX.Y = C + I + G + NX.

Are checking accounts money?

Yes, because checking accounts can be used to buy goods and services.

Are saving accounts money?

Yes, even though they technically can't be used to buy goods and services.

Can changes in the growth rate of the velocity of money create a recession?

Yes, if the change is negative and large enough.

Insecure property rights in bank account deposits typically lead to:

a decrease in the supply of savings.

An increase in the growth rate of nominal GDP would be displayed in our model as:

a parallel shift of the AD curve outward.

A real price is:

a price that has been corrected for inflation.

What was the most significant cause of the Great Depression?

a series of negative aggregate demand shocks

The cost of stimulating the economy in the 1970s was:

a severe recession with high unemployment in the 1980s.

What do the points on a particular AD curve have in common?

a specified rate of spending growth

The long-run aggregate supply curve is:

a vertical line.

Economists typically define money as:

a widely accepted means of payment.

The Fed may also lend to insolvent banks, rather than winding them down, in order to:

address the problem of systemic risk.

The Federal Reserve is powerful because it can influence _______ through its control over _______.

aggregate demand; the money supply

Inflation increases:

all prices, including wages.

Inflation is:

an increase in the average level of prices.

examples of real shocks

bad weather, wars, changes in the price of oil

As pessimism grew following the stock market crash of 1929:

bank depositors began to worry about banks failing, and they rushed to withdraw their money.

The reserve ratio is the ratio of bank reserves to:

bank deposits.

Borrowers who took out mortgages in the 1960s:

benefited from the unexpectedly high inflation rates of the 1970s.

The primary purpose of the AD-AS model is to explain:

business fluctuations.

Real shocks to one area of the economy:

can be amplified and transmitted to other areas of the economy.

In the absence of high or volatile inflation, an increase in the price of oil:

can be confidently interpreted as meaning that oil has become more scarce.

In the long-run version of the aggregate demand and aggregate supply model, a shift in the aggregate demand curve:

can change the inflation rate, but not the real growth rate.

To increase the money supply in the economy, the Fed would:

carry out open market purchases and/or decrease the interest rate paid on reserves.

Classic Dichotomy

changes in money affect nominal variables (prices) but not real variable outputs

the most important thing to understand about the AD curve is that:

changes in spending growth can shift the AD curve

According to the AD model, a change in the growth rate of spending, or nominal GDP, can come from:

changes in the growth rate of the money supply or changes in the growth rate of the velocity of money.

Negative real shocks and negative demand shocks:

commonly come together.

The economy is:

complex, and it operates under uncertain rules.

The tools of monetary policy:

continue to evolve as the economy changes.

An increase in the rate of interest paid on reserves would be an example of:

contractionary policy that increases the demand for reserves and raises short-term interest rates.

The monetary base (MB) refers to:

currency plus total reserves held at the Fed.

In order to fight high inflation the Fed should _______;

decrease the growth rate of the money supply;

Paying a higher interest rate on reserves held at the Fed will tend to:

decrease the money supply.

What factors triggered the Great Depression?

decreased consumer spending and tight monetary policy

The FDIC ensures that:

depositors can get their money back, even if their bank fails.

A bank run occurs when:

depositors lose trust in a bank and rush to the bank to pull out their deposits.

Deposit insurance guarantees that:

depositors will get their deposits back, even if the bank is insolvent.

Government ownership of banks is a:

drag on the economy because it reduces the efficiency of investment.

For the most part, prior to 2008, banks typically held:

excess reserves equal to less than 1% of deposits.

An increase in _____ will shift the SRAS curve.

expected inflation, but not actual inflation,

The rate of inflation in the United States since 1960 has:

fluctuated between 1.3 and 14%, often catching many people by surprise.

A reverse repurchase agreement will accomplish all of the following to banks and other financial intermediaries

give them a higher rate of return on T-Bill holdings, discourage investment elsewhere, drain them of liquid cash.

Savings is:

income that is not spent on consumption goods.

Debt monetization means that a government pays off its debt by:

increasing the money supply.

The aggregate demand curve shows combinations of:

inflation and real GDP growth.

Between 1929 and 1933, _______ dropped by 75%.

investment spending

Prior to 2008, a bank might have borrowed reserves from another bank because:

it kept its reserves too low and could not meet Fed requirements.

If both borrowers and lenders become discouraged by difficult-to-predict inflation:

it will become more difficult for financial intermediation to generate and coordinate savings with investment.

What would happen if banks decided to stop lending altogether and instead held on to enormous amounts of cash?

it will cause inflation, which the Fed will fight by reducing the growth rate of the money supply.

The Fed tried to reduce unemployment in the years following the recession of 2001 by:

keeping the Federal funds rate very low.

An employer automatically enrolling employees in a retirement plan is an example of a nudge that:

leads to higher rates of savings.

If inflation is both high and volatile:

lenders may be unwilling to lend out of fear of unexpected increases in inflation.

An insolvent institution has:

liabilities that exceed its assets

High-value, long-term projects benefit from:

long-term relationships between lenders and borrowers.

The Fed's actions leading up to the Great Recession:

may have contributed to the housing bubble and made the recession worse.

If economic data reveals that inflation is rising, the Fed:

may reduce the growth rate of the money supply without really knowing the state of real GDP growth.

Money illusion is:

mistaking changes in nominal prices for changes in real prices.

Quantitative easing involves the Fed swapping:

money for assets other than T-bills.

When banks take on too much risk with the hope that the Fed will eventually bail them out, a condition of _____ exists.

moral hazard

The shadow banking system is:

more prone to panic than commercial banks because deposits are not guaranteed.

In the early 1930s, the Federal Reserve caused the largest _______ in U.S. history by _______ 30%.

negative aggregate demand shock; allowing the money supply to plunge

With respect to real output, in the long run, money is:

neutral.

If people were perfectly rational, they would:

only care about real prices.

Falling interest rates and acute problems in the economy made

open market operations less effective.

The Federal Funds rate is the:

overnight lending rate on loans from one major bank to another

The difference between the value of a house and the unpaid amount of the mortgage is known as:

owner's equity.

People who took out mortgages at the height of U.S. inflation in 1981:

paid much higher real interest rates than expected since inflation fell dramatically after 1981.

During the Great Recession, the Fed relied on each of the following tools to influence the economy

paying interest on reserves, reverse repurchase agreements, quantitative easing.

Every economy has a(n) _______ given by the fundamental factors of growth.

potential growth rate

The position of the long-run aggregate supply curve shows the economy's:

potential growth rate given by the real factors of production.

The Solow growth rate is the economy's:

potential growth rate.

According to the quantity theory of money, an increase in the money supply causes an increase in _____ over the long run.

prices

The reason that changes in spending don't immediately flow into changes in inflation is that:

prices and wages are sticky.

As a result of an increase in the growth rate of the money supply:

real GDP growth increases only in the short run, and the inflation rate increases in both the short run and the long run.

If inflation is slow to change after an increase in the growth rate of spending, then:

real growth must increase.

When the expected rate of inflation is higher than the actual rate of inflation, wealth is:

redistributed from borrowers to lenders

As the financial crisis unfolded, banks could not access capital and started selling assets simply to cover operating costs. This:

reduced the price of these assets, pushing more banks closer to insolvency and causing more assets to be put up for sale.

Bank failures:

represent both a negative aggregate demand shock and a negative real shock.

What is included in MB that is not included in either M1 or M2?

reserve deposits

Which of these demonstrates a negative real shock causing a negative demand shock?

rising oil prices, causing people to become pessimistic and to cut back on their spending.

In the "old days" (prior to 2008), the Fed typically conducted monetary policy by:

targeting the federal funds rate with open market operations.

The pitfalls of a strict money supply rule can be avoided if the Fed:

targets nominal GDP growth.

The money supply growth rate can be changed permanently, but changes in the growth rate of velocity are always

temporary.

As a result of "money illusion," people:

tend to be more upset by a decrease in their nominal wage than by a decrease in their real wage.

One explanation given in the video for the fluctuations of an economy's real growth rate around its potential growth rate is:

that there are often shocks to the key growth factors.

In the aggregate demand and aggregate supply model, an increase in the growth rate of the velocity of money differs from an increase in money supply growth rate in that:

the AD curve will eventually shift back to its original position after an increase in velocity growth.

If the government decides to increase spending on defense:

the aggregate demand curve will shift out temporarily.

Securitization refers to:

the bundling together of mortgages which are then sold as liquid financial assets.

Open market operations refer to:

the buying and selling of primarily government bonds by the Fed.

The AD curve is:

the combination of inflation rates and real growth rates that add up to a constant amount.

The long-run aggregate supply curve shows:

the economy's potential growth rate if all is going well.

The horizontal axis in the AD-AS model shows:

the economy's real GDP growth rate.

If everyone knew in advance the exact rate of inflation:

the exact rate of inflation wouldn't matter so much because people could prepare.

The position of the SRAS curve depends on:

the expected rate of inflation.

If the growth rate of velocity changes:

the growth rate of C, I, G, or NX must change

Another way to describe the growth rate of spending is:

the growth rate of nominal GDP.

Systemic risk is:

the risk of contagion that occurs when a failing financial institution owes significant sums of money to other financial institutions.

The combination of inflation and real growth shown by the AD curve give:

the same level of nominal GDP growth.

The first shock that set off the Great Depression was:

the stock market crash of 1929.

Suppose the growth rate of the money supply is 5% per year and the velocity of money is constant. In this case:

the sum of inflation and the real growth rate must be 5%.

When the Fed buys T-bills from banks:

the supply of bank reserves rises.

The market for loanable funds is comprised of:

the supply of savings and the demand for borrowing.

One of the problems with a strict monetary policy rule that sets a constant growth rate for the money supply is that when there are large shocks to the economy, the growth rate of _______, causing real GDP growth to slow down.

the velocity of money can fall

The economy's normal, long-run growth rate is shown in the AD-AS model as:

the vertical LRAS curve.

The Great Depression was:

the worst recession in U.S. history.

Banking panics are especially dangerous because:

they can start easily and spread quickly.

An illiquid asset is one that is _______ but _______.

worth a lot in the future; can only be sold today at a low price

The interest rate, as it appears on paper in a contract, is the:

nominal interest rate.

_______ is one of the biggest personal and social costs of a recession.

unemployment

The Fed acts as lender of last resort:

when deposit insurance isn't enough or when an institution isn't covered by deposit insurance.

Which of the following is a real shock that contributed to the economic contraction during the Great Depression?

widespread bank failures