Macroeconomics Homework 7

Which of the following is true of the relationship between consumer sentiment and a​ recession?

Both directions of causality between consumer sentiment and recession are present in an economy.

Which of the following shows the correct sequence of events from an initial shock to consumption and the resulting multiplier​ effects?

Consumption​ declines, firms' revenue​ falls, labor demand shifts​ left, unemployment​ rises, and the multiplier effects continue their cycle.

Which series of events would result in a decrease in the inflation​ rate?

Increase the reserve​ requirement, which increases the federal funds rate and decreases the demand for​ loans, which in turn reduces money supply growth and reduces the rate of inflation.

Which of the following statements is true about economic​ fluctuations?

Investment and business expansion would show​ co-movement.

___________ used the concepts of animal spirits and sentiment to explain economic fluctuations.

John Maynard Keynes

Does the chart​ 'University of​ Michigan: Consumer​ Sentiment' prove that​ Keynes' theory is​ correct?

No

In​ 1973, the major​ oil-producing nations of the world declared an oil embargo. The price of​ oil, a key source of​ energy, increased. This led to widespread inflation as costs of production increased steeply. The resulting fall in GDP and employment led the United States into a recession. Which of the business cycle theories explained in the chapter would best fit this explanation of the 1970s​ recession?

Real business cycle theory

Which of the following statements correctly describe co-movements that are historically observed in the​ data?

Real consumption moves positively with real investment. Unemployment moves negatively with real GDP.

Identify the impact of a lower federal funds rate on the following​ factors: Rate of Inflation Interest rates faced by households and firms for borrowing Growth rate of the money supply Rate of loan growth to households and firms

Rise Fall Rise Rise

Based on the information given in the​ chart, which of the following is likely to be true according to​ Keynes' animal spirits view of economic​ fluctuations?

The decline in consumer sentiment will likely lead to the deepening of recessions.

During the financial crisis of​ 2007-2008, many central​ banks, including the Federal Reserve and the Bank of​ Japan, lowered their federal funds rate​ (or the​ non-U.S. equivalent) to around zero. The Bank of Japan took an​ additional, unusual​ measure: it introduced a negative​ short-term interest rate on excess reserves. Faced with a negative interest​ rate, banks must pay to lend their excess reserves to other banks. Given this​ information, which of the following is likely to happen as a result of this policy​ change?

The demand curve for reserves will shift to the left

Which of the following inferences can be made from the​ chart?

The direction of causality between recessions and consumer sentiment is indeterminate.

An old saying​ goes: "Nothing succeeds like​ success." How could this saying relate to​ Keynes's animal spirits view of economic​ fluctuations?

When people​ succeed, they become confident and​ optimistic, which can lead to actions that stimulate further success.

A multiplier is

an economic mechanism that causes an initial shock to be amplified by​ follow-on effects.

An example of a multiplier is when

an increase in business confidence causes firms to increase production and hire​ employees, leading to an increase in household​ spending, causing firms to further increase production and employment. a drop in consumer confidence reduces household​ spending, causing firms to cut production and lay off​ employees, leading to a greater reduction in household spending.

An economic expansion begins

at the end of a recession

According to his theory of animal spirits and​ sentiment, changes in sentiment cause economic fluctuations through​ ____________.

changes in household consumption and firm investment.

Recessions are periods in which the economy _____, while economic expansions are defined as the periods _____

contracts between recessions

During recessions, there is a ___ in consumer sentiment

dip

The long-term real interest rate moves ___ with the federal funds rate. If the federal funds rate falls, the long-term nominal interest rate ___ and the inflation expectations respond _____

directly falls minimally

Real business cycle theory​ ____________.

emphasizes the role of changing productivity and technology in causing economic fluctuations.

There is an increase in the reserves held at the central bank because of open market operations conducted by the Fed. Suppose this activity results in a change in the federal funds rate from 5.5 percent to 3.5 percent and that this change is going to last for 4​ years, at which point the federal funds rate will revert to its old level. The long-term inflation expectations over the 10 years is constant at 1.7 percent. In this case: The 10-year nominal interest rate ___ from 5.5% to ____% The 10-year expected real interest rate ___ from ____% to ____%

falls; 4.7 falls; 3.8; 3

Suppose an economy has been growing for the last five quarters. It is more likely to ___ in the next quarter

grow

Real ____ growth tends to be more volatile than real ___ growth

investment consumption

Okun's Law

is usually an accurate representation of the data.

An economic expansion begins

just after the trough of a recession.

According to the concept of persistence in the rate of​ growth, if the economy contracts this​ quarter, it will

likely contract next quarter

How do wage flexibility and downward wage rigidity affect the extent of unemployment in the economy when the demand for labor​ falls? When the demand for labor​ falls, the fall in employment is ___ when real wages are flexible and _______ when wages are downwardly rigid.

limited amplified

The average number of initial applications for unemployment insurance is likely to be ____ with real GDP

negatively correlated

Consumer sentiment is likely to be ______ with real GDP

positively correlated

The amount of new building permits for residential buildings is likely to be ___ with real GDP

positively correlated

The amount of new orders for capital goods unrelated to defense is likely to be ___ with real GDP

positively correlated

The average weekly hours worked by manufacturing workers is likely to be ____ with real GDP

positively correlated

The​ S&P 500 stock index is likely to be _____________ with real GDP.

positively correlated

When the Fed attempts to reduce the federal funds​ rate, it can do so with the help of the following three​ tools: By ____ the quantity of bank reserves through open market operations. By ____ the reserve requirement By ___ the interest rate it pays on reserves

raising reducing reducing

Economic Fluctuations are

short-run changes in the growth of GDP

When the inflation rate starts to rise above the​ Fed's inflation​ target, the Fed will try to _________ the rate of money supply growth.

slow down

An economic expansion is defined as

the period between two economic recessions.

The Federal Reserve influences the long-run real interest rate through

the short-term federal funds rate

Which of the following explains why a central bank would choose to lower interest rates on reserves below​ zero?

to stimulate the economy

In the United States, recessions are usually defined as

two consecutive quarters of negative growth in real GDP.

Recessions and expansions have ___ ​lengths, which explains why they ____ a​ repetitive, easily predictable cycle. This is why there is ____ of turning points

variable do not follow limited predictability

​Okun's Law states that​ ____________.

when growth in real GDP is above​ 2%, unemployment drops and when it is below​ 2%, unemployment increases.

During an economic downturn of any​ duration,

​consumption, investment, and GDP decrease while unemployment increases.