Unit 5 - Macroeconomics
If nominal GDP is $600 billion and, on the average, each dollar is spent three times per year, then the amount of money demanded for transactions purposes will be
$200 billion.
A few years ago, you bought a bond with no expiration and a fixed annual interest payment of $1,000 at a price of $10,000. If the interest rate in the economy is now 12.5 percent a year and you want to sell the bond, the maximum price that you can get for it is
$8,000
In this case, if AD decreases, what will happen to equilibrium output and the price level? Equilibrium output will and the price level will
Fall Fall
If AD decreases in this situation, what will happen to equilibrium output and the price level? Equilibrium output will and the price level will
Fall Not Change
Which of the following is a difference between "quantitative easing" and ordinary open-market operations?
Open-market operations are focused exclusively on U.S. government bonds; quantitative easing also includes the buying and selling of debt issued by government agencies and government-sponsored entities.
Which of the following is correct?
The asset demand for money is downsloping because the opportunity cost of holding money increases as the interest rate rises.
Total money demand is the
horizontal sum of the transactions demand for money and the asset demand for money
According to the Taylor rule
if inflation rises by 1 percentage point above its target, then the Fed should raise the real federal funds rate by one-half a percentage point.
An expansionary monetary policy may be frustrated if the
investment-demand curve shifts to the left.
Monetarists say that the relationship between the amount of money that households and businesses want to hold and the level of national output and income
is relatively stable.
The basic determinant of the transactions demand for money is the
level of nominal GDP.
Rational expectations theory implies that the
long-run aggregate supply curve is vertical.
In which of the following situations is it certain that the quantity of money demanded by the public will decrease?
nominal GDP decreases and the interest rate increases
If velocity unexpectedly falls because of, say, a drop in investment spending by businesses, adherence to a monetary rule will
not provide sufficient liquidity to provide for economic growth.
The velocity of money is the
number of times per year the average dollar is spent on final goods and services.
The Fed's response to the zero lower bound problem was
quantitative easing.
The mainstream view is that macro instability is caused by
significant changes in investment spending.
In recent years, the Federal Reserve has
taken an activist, pragmatic approach to monetary policy, paying close attention to interest rates.
The liquidity trap refers to the situation where
the Fed adds excess reserves to the banking system, but it has minimal positive effect on lending, investment, or aggregate demand.
When economists say that monetary policy can exhibit cyclical asymmetry, this means
expansionary and restrictive monetary policy do not have the same potential for economic expansion and contraction
The possible asymmetry of monetary policy is the central idea of the
pushing-on-a-string analogy.
Most monetarists would say that
the MV = PQ equation provides a better understanding of the macroeconomy than does the Ca + Ig + Xn + G = GDP equation.
Suppose there is an increase in the total demand for money. In this case,
the equilibrium interest rate will rise
In response to the zero lower bound problem,
the Fed pursued quantitative easing.
Which of the following is not an aggregate-demand-side explanation of business cycles?
the real-business-cycle theory
If nominal GDP is $4,000 billion and the amount of money demanded for transactions purposes is $800 billion, it can generally be concluded that
on average, each dollar will be spent five times a year.
To determine the velocity of money, you would need to know
nominal GDP and the money supply.
Prior to the mortgage debt crisis, the most frequently employed restrictive monetary policy tool was
selling bonds in the open market
Hourly Wage Rate Output Per Hour Of Work $10 6 9 6 8 4 7 2 6 1 Refer to the table. At the $8 wage, labor cost per unit of output is
$2.00
If the dollars held for transactions purposes are, on the average, spent four times a year for final goods and services, then the quantity of money people will wish to hold for transactions purposes is equal to
25 percent of nominal GDP.
If a certain household earns and spends $24,000 per year and, on the average, holds a money balance of $6,000, then the velocity of money for this household is
4
Finally, if both input and output prices are fully flexible, what does the aggregate supply curve look like?
AS(1)
Next, imagine that input prices are fixed, but output prices are flexible. What does the aggregate supply curve look like?
AS(2)
The mainstream view of macroeconomic instability emphasizes sticky prices. Use the figure below to answer the following questions. What does the aggregate supply curve look like if both input and output prices are fixed?
AS(3)
Which of the following best explains why there may exist a negative lower bound for interest rates, beyond which lowering interest rates is counterproductive?
Depositors will be willing to accept small negative interest rates in exchange for the convenience of being able to make electronic transactions.
Which of the following best describes the effect of the zero interest rate policy implemented in December 2008?
Its effectiveness was limited by the zero lower bound problem.
Rational expectations theory is based on the assumption that
both product and resource markets are very competitive.
Changes in the federal funds rate and the prime interest rate closely track one another because
both rates are related to the relative scarcity or availability of reserves.
A higher wage could result in a lower labor cost per unit of output than a lower wage if the higher wage
brings forth greater work effort.
Before the financial crisis, if the Fed wanted to lower the federal funds rate, it would
buy government securities in the open market
One of the strengths of monetary policy relative to fiscal policy is that monetary policy
can be implemented more quickly.
In new classical economics, a "price-level surprise"
causes a temporary change in real output.
Mainstream macroeconomics would suggest that fiscal policy
changes aggregate demand and GDP through the multiplier process.
Refer to the figure and assume the economy initially is in equilibrium at point a. In the new classical theory, an unanticipated decrease in aggregate demand from AD2 to AD3 would move the economy
from a to c to h.
The federal funds rate is
lower than the prime interest rate because federal funds are loaned overnight.
In an effort to stabilize the banking sector and keep banks lending, from October 2008 to September 2009, the Fed
lowered the federal funds target rate.
The policy position that the supply of money should be increased at a constant rate each year is most closely associated with the views of
monetarism.
Which of the following groups of economists believe that cost-push inflation is impossible in the long run without excessive monetary growth?
monetarists and rational expectations economists
Cyclical asymmetry is important to policymakers because
monetary policy is more effective in fighting inflation than recession
The velocity of money is equal to
none of these.
The view that anticipated changes in the money supply will have no effect on the economy's output would most likely be a proposition of
rational expectations theory.
Refer to the diagram. A decline of aggregate supply from ASLR1 to ASLR2, followed by a decline of aggregate demand from AD1 to AD2, would best describe the
real-business-cycle view of recession
The increase in excess reserves that occurred as a result of the mortgage debt crisis
rendered open-market operations ineffective
The federal funds rate is
the interest rate that banks charge one another on overnight loans, whereas the prime interest rate is the interest rate that banks charge on loans to their most creditworthy customers.
If the quantity of money demanded exceeds the quantity supplied,
the interest rate will rise
The 2007-2009 recession began with reductions in investment and consumption spending, precipitated by a financial crisis. This explanation for the recession is consistent with
the mainstream view of macroeconomic instability.
Which of the following varies directly with the interest rate?
the opportunity cost of holding money
A consumer holds money to meet spending needs. This would be an example of the
transactions demand for money.
According to rational expectations theory, observed instability in the private economy would most likely be due to
unanticipated aggregate demand and aggregate supply shocks in the short run.
The rationale for a monetary rule can be explained by using the equation of exchange if
velocity is assumed to be constant so that changes in the money supply equal changes in real output and leave the price level (P) unchanged
A decrease in the interest rate will cause a(n)
increase in the amount of money held as an asset.
Answer the question on the basis of the following information for a hypothetical economy. All values are in nominal terms. M = $100 V = 2 Ca = $160 Xn = $10 G = $10 In equilibrium, Ig is
$20
raig and Kris were walking directly toward each other in a congested store aisle. Craig moved to his left to avoid Kris, and at the same time Kris moved to his right to avoid Craig. They bumped into each other. This idea relates to macroeconomic instability because the economy
Coordination Failure - does not achieve a mutually beneficial equilibrium because there is a lack of coordination of the actions of people and businesses.
When bond prices go up, interest rates go
Down
An efficiency wage is
NOT a "wage" that contains a profit-sharing component as well as traditional hourly pay.
On a diagram where the interest rate and the quantity of money demanded are shown on the vertical and horizontal axes, respectively, the transactions demand for money can be represented by
NOT a line parallel to the horizontal axis Best guess - a vertical line
Prior to the financial crisis of 2007-2009, the Fed would typically initiate an expansionary monetary policy by
NOT setting a lower reserve ratio.
Why wouldn't the Fed want to drive nominal interest rates below zero in response to a financial crisis and recession?
Negative nominal interest rates would cause people to withdraw their money from banks, reducing what banks could lend out to consumers and businesses.
In this case, if AD decreases, what will happen to equilibrium output and the price level? Equilibrium output will and the price level will
Not Change Fall
What does it mean when economists say that the Fed has attempted to "normalize" monetary policy after the Great Recession?
The Fed has tried to use monetary policy to bring interest rates back to the historically normal range of 3 percent or higher.
Other things equal, which of the following would increase the federal funds rate?
a decline in excess reserves in the banking system
Commercial bank reserves, most of which are held by the Federal Reserve Banks, are
a liability of the Federal Reserve Banks and an asset for commercial banks.
The problem of cyclical asymmetry refers to the idea that
a restrictive monetary policy can force a contraction of the money supply, but an expansionary monetary policy may not achieve an increase in the money supply.
The Federal Reserve Banks sell government securities to the public. As a result, the checkable deposits
and reserves of commercial banks both decrease.
A wealthy executive is holding money, waiting for a good time to invest in the stock market. This action would be an example of the
asset demand for money.
The equilibrium interest rate is determined
at the intersection of the total demand for money curve and the supply of money curve
According to monetarists,
changes in the money supply are the primary cause of changes in the price level.
An expansionary monetary policy may be less effective than a restrictive monetary policy because
commercial banks may not be able to find good loan customers.
New classical economists
hold that, left alone, the economy gravitates to its full-employment level of output.
Suppose laid-off workers and other qualified unemployed workers offer to work for less than the wages being paid existing employed workers, but employers do not hire these workers for fear that existing workers will refuse to cooperate with them. This situation best describes the
insider-outsider theory.
The basic determinant of the asset demand for money is the
interest rate
The difference between a so-called real business cycle and a more traditional "spending" business cycle is that in the real-business-cycle theory, macroeconomic instability arises
on the aggregate supply side of the economy.
The benchmark interest rate that banks use as a reference point for a variety of consumer and business loans is the
prime interest rate.