Chapter 14, 15, 16, 17

​Similarly, explain why a decrease in the marginal propensity to import would increase the size of the government purchases multiplier. The value of the government purchases multiplier would decrease because in the formula for the multiplier the denominator is

1- ​[MPC x ​(1 -t) -​MPI]

The United States is divided into ---12. Federal Reserve Districts. The Federal Reserve​ Bank's Board of Governors consists of ----- 7. members appointed by the president of the U.S. to​ 14-year, ​ non-renewable terms. One of the board members is appointed to a -----4. ​year, renewable term as the chairman.

12, 7, 4

Suppose the reserve requirement is 15​%. What is the effect on total checkable deposits in the economy if bank reserves increase by ​$60 ​billion?

400 billion increase

In a fractional reserve banking system what is the difference between a​ "bank run" and a​ "bank panic?

A bank run involves one​ bank; a bank panic involves many banks.

Which of the following is true with respect to ​hyperinflation?

A.It is caused by central banks increasing the money supply at a rate much greater than the growth rate of real GDP. B.It can be hundreds long -even thousandslong-of percentage points per year. C.In the presence of​ hyperinflation, firms and households avoid holding money. D.All of the above.

Which of the following is true with respect to Irving​ Fisher's quantity​ equation, M xV = P xY​?

A.V​ = Average number of times a dollar is spent on goods and services B. V = P x Y / M C.P​ = the GDP deflator D.M​ = M1 definition of the money supply E.All of the above

Which of the following is NOT a function of​ money?

Acceptability

The figure to the right illustrates the economy using the Dynamic Aggregate Demand and Aggregate Supply Model If actual real GDP in 2006 occurs at point B and potential GDP occurs at LRAS 06​, we would expect the federal government to pursue​ a(n) Contractionary fiscal policy. If the​ government's policy is​ successful, what is the effect of the policy on the following macroeconomic​ indicators?

Actual real GDP decrease . Potential real GDP does not change . Price level decrease . Unemployment increase .

What is inflation​ targeting?

Committing the central bank to achieve an announced level of inflation.

How does a budget deficit act as an automatic stabilizer and reduce the severity of a​ recession?

Consumers spend more than they would in the absence of social insurance​ programs, like unemployment. Transfer payments to households increase. During​ recessions, tax obligations fall due to falling wages and profits. All the above

In addition to the Federal Reserve​ Bank, what other economic actors influence the money​ supply? A. The U.S. Mint and the U.S. Treasury. B. The U.S. President and Vice President. C. The U.S. Senate and the U.S. House of Representatives. D. ​Households, firms, and banks.

D. ​Households, firms, and banks.

Which of the following is a monetary policy tool used by the Federal Reserve​ Bank? A.Decreasing the rate at which banks can borrow money from the Federal Reserve. B.Increasing the reserve requirement from 10 percent to 12.5 percent. C.Buying​ $500 million worth of government​ securities, such as Treasury bills. D.All of the above.

D.All of the above.

Why did the Fed help JP Morgan Chase buy Bear​ Stearns? A.Commercial banks would be reluctant to lend to investment banks. B.JP Morgan Chase is an influential partner with the Fed. C.Failure of Bear Stearns would lead to a larger investment bank failure. D.All of the above. E.A and C only.

E.A and C only.

Evaluate the following​ statement: Banks use deposits to make consumer loans to households and commercial loans to businesses. Banks will loan out every penny of their deposits in order to make a profit

False. Banks must hold a fraction of their deposits as vault cash or with the Federal Reserve.

The Phillips curve's downward slope depends on rational expectations.

False: Because The Phillips curve depends on adaptive expectations. If expectations in an economy were rational, the adjustments would be immediate and would not generate a trade-off. Because expectations are adaptive, there is a trade-off between inflation and unemployment.

The vertical Phillips curve implies that expansionary monetary policy can raise the rate of inflation.

False: Because a vertical Phillips curve indicates just the opposite. According to classical economics, money is neutral in the long run and cannot affect real variables. The Phillips curve is vertical because output (a real variable) is not affected by changes in the money supply (a nominal variable).

As of​ 1993, the Fed sets targets for which of the following in order to achieve price stability and high​ employment?

Federal funds rate

According to many economists and​ policymakers, what other options does the Fed have to improve its credibility with​ workers, firms, and​ investors?

Following a discretion strategy. Following the Taylor rule. Following a rules strategy.

What is the difference between federal government purchases​ (spending) and federal government​ expenditures?

Government purchases are included in government expenditures.

What are the gains to be had from simplifying the tax​ code?

Greater clarity of the decisions made by households and firms. Increased efficiency of households and firms. Resources from the tax preparation industry freed up for other endeavors. All of the above.

Which of the following is not a result of an outward shift of the aggregate demand curve?

Higher unemployment: The Phillips curve explains why unemployment decreases when the price level, or inflation, rises in the short run. Rising demand and prices increase output and employment. Therefore, unemployment decreases in the short run.

Why​ doesn't the Phillips curve represent a permanent​ trade-off between unemployment and inflation in the long​ run?

In the long​ run, aggregate supply is vertical.

In the figure to the​ right, which of the following events is most likely to cause a shift in the money demand​ (MD) curve from MD 1 to MD 2 ​(Point A to Point ​C)​?

Increase in real GDP or increase in the price level

In the figure to the​ right, when the money supply increased from MS 1 to MS 2​, the equilibrium interest rate fell from​ 4% to​ 3%. Why?

Increased demand for Treasury securities drives up their prices. ​Initially, firms hold more money than they want relative to other financial assets. Increased demand for Treasury securities drives down their interest rate. All of the above.

Which of the following is most likely to occur in an economy that is operating below its level of full employment?

Inflation will be low. When an economy operates below its speed limit, it does not use all of its resources. Unemployment will be high, because people are out of work. Unused resources will lower production costs and inflation, illustrating the short-run trade-off between unemployment and inflation.

The Phillips curve was developed by A.W. Phillips in 1957 and shows the relationship between unemployment and inflation. The​ curve, shown at the​ right, indicates what type of relationship between the two​ variables?

Inverse relationship

How do investment banks differ from commercial​ banks? ​(Mark all that​ apply.) A.Investment banks generally do not lend to households. B.Investment banks take deposits. C.Investment banks do not take deposits. D.Commercial banks are financial advisors to firms issuing stocks. E.Commercial banks do not lend to households.

Investment banks generally do not lend to households. Investment banks do not take deposits.

Consider the figure to the right. An increase in government spending shifted the aggregate demand curve from AD 1 to AD 2. As a​ result, both price level and real GDP increased. What can be​ said, however, about the increase in real​ GDP?

It increased by less than indicated by a multiplier with a constant price level.

When SRAS 1 shifts to SRAS 2​, the price level increases and the level of real GDP falls. What happens to the​ short-run Phillips curve when the​ short-run aggregate supply curve shifts​ (a supply​ shock)?

It shifts up such that a given level of unemployment occurs at a higher price level.

In​ 2008, the required reserve ratio for a​ bank's first​ $9.3 million in checking account deposits was zero. It was 3 percent on deposits between​ $9.3 million and​ $43.9 million, and 10 percent on deposits above​ $43.9 million. In most​ cases, and for​ simplicity, we assume that the required reserve ratio is 10 percent on all deposits.​ Therefore, the simple deposit multiplier is 10. Is the​ real-world deposit multiplier greater​ than, less​ than, or equal to the simple deposit​ multiplier?

Less. The simple deposit multiplier is a model with assumptions that keep it higher than the​ real-world multiplier.

Which of the following is NOT a monetary policy goal of the Federal Reserve bank​ (the Fed)? Low unemployment Higher living standards Low prices Stable financial markets

Low prices

Consider the figure to the right. Can the Fed achieve a​ $900 billion money supply​ (MS) AND a​ 5% interest rate​ (point C)?

No. The Fed cannot target both the money supply and the interest rate simultaneously.

After September​ 11, 2001, the federal government increased military spending on wars in Iraq and Afghanistan. Is this increase in spending considered fiscal​ policy?

No. The increase in defense spending after that date was designed to achieve homeland security objectives.

Suppose the economy is in equilibrium in the first period at point A. In the second​ period, the economy reaches point B. What policy would the Fed likely pursue in order to move AD 2 to AD Subscript 2 comma policy and reach equilibrium​ (point C) in the second​ period? ​ (What policy will increase the price level and increase actual real​ GDP?) A.Decrease taxes B.Open market purchase of government securities C.Increase the discount rate D.Increase the reserve requirement

Open market purchase of government securities

The figure to the right illustrates a dynamic AD-AS model Suppose the economy is in equilibrium in the first period at point A. In the second​ period, the economy reaches point B. What policy would the Fed likely pursue in order to move AD 2 to AD Subscript 2 comma policy and reach equilibrium​ (point C) in the second​ period?

Open market purchase of government securities.

If the Federal Reserve is late to recognize a recession and implements an expansionary policy too​ late, the result could be an increase in inflation during the beginning of the next phase. Even though the goal had been to reduce the severity of the​ recession, the poor timing caused another​ problem: inflation. This is an example of what type of​ policy?

Procyclical policy

The Fed uses monetary policy to offset the effects of a recession​ (high unemployment and falling prices when actual real GDP falls short of potential​ GDP) and the effects of a rapid expansion​ (high prices and​ wages). Can the​ Fed, therefore, eliminate​ recessions?

The Fed can only soften the magnitude of​ recessions, not eliminate them.

Nobel laureate Milton Friedman and his followers belong to a school of thought known as monetarism. What do the monetarists argue the Fed should​ target?

The Fed should target the money​ supply, not the interest​ rate, and that it should adopt the monetary growth rule.

According to the Taylor rule LOADING...​, what is the federal funds target rate under the following​ conditions? followsEquilibrium real federal funds rate equals 3​% followsTarget rate of inflation equals 3​% followsCurrent inflation rate equals 2​% followsReal GDP is 2​% below potential real GDP

The federal funds target rate equals Your answer is correct. You answered 3.5.​%

According to the quantity theory of money inflation results from which of the​ following?

The money supply grows faster than real GDP.

Changes in interest rates affect aggregate demand. Which of the following is affected by changes in interest rates​ and, as a​ result, impacts aggregate​ demand?

The value of the dollar Consumption of durable goods Business investment projects

Paul Volcker is credited largely with which of the​ following?

The​ "Volcker disinflation." Fighting inflation by reducing the growth of the money supply.

When is it considered​ "good policy" for the government to run a budget​ deficit?

When borrowing is used for​ long-lived capital goods.

What is the Fed doing to increase the credibility of its​ policies?

Whenever a change in policy is​ announced, the change actually takes place. Announcing the federal funds target rate.

Indicate the two main objections to the idea that the​ short-run Phillips curve is vertical.

Workers and firms might not have rational expectations. Contracts with workers keep wages sticky.

The figure to the right illustrates the economy using the Dynamic Aggregate Demand and Aggregate Supply Model If actual real GDP in 2006 occurs at point B and potential GDP occurs at LRAS 06​, we would expect the Federal Reserve Bank to pursue------- monetary policy. If the​ Fed's policy is​ successful, what is the effect of the policy on the following macroeconomic​ indicators?

a contractionary Actual real GDP decrease . Potential real GDP does not change . Price level decrease . Unemployment increase.

Economists who believed that the Phillips curve represented a structural relationship believed that the curve represented

a permanent​ trade-off between unemployment and inflation.

Policymakers can expand aggregate demand and lower unemployment, but the cost is

a temporary increase in inflation. In the short run, there is a trade-off between inflation and unemployment. When aggregate demand increases, productivity temporarily increases and reduces unemployment. This trade-off is illustrated by the Phillips curve.

If actual inflation is higher than expected​ inflation, the

actual real wage is less than the expected real​ wage: unemployment falls.

Alan Greenspan

agreed with Paul Volcker about the importance of keeping inflation low.

The use of money A. reduces the transaction costs of exchange. B. allows for greater specialization. C. eliminates the double coincidence of wants. D. all of the above.

all of the above

In the short run, the unemployment rate depends on

all of the above. In the short run, the unemployment rate depends on monetary policy, aggregate demand, and the rate of inflation. Monetary policy affects the aggregate price level, and will alter the trade-off between inflation and unemployment.

When the Federal Open Market Committee​ (FOMC) decides to increase the money​ supply, it ------U.S. Treasury securities. If the FOMC wishes to decrease the money​ supply, it ------- U.S. Treasury securities.

buys, sells

An initial decrease in a​ bank's reserves will decrease checkable deposits

by an amount greater than the decrease in reserves.

The figure to the right shows a breakdown of the M1 definition of the money supply in 2015. Which area corresponds to the amount of checking account​ deposits?

c

​One-time tax​ rebates, such as those in 2001 and​ 2008, increase consumption spending by less than a permanent tax cut because​ one-time tax rebates increase

current income.

In the figure to the​ right, the opportunity cost of holding money--------- when moving from Point A to Point B on the money demand curve.

decreases

The figure to the right illustrates a dynamic AD-AS model Suppose the economy is in equilibrium in the first period at point A. In the second​ period, the economy reaches point B. We would expect the Fed to pursue what type of policy in order to move AD 2 to AD Subscript 2 comma policy and reach equilibrium​ (point C) in the second​ period? If the Federal Reserve​ Bank's policy is​ successful, what is the effect on the following macroeconomic​ indicators? .

expansionary monetary policy Actual real​ GDP: increase Potential real​ GDP: does not change Price​ level: increase ​Unemployment: decrease

In the long run, inflation and unemployment are closely related.

false: Only in the short run are inflation and unemployment closely related. Remember that the Phillips curve (the short-run tradeoff between inflation and unemployment) is vertical in the long run. Output is independent of nominal variables.

An economy that operates faster than its natural level of full employment will experience high unemployment and unused resources.

false;When an economy drives faster than the speed limit, there is a low rate of unemployment and increasing competition for scarce resources. Because of this competition, inflation increases, giving us the short-run trade-off between unemployment and inflation known as the Phillips curve.

The U.S. dollar can best be described as

fiat money.

Expected inflation is

how much people expect the aggregate price level to change. Expected inflation is the inflation rate that people predict for the future based on current economic conditions.

Credit cards are

included in neither the M1 definition of the money supply nor in the M2 definition.

Which of the following is most likely to occur in an economy that is operating below its level of full employment? Competition for scarce resources will ensue. Unemployment will be low. Inflation will be low. Production costs will begin to rise.

inflation will be low. When an economy operates below its speed limit, it does not use all of its resources. Unemployment will be high, because people are out of work. Unused resources will lower production costs and inflation, illustrating the short-run trade-off between unemployment and inflation.

The federal funds rate

is the rate that banks charge each other for​ short-term loans of excess reserves.

The supply shocks of the 1970s

led to both high inflation and unemployment. The supply shocks of the 1970s led the economy into a period of stagflation characterized by rising prices and decreasing output.

As a result of crowding out in the short​ run, the effect on real GDP of an increase in government spending is often

less than the increase in government spending.

Suppose the government decides to cut taxes. The aggregate demand curve will shift __________, unemployment will __________, and prices will __________.

outward; decrease; increase

Suppose the government increases its spending. The aggregate demand curve will shift __________, unemployment will __________, and prices will __________.

outward; decrease; increase

In the figure to the​ right, at what point is the inflation rate​ stable? That​ is, at what point can we refer to the inflation rate as the nonaccelerating inflation rate of unemployment​?

point C

Models that use​ factors, such as technology​ shocks, to explain fluctuations in real GDP instead of changes in the money supply are called

real business cycle models.

The ------- is considered the most relevant interest rate when conducting monetary policy.

short-term nominal interest rate

From an understanding of the multiplier​ process, explain why an increase in the tax rate would decrease the size of the government purchases multiplier. The value of the government purchases multiplier would decrease because in the formula for the multiplier

the MPC is multiplied by​ (1 minus ​t).

​If, in the long​ run, real GDP returns to its potential​ level, then in the long​ run,

the Phillips curve is vertical.

As the figure to the right​ indicates, the Fed can affect both the money supply and interest rates.​ However, in recent​ years, the Fed targets interest rates in monetary policy more often than it does the money supply. Which interest rate does the Fed​ target?

the federal funds rate

The Phillips curve illustrates

the short-run tradeoff between inflation and unemployment.

A downward movement along the Phillips curve will cause an inward shift in the aggregate demand curve.

true:A downward movement along the Phillips curve indicates lower inflation with higher unemployment. If unemployment is high, production and income decrease. Consumers alter their spending patterns and reduce demand because of lower income. The aggregate demand curve will shift inward.

What two institutions did Congress create in order to increase the availability of mortgages in a secondary​ market?

​"Fannie Mae" and​ "Freddie Mac"

Increased government debt can lead to higher interest rates​ and, as a​ result, crowding out of private investment spending. In terms of borrowing​ (debt-spending), what will offset the effect of crowding out in the long run so that government debt poses less of a problem to the​ economy?

​Debt-spending on highways and ports. ​Debt-spending on research and development. ​Debt-spending on education. All of the above.

The M2 definition of the money supply includes

​M1, savings​ accounts, small time​ deposits, and money markets.

Does government spending ever reduce private​ spending?

​Yes, due to crowding out.

Policy that is specifically designed to affect aggregate supply and increase incentives to​ work, save, and start a​ business, by reducing the tax wedge

​supply-side economics.