Chapter 27-30 Economics

Disposable income is the left column, consumption expenditure is the right. 200 350 400 500 600 650 800 800 1000 950 When disposable income is 1000, saving is how much? When disposable income is ____ than​ $800 billion, consumption expenditure exceeds disposable income. Autonomous consumption expenditure equals $____ billion.

1000-950 = 50; less; 200

The multiplier will increase if the marginal propensity to consume​ ______ or the marginal tax rate​ ______.

increases; decreases

One of the​ Fed's policy tools is​ ______.

the discount​ rate, which is the interest rate at which the Fed stands ready to lend reserves to commercial banks

When firms reduce their target level of​ inventories, planned investment​ ________, and equilibrium expenditure and real GDP​ ________.

​falls; decrease

A buildup of inventories might boost economic growth because when firms plan to restock their​ inventories, equilibrium expenditure​ ______ and real GDP​ ______.

increases; increases

How do you calculate the multiplier?

The multiplier is equal to 1 ÷ (1−slope of AE curve​).

The above table contains information about the nation of Syldavia. There are no income taxes or imports in this nation. The marginal propensity to consume in Syldavia is equal to

0.80

The table above gives data for the nation of​ Pearl, a small island in the South Pacific. When the economy is at full employment the price level is

120.

A bank must balance​ ______ against​ ______. security for​ depositors; profit for stockholders

A bank makes a profit by borrowing from depositors at a low interest rate and lending at a higher interest rate. The bank must hold enough reserves to meet​ depositors' withdrawals. The​ bank's balancing act is to balance the risk of loans​ (profits for​ stockholders) against the security for depositors

How do you calculate aggregate planned expenditure?

Aggregate planned expenditure is the sum of consumption​ expenditure, investment, government expenditure on goods and​ services, and exports minus imports.

Which of the following is​ true?

At full​ employment, aggregate supply is equal to potential GDP.

How do you calculate Autonomous expenditure?

Autonomous expenditure is the sum of consumption​ expenditure, investment, government​ expenditure, and​ exports, which does not vary with real GDP.

Think about the definition of​ money, and then choose the correct statement.

Deposits are​ money, checks are not​ money, and credit cards are not money.

Draw the potential GDP line when potential GDP is $16.5 trillion. Label it. As we move up the potential GDP line, ______.

Draw a vertical line at $16.5 trillion; the real wage rate remains constant

Choose the statement about money that is correct.

In the United States today, money consists of currency and deposits at banks and other depository institutions.

What is​ money? Would you classify any of the following items as​ money? a. A $20 traveler's check b. A $50 discount voucher for your next laptop c. Frequent flier miles d. Store coupons for noodles e. An IOU signed by the director of the U.S. postal service f. Commemorative medals g.

Item a is money. Items c​, d​, g​, e​, b​, and f are not money.

Choose the statement about the Fed that is correct.

The FOMC meets approximately every six weeks to review the state of the economy.

The desired reserve ratio is 2 ​percent, and the currency drain ratio is 4 percent of deposits. The central bank makes an open market purchase of ​$4 million of securities. Calculate the change in the monetary base and the change in its components. When the central bank makes an open market purchase of ​$4 million of​ securities, the component of the monetary base that changes is​ _______.

The change in the monetary base is an increase of ​$4 million. Bank reserves

Choose the correct statement.

The increased uncertainty of inflation misallocates resources.

The quantity of money grows at a rate of 11 percent a​ year, potential GDP grows at 2 percent a​ year, and the velocity of circulation increases at a rate of 1 percent per year. Calculate the inflation rate in the long run.

The inflation rate in the long run is 10 percent a year. (growth rate + velocity of circulation rate - potential GDP)

The velocity of circulation is growing at 3 percent a​ year, the real interest rate is 2 percent a​ year, the nominal interest rate is 12 percent a​ year, and the growth rate of real GDP is 2 percent a year. Calculate the inflation​ rate, the growth rate of​ money, and the growth rate of nominal GDP.

The inflation rate is 10 percent a year. The growth rate of money is 9 percent a year. The growth rate of nominal GDP is 12 percent a year.

Sally has a credit card balance of ​$2,000. The credit card company charges a nominal interest rate of 18 percent a year on unpaid balances. The inflation rate is 7 percent a year. Calculate the real interest rate that Sally pays the credit card company.

The real interest rate is equal to the nominal interest rate minus the inflation rate. The real interest rate is 18 percent a year minus 7 percent a​ year, which is 11 percent a year.

Sally has a credit card balance of ​$5,000. The credit card company charges a nominal interest rate of 19 percent a year on unpaid balances. The inflation rate is 10 percent a year. Calculate the real interest rate that Sally pays the credit card company.

The real interest rate is equal to the nominal interest rate minus the inflation rate. The real interest rate is 19 percent a year minus 10 percent a​ year, which is 9 percent a year.

The spreadsheet gives real GDP ​(Y​) and its components in billions of dollars. Calculate equilibrium expenditure.

The spreadsheet gives real GDP ​(Y​) and its components in billions of dollars. Calculate equilibrium expenditure. So, find which row Y = (C + I + G + X - M). That row is your answer.

Money serves the function of being​ ______.

a medium of​ exchange, which means that it is generally accepted in return for goods and services

How do you calculate the change in equilibrium expenditure?

When investment increases, the y-intercept of the AE curve also increases by the same amount. (a $1 increase in investment shifts the AE curve upwards by $1)

Your bank manager tells you that she does not create​ money; she just lends what is deposited. Explain why she is wrong and how she creates money. The banking system creates money because​ ______.

a bank that has excess reserves can make loans. When a bank creates a​ loan, the bank increases the balance of the​ borrower's account and that increase in deposits is new money Your answer is correct.

Money is​ _______.

any commodity or token that is generally accepted as a means of payment

Aggregate planned expenditure is the sum of planned​ _____.

consumption​ expenditure, investment, government​ expenditure, and exports minus imports

An early goldsmith banker earned a profit​ (sometimes a large​ profit) simply by writing notes to certify that a person had deposited a certain amount of gold in his vault. By writing more notes than the amount of gold​ held, the goldsmith could lend the notes and charge interest on them. What were the main benefits from the activities of the goldsmith​ bankers? The main benefits of the activities of the goldsmith bankers include​ ______.

creating a means of payment

A medium of exchange is an object that is generally accepted in return for​ _____. Barter is the direct exchange of goods and services for​ _____, which ​ _____ a double coincidence of wants.

goods and​ services; other goods and​ services; requires

Moving along the potential GDP​ line, when the price level​ changes, the i. real wage rate stays at the full−employment equilibrium level. ii. money wage rate changes by the same percentage. iii. money prices of non−labor resources change by the same percentage.

i, ii, and iii

If investment increases​ ,which of the following​ happens? i. aggregate expenditure increases ii. real GDP increases iii. consumption expenditure decreases

ii and iii

The spread of ATMs and the increased use of debit cards​ ______ money. Everything else remaining the​ same, the nominal interest rate​ ______.

increase the demand​ for; rises

When Mexico increases the quantity of​ money, Mexico's aggregate demand​ ______.

increases and its AD curve shifts rightward

Aggregate demand increases if expected future​ income, inflation, or profits​ ______. And aggregate demand increases if fiscal policy​ ______ government expenditure.

increases; increases

A fall in the money wage rate​ ________ aggregate supply and​ ________.

increases; shifts the AS curve rightward

The Fed uses its policy tools to​ _______.

influence the interest rate and regulate the amount of money circulating in the United States by adjusting the reserves of the banking system

If real GDP​ ______ planned​ expenditure, the economy converges to equilibrium expenditure because inventories​ ______ and firms increase production.

is less​ than; are run down

By lowering the interest​ rate, the Fed makes it​ _______ costly for the banks to borrow monetary base and the interest rate​ _______.

less; falls

How do you find the equilibrium expenditure?

multiply the change in investment by the​ multiplier

If the quantity theory of money is correct and other things remain the​ same, an increase in the quantity of money increases​ _______.

nominal GDP and the price level

The demand for money is the relationship between the quantity of money demanded and the​ _______ when all other influences on the amount of money that people wish to hold remain the same.

nominal interest rate

Which of the following variables is fixed in the aggregate expenditure​ model?

price level

If the Fed wants to increase the quantity of​ money, it makes an open market​ _______. Reserves in the banking system​ ______. Banks​ ______ loans. Bank deposits​ ______ and the quantity of money​ ______.

purchase increase; make more increase; increases

The​ Fed's $2.2 trillion fire hose The Fed threw a lot of money at the financial crisis in 2008 to unfreeze credit markets and encourage economic activity. As part of its effort to keep the interest rate​ low, the Fed purchased government bonds worth​ $300 billion between March and September 2009. By​ October, the Fed held​ $770 billion in government​ securities, nearly double its​ pre-crisis total. Before the​ crisis, the Fed held mainly government​ securities, which it used to control the quantity of money in the economy. Now government securities make up just​ 35% of the​ Fed's balance sheet. ​Source: CNN​ Money, October​ 9, 2009 As the Fed purchased​ $300 billion of government​ securities, did the price of government securities fall or​ rise? Explain your answer. When the Fed purchases​ $300 billion of government​ securities, the price of government securities​ ______ because the price of a bond and its interest rate​ ______.

rises; move in opposite directions

What is a​ bank's balancing​ act? A bank must balance​ ______ against​ ______.

security for​ depositors; profit for stockholders

When U.S. autonomous consumption decreases​, the U.S. consumption function​ ______.

shifts downward

When Americans expect an increase in future​ income, the U.S. consumption function​ ______.

shifts upward

If potential GDP​ increases, ______.

the AS curve shifts rightward

The main sources of cost−push inflation are increases in

the money wage rate and the price of raw materials.

An open market operation is​ ______.

the purchase or sale of government securities by the Federal Reserve System in the open market

Which of the following is money​?

​Charlie's checking account deposit at the Bank of America.

Still on the​ job, but at half the pay In past​ recessions, firms have cut their labor costs by laying off workers. During this​ recession, many firms and state governments have trimmed labor costs by cutting pay or shortening the​ workweek, rather than laying off workers. ​Source: The New York Times​, October​ 13, 2009 What effect might the strategy of cutting pay or the workweek rather than laying off workers have on the depth of the recession and the unemployment​ rate? In comparison to laying off​ workers, cutting pay and shortening the workweek​ ______ the unemployment rate and makes the recession​ ______.

​decreases; less deep

When the Fed sells securities in the open​ market, the monetary base​ _______ and the interest rate​ _______.

​decreases; rises

A rise in the real interest rate​ ________ consumption expenditure and​ ________.

​decreases; shifts the consumption function downward

If autonomous imports​ increase, then the aggregate expenditure curve shifts​ ________ and equilibrium real GDP​ ________.

​downward; decreases

​Inflation-adjusted savings bonds hit​ 0% rate for first time ​Inflation-adjusted savings bonds purchased from May through October 2009 will earn​ 0% for the first six months. The fixed interest rate on these bonds is​ 0.1% and over the previous 6​ months, inflation fell at an annual rate of​ 5.56%. The minimum interest rate on savings bonds is set at​ 0%. ​Source: USA Today​, May​ 5, 2009 Are these savings bonds a better deal than cash under the​ mattress? At an interest rate of 0​ percent, the return on the bonds​ ______ the return on money. If inflation starts to​ rise, and bonds receive a fixed interest rate of 0.1​ percent, the return on the bonds​ ______ the return on money.

​equals; is greater than

The consumption function shifted upward from 1960 to 2013 because as economic growth brought​ ________ expected future income and​ ________ wealth, people chose to​ ________ their consumption expenditure from a given level of income.

​higher; greater; increase

When investment​ increases, the​ ________ in aggregate demand is​ ________ the change in investment.

​increase; greater than

Real GDP and incomes begin to​ _______. The multiplier kicks in and consumption expenditure​ _______.

​increase; increases

Explain the​ Fed's policy tools and briefly describe how each works. The Fed uses its policy tools to​ _______. A. influence the interest rate and regulate the amount of money circulating in the United States by adjusting the reserves of the banking system Your answer is correct. B. regulate the amount of money circulating in the United States by printing enough money each year for the purchase of consumer goods and services C. influence the exchange rate and the​ country's trade balance by adjusting the interest rate D. keep the government budget debt under​ $20 trillion by adjusting loans to Congress By increasing the required reserve​ ratio, the Fed forces banks to hold a​ _______ quantity of monetary base and the interest rate​ _______.

​larger; rises

When the nominal interest rate​ rises, the opportunity cost of holding money​ ______ and the quantity of money demanded​ ______.

​rises; decreases

If there is a rise in the price​ level, there is​ a(n) ________ movement along the AS curve because there is​ ________ in the quantity of real GDP supplied.

​upward; an increase

The Fed threw a lot of money at the financial crisis in 2008 to unfreeze credit markets and encourage economic activity. As part of its effort to keep the interest rate​ low, the Fed purchased government bonds worth​ $300 billion between March and September 2009. By​ October, the Fed held​ $770 billion in government​ securities, nearly double its​ pre-crisis total. Before the​ crisis, the Fed held mainly government​ securities, which it used to control the quantity of money in the economy. Now government securities make up just​ 35% of the​ Fed's balance sheet. If government securities make up just 35 percent of the​ Fed's assets, calculate the​ Fed's total assets. What effect did the​ Fed's purchase of​ $300 billion of government bonds have on the​ Fed's total​ liabilities?

$2200; increased; 300

Sara has ​$500 in currency and ​$4,000 in a bank account on which the bank pays no interest. The inflation rate is 4 percent a year. Calculate the amount of inflation tax that Sara pays in a year.

(4,500*(1 - inflation rate [4 %]) = 4320. 4500 - 4320 = 180$ of "inflation tax." Sara is holding ​$500 in currency and ​$4,000 in her bank​ account, and she receives no interest on either her currency holding or her bank account. At the end of the​ year, her purchasing power is 4 percent less than at the beginning of the year because of the effects of inflation. The inflation tax that she pays is equal to the decrease in her purchasing​ power, which is 4 percent of her currency holding plus 4 percent of her bank account. So Sara pays an inflation tax of ​$180.

Explain why businesses paid workers twice a day during the hyperinflation in Germany after World War I and why workers spent their incomes as soon as they were paid. Choose the correct statement.

(The longest one) Businesses paid workers twice a day so that employees would not leave their jobs and search for employment elsewhere. Workers spent their incomes as soon as they were paid to minimize the loss in value of their income.

Why does an increase in real GDP increase the demand for money and changes in financial technology can increase the demand for money or decrease the demand for money

An increase in real GDP increases the demand for money and financial technology can increase the demand for money or decrease the demand for money. For​ example, daily interest checking deposits and automatic transfers between checkable deposits and saving deposits lower the opportunity cost of holding money and increase the demand for money. Credit cards that have made it easier for people to buy goods and services on credit and pay for them later have decreased the demand for money.

The​ Fed's $2.2 trillion fire hose The Fed threw a lot of money at the financial crisis in 2008 to unfreeze credit markets and encourage economic activity. As part of its effort to keep the interest rate​ low, the Fed purchased government bonds worth​ $300 billion between March and September 2009. By​ October, the Fed held​ $770 billion in government​ securities, nearly double its​ pre-crisis total. Before the​ crisis, the Fed held mainly government​ securities, which it used to control the quantity of money in the economy. Now government securities make up just​ 35% of the​ Fed's balance sheet. ​Source: CNN​ Money, October​ 9, 2009 If the Fed purchased the government securities on the open​ market, explain why the purchase of​ $300 billion of government securities would influence the interest rate.

If the Fed purchases the government securities on the open​ market, the quantity of money​ ______ because​ _______. increases; bank reserves increase The nominal interest rate​ _______. falls

In 2000​, the Canadian economy was at full employment. Real GDP was $940 billion. The nominal interest rate was 7.0 percent a​ year, the inflation rate was 4.0 percent a year, the price level was 1.10​, and the velocity of circulation was 11.00. What was the quantity of money in Canada​?

In 2000​, the quantity of money in Canada is $94.0 billion.

How do you calculate Induced expenditure?

Induced expenditure is consumption expenditure minus​ imports, which varies with real GDP.

Choose the correct statement.

Inflation is a tax on holding money.

The table gives information from a​ bank's balance sheet. Calculate the​ bank's loans,​ securities, and reserves. The​ bank's loans are ​$1150 million. (Loans to businesses) The​ bank's securities are ​$700 million. (Government securities) The​ bank's reserves are ​$90 million. (reserves at the fed + currency)

Item ​(millions of​ dollars) Checkable deposits 300 Savings deposits 400 Small time deposits 1240 Loans to businesses 1,150 Government securities 700 Currency 40 Reserves at the Fed 50

Explain the effect of each of the following events on the quantity of real GDP demanded and aggregate demand in Mexico. When Europe trades with Mexico and goes into a recession​, ​______.

Mexico's exports to Europe decrease​, ​Mexico's aggregate demand decreases​, and​ Mexico's AD curve shifts leftward

When Europe trades with Mexico and goes into an expansion​, ​______.

Mexico's exports to Europe increase​, ​Mexico's aggregate demand increases, and​ Mexico's AD curve shifts rightward

Choose the statement about money that is correct.

Money acts as a unit of account, which is an agreed measure for stating the prices of goods and services.

Peter Howitt of Brown University has estimated that if inflation is lowered from 3 percent a year to​ zero, then after 30​ years, real GDP would be​ ______ percent higher.

Peter Howitt of Brown University has estimated that if inflation is lowered from 3 percent a year to​ zero, then after 30​ years, real GDP would be 2.3 percent higher.

Sally has a credit card balance of ​$10,000. The credit card company charges a nominal interest rate of 17 percent a year on unpaid balances. The inflation rate is 9 percent a year. Calculate the real interest rate that Sally pays the credit card company.

The real interest rate that Sally pays the credit card company is 8 percent a year.

In an economy with no exports and​ imports, autonomous consumption is ​$4 ​trillion, the marginal propensity to consume is 0.8​, investment is ​$5 ​trillion, and government expenditure on goods and services is ​$3 trillion. Taxes are ​$2 trillion and do not vary with real GDP. Investment increases by ​$1.5 trillion. Calculate the change in equilibrium expenditure and the multiplier.

The AE curve shifts upward by $1.5 trillion; The multiplier is 5; Equilibrium expenditure changes by $7.50 trillion.

An economy has no imports and no​ taxes, the MPC is 0.8​, and real GDP is ​$300 billion. Businesses decrease investment by ​$5 billion. Calculate the new level of real GDP. Explain why real GDP decreases by more than ​$5 billion. The new level of real GDP is ​$____ billion. Real GDP decreases by more than ​$5 billion because the decrease in investment​ ______.

The MPC is used in the 1 ÷ (1−slope of AE curve​) formula to find the multiplier. Then the multiplier is multiplied by the investment. Subtract that amount from the real GDP 1 ÷ (1-0.8) = 5. 5 * 5 = 25. 300 - 25 = 275 The new level of real GDP is $275 billion; induces a decrease in consumption expenditure

A bank holds ​$6 for every​ $100 in deposits. The bank wants to hold ​$2 for every​ $100 in deposits. The bank holds excess reserves of ​$8,000 and actual reserves of ​$21,000. What is the actual reserve​ ratio, the desired reserve​ ratio, and the desired reserves​?

The actual reserve ratio is 0.06 The desired reserve ratio is 0.02 The desired reserves are $13,000

Explain the process by which an increase in durable goods orders at a constant price level changes equilibrium expenditure and real GDP.

The aggregate planned expenditure curve shifts upward by an amount equal to the increase in planned​ investment, and equilibrium expenditure and real​ GDP, which are determined at the intersection of the aggregate expenditure curve and the​ 45-degree line, increase.

What are some costs of inflation?

The costs of inflation include the tax on money held by individuals and​ businesses, the increased opportunity cost of holding​ money, and the cost of running around to compare prices at different outlets.

In 1999​, the United Kingdom economy was at full employment. Nominal GDP was ​£770 ​billion, the real interest rate was 4 percent per​ year, the inflation rate was 3 percent a​ year, and the price level was 110. Calculate the nominal interest rate.

The nominal interest rate is 7 percent a year. (Nominal equals real interest rate + inflation rate) In the long​ run, if the real interest rate remains the same but the inflation rate increases to 4 percent a​ year, then the nominal interest rate increases to 8 percent a year.

What is the opportunity cost of holding money?

The opportunity cost of holding money is the nominal interest rate. The nominal interest rate equals the real interest rate plus the inflation rate. When the​ inflation-adjusted rate of interest on bonds is 0​ percent, the real interest rate on bonds is 0 percent and the opportunity cost of holding a bond is equal to the nominal interest rate. So the returns on bonds and money are equal. But when the inflation rate rises and the real interest rate on bonds is guaranteed to be 0.1​ percent, the nominal interest rate exceeds the real interest rate received on bonds. So the return on bonds is greater than the return on holding money.

In 2007​, the United States was at full employment. The quantity of money was growing at 6.4 percent a​ year, the nominal interest rate was 4.4 percent a​ year, real GDP grew at 1.9 percent a​ year, and the inflation rate was 2.9 percent a year. Was the velocity of circulation​ constant? [Hint: Use the quantity theory of​ money.] If the velocity of circulation was not​ constant, how did it change and why might it have​ changed?

The velocity of circulation decreased and its change was −1.6 percent a year. The change in the velocity of circulation occurred because​ the_______. growth rate of the quantity of money was greater than the growth rate of nominal GDP

A bank has the following deposits and​ assets: Checkable​ deposits, ​$300 Savings​ deposits, ​$1,360 Small time​ deposits, ​$675 Loans to​ businesses, ​$1,734 Outstanding credit card​ balances, ​$400 Government​ securities, ​$200 ​Currency, ​$1 Reserve account at the​ Fed, ​$6 Calculate the​ bank's total deposits and the amount of deposits that are part of M1 and M2.

The​ bank's total deposits are ​$2335. (checkable deposits + saving deposits + small time deposits) Deposits that are part of M1 are ​$300. (Checkable deposits) Deposits that are part of M2 are ​$2335. (checkable deposits + saving deposits + small time deposits)

The table gives the elements of planned expenditure. The rows are ordered: Real GDP, Consumption expenditure, Investment, Government expenditure, Exports, and Imports (respectively). The units are trillions of 2005​ dollars. 0 0.3 0.5 0.5 0.7 0 1 2.3 0.5 0.5 0.7 0.5 When real GDP is ​$1 ​trillion, what are aggregate planned​ expenditure, autonomous​ expenditure, and induced​ expenditure?

When real GDP is 1 ​trillion, Aggregate planned expenditure​ = ​$2.3 trillion​ + ​$0.5 trillion​ + ​$0.5 trillion​ + ​$0.7 trillion−​$0.5 ​trillion, which is ​$3.5 trillion. (Add the first 4, subtract the last on the row of 1 Real GDP) Autonomous expenditure is ​$0.3 trillion​ + ​$0.5 trillion​ + ​$0.5 trillion​ + ​$0.7 ​trillion, which is ​$2.0 trillion. (Add the first 4 in the row of 0 Real GDP) Induced expenditure is ​($2.3 trillion−​$0.3 ​trillion)−​$0.5 ​trillion, which is ​$1.5 trillion. (Subtract the Real GDP from the 0 Real GDP, then subtract the imports)

Explain​ why, other things remaining the​ same, interest rates will rise the economy recovers from recession.

When real GDP​ increases, expenditures and incomes increase. To make the increased expenditures and income​ payments, households and firms must hold larger average amounts of money. The demand for money increases. The demand for money curve shifts rightward and the interest rate rises. In the​ figure, the demand for curve for money shifts rightward from MD0 to MD1 and the equilibrium nominal interest rate rises from 5 percent a year to 6 percent a year

A central bank is​ ______. The​ ______ is the central bank of the United States.

a public authority that provides banking services to banks and governments and regulates financial institutions and​ markets; Federal Reserve System

Which of the following could result in a​ recession?

a rise in the price of oil

The costs of inflation do not include​ _______.

an increase in saving and investment

A multiplier is the amount by which a change in any component of​ _____ is magnified or multiplied to determine the change in​ _____ and​ _____ that it generates.

autonomous​ expenditure; equilibrium​ expenditure; real GDP

When the marginal propensity to consume decreases​, the U.S. consumption function​ ______.

becomes flatter

When the marginal propensity to consume increases​, the U.S. consumption function​ ______.

becomes steeper

If the Fed makes an open market sale of​ $1 million of securities to a​ bank, the​ bank's reserves​ ______. Excess reserves​ ______.

decrease; decrease ​decrease; decreases

A rise in the money wage rate when the economy is at potential GDP​ ______.

decreases aggregate supply because a rise in the money wage rate increases​ costs, so firms employ fewer workers

When Mexico decreases the quantity of money, Mexico's aggregate demand ______.

decreases and its AD curve shifts leftward

A fall in inventories might slow economic growth because when firms reduce their target level of​ inventories, equilibrium expenditure​ ______ and real GDP​ ______.

decreases; decreases

The Fed decreases the quantity of money. In the short​ run, the quantity of money demanded​ ______ and the nominal interest rate​ ______.

decreases​; rises

Firms see their inventories​ ______ so they​ ______ production.

decreasing; increase

Macroeconomic equilibrium occurs when the quantity of real GDP​ ______ equals the quantity of​ ______.

demanded; real GDP supplied Macroeconomic equilibrium occurs when the quantity of real GDP demanded equals the quantity of real GDP supplied at the point of intersection of the AD curve and the AS curve.

The consumption function shows how an increase in​ ______ influences​ ______.

disposable​ income; consumption expenditure

In the long run with a constant velocity of​ circulation, the inflation rate​ _______.

equals the money growth rate minus the growth rate of real GDP Money growth​ + Velocity growth​ = Inflation rate​ + Real GDP growth Rearranging Inflation rate​ = Money growth​ + Velocity growth−Real GDP growth With a constant velocity of circulation Inflation rate​ = Money growth−Real GDP growth

​Inflation-adjusted savings bonds purchased from May through October 2009 will earn​ 0% for the first six months. The fixed interest rate on these bonds is​ 0.1% and over the previous 6​ months, inflation fell at an annual rate of​ 5.56%. The minimum interest rate on savings bonds is set at​ 0%. ​Source: USA Today​, May​ 5, 2009 Are these savings bonds a better deal than cash under the​ mattress? At an interest rate of 0​ percent, the return on the bonds​ ______ the return on money. If inflation starts to​ rise, and bonds receive a fixed interest rate of 0.1​ percent, the return on the bonds​ ______ the return on money.

equals; is greater than

The game of winning the Olympic games has become popular with cities around the world. To win the 2016​ games, Rio de Janeiro in Brazil spent some​ $50 million. Now it will spend about​ $50 billion to build new​ stadiums, other sports​ facilities, new bridges and​ roads, to extend the​ metro, and to double the number of hotel rooms. Use the multiplier to explain why cities want to stage the Olympic games. Cities want to stage the Olympic games because real GDP will increase by an amount​ ______.

greater than the expenditure on Olympic investment because the new workers who are hired will spend their​ income, the demand for goods and services​ increases, so sellers will hire more workers who spend their incomes and so on

The graph shows the demand for money curve. Draw the supply of money curve if the equilibrium interest rate is 8 percent a year. Label it MS. Draw a point at the equilibrium quantity of money and nominal interest rate.

https://i.imgur.com/qlc1oCV.png demand for money decreases and the nominal interest rate falls

An economy has the following aggregate expenditure schedules. Draw the three AE curves. Label them appropriately as AE115​, AE105​, and AE95. Draw a point at equilibrium expenditure for each price level. Label the points​ 115, 105, and 95.

https://imgur.com/4y1PB9l >>note: the top line is supposed to be labeled AE95, not 115 Plot the lines using the table and label them accordingly. Plot the points where the lines intersect the 45 degree line and label them according to what line intersected the point.

The left graph shows an​ economy's aggregate planned expenditure curve. The right graph shows its aggregate demand curve. Equilibrium expenditure is​ $12 trillion and the price level is 115. Then the price level rises to 135 and the new equilibrium expenditure is​ $11 trillion. Show the effect in the graphs. In the left​ graph, draw a new AE curve. Label it. Draw a point at the intersection of the new AE curve and the​ 45-degree line. In the right​ graph, draw a point at the new equilibrium real GDP and price level. Draw an arrow on the AD curve from the original equilibrium to the new equilibrium point.

https://imgur.com/NVxqhEm When the price level​ rises, the AE curve shifts downward and intersects the 45° line at the new equilibrium expenditure of​ $11 trillion. When the price level​ rises, there is a movement upward along the AD curve. The quantity of real GDP demanded decreases from​ $12 trillion to​ $11 trillion.

In the most recent quarter​ (the third quarter of 2020​), U.S. real GDP was ​$18.6 trillion and the price level measured by the GDP deflator was 113.8. 1. Draw a point that shows real GDP and the price level in the third quarter of 2020. 2. Draw an aggregate demand curve for the third quarter of 2020 and label it AD. 3. Draw an aggregate supply curve for the third quarter of 2020 and label it AS.

https://imgur.com/a/WLsnIJm Draw the point where it says at (18.6, 113.8) Downwards slope for the AD Upwards slope for the AS (I don't know if they have to intersect the point or not)

In the most recent quarter​ (the third quarter of 2020​), U.S. real GDP was ​$18.6 ​trillion, potential GDP was ​$19.3 ​trillion, and the price level measured by the GDP deflator was 113.8. In the third quarter of 2020 the output gap was ​______.

https://imgur.com/a/hK9zAyR A recessionary gap Potential GDP is greater than real GDP so the output gap is a recessionary gap.

In the most recent quarter​ (the third quarter of 2020​), U.S. real GDP was ​$18.6 ​trillion, potential GDP was ​$19.3 ​trillion, and the price level measured by the GDP deflator was 113.8. 1. Draw a point that shows real GDP and the price level in the third quarter of 2020. 2. Draw an aggregate demand curve for the third quarter of 2020 and label it AD. 3. Draw an aggregate supply curve for the third quarter of 2020 and label it AS. 4. Draw a line that shows potential GDP for the third quarter of 2020 and label it Potential GDP.

https://imgur.com/a/hK9zAyR Draw the point where it says at (18.6, 113.8) Downwards slope for the AD Upwards slope for the AS Vertical line at 19.3 trillion

The marginal propensity to consume in Japan is less than that in the United​ States, and for any amount of disposable​ income, Americans spend more on consumption than do the Japanese. Compare the consumption functions in Japan and the United States using the graph. Draw the U.S. consumption function. Label it CFus. Draw the Japanese consumption function. Label it CFj.

https://imgur.com/hNa8OSu The slopes of CFus and CFj both intersect the y-axis. The CFus line is steeper and above the line of CFj.

The United States is at full employment. Suppose that the price of oil falls and the price level at full employment changes by 10. Draw a curve to show the effect of this event on aggregate supply. Label it AS1.

https://imgur.com/nNOoOWz Draw the same line just 10 units lower

The graph to the right is a scatter diagram of consumption expenditure against disposable income from the fourth quarter of 2011 to the third quarter of 2020. Draw a consumption function through these points and label it CF. What influences consumption decisions and shifts the consumption​ function? Is it likely that all the points in the graph to the right lie on the same consumption​ function? (Yes/No) ​because:

https://imgur.com/vxhWhgT The graph starts from about (10,000, 9,900) and ends at around (16,000, 12,800) The slope is about -.85, which means MPC = 0.85; The real interest rate, wealth, and expected future income; No, the real interest​ rate, wealth, and expected future income changed

When U.S. real GDP​ increases, U.S. imports

increase by less than the change in real GDP.

Because fluctuations in the world oil price make the U.S.​ short-run macroeconomic equilibrium​ fluctuate, someone suggests that the government should vary the tax rate on​ oil, lowering the tax when the world oil price rises and increasing the tax when the world oil price​ falls, to stabilize the oil price in the U.S. market. How would such an action influence aggregate​ demand? Such an action​ ______.

increases aggregate demand when the tax falls because it increases disposable​ income, which increases consumption expenditure Disposable income is equal to income minus net taxes. When the tax​ falls, disposable income increases. As disposable income​ increases, consumption expenditure increases and aggregate demand increases.

When investment​ increases, aggregate demand​ ______.

increases by an amount equal to the change in investment multiplied by the multiplier

Investment decreases by​ $300 billion, government expenditure is​ unchanged, and exports increase by​ $500 billion. As a​ result, autonomous expenditure​ ________, the total expenditure​ ________, and equilibrium real GDP​ ________.

increases by​ $200 billion;​ increases; increases by more than​ $200 billion

A​ bank's liquid assets consist of​ ______.

its​ short-term Treasury bills and overnight loans to other banks

After the increase in the quantity of​ money, at an interest rate of 9 percent a​ year, people want to hold​ _____ so they​ _____ bonds.

less money than the quantity​ supplied; buy

The largest asset of commercial banks are​ _______.

loans

A change in any component of aggregate demand creates a larger change in overall aggregate demand. This is the​ ________ effect, and it means​ , for​ example, that a​ ________ in consumption will cause an even larger​ ________ in AD.

multiplier; decrease; decrease

A planned increase in durable goods is an increase in planned investment. When planned investment​ increases, _______. The AE curve shifts​ _______ and equilibrium expenditure and real GDP​ _______.

real GDP initially increases by an amount equal to the change in investment. Disposable income​ increases, which increases consumption​ expenditure, and real GDP increases further; ​upward; increase

Which of the following situations leads to an unplanned increase in inventories of​ $2.0 trillion?

real GDP​ = $6.0 trillion and aggregate planned expenditures​ = $4.0 trillion

When U.S. autonomous consumption increases​, the U.S. consumption function​ ______.

shifts upward

The Federal Reserve Chairman Ben Bernanke said Thursday that while interest rates will stay low for some​ time, interest rates will rise as the recovery picks​ up, in order to fight off the threat of inflation. ​Source: CNNMoney, October​ 9, 2009 Explain​ why, other things remaining the​ same, interest rates will rise the economy recovers from recession. Other things remaining the​ same, interest rates will rise as the economy recovers from recession because​ ______.

the increase in real GDP increases the demand for money

The quantity of real GDP demanded increases if​ ______.

the price level falls

When the price level in Mexico​ rises, _______.

the quantity of real GDP demanded in Mexico decreases

If the price level​ increases, ______.

the quantity of real GDP supplied increases

The​ Fed's policy tools include​ ______. To increase its assets to​ $4 trillion, the Fed used​ ______.

the required reserve​ ratio, discount​ rate, and open market operations ​large-scale open market operations called quantitative easing

The above table gives data for the nation of South Hampton. There are no imports into or exports from South Hampton. The equilibrium level of real GDP is

​$700 billion. (row where real GDP equals the other three added)

An economy has no imports or income taxes. The MPC is 0.75 and real GDP is​ $120 billion. Businesses increase investment by​ $4 billion. The expenditure multiplier is​ ________ and the change in real GDP from the increase in investment is​ ________ billion.

​4; $16

An increase in real GDP​ ______ the demand for money and changes in financial technology​ ______.

​increases; can increase the demand for money or decrease the demand for money

Equilibrium expenditure​ ______ and the quantity of real GDP demanded​ ______.

​increases; increases

The price of a bond​ _____ and the interest rate​ ______.

​rises; falls