ECO202 homework #4,#5,#6 questions

In a speech delivered in June 2008, Timothy Geithner, then president of the Federal Reserve Bank of New York and later U.S. Treasury secretary, said: The structure of the financial system changed fundamentally during the boom... [The] non- banking financial system grew to be very large... [The] institutions in this parallel financial system [are] vulnerable to a classic type of run, but without the protections such as deposit insurance that the banking system has such risks. What is a "classic type of run"?

Many depositors simultaneously decide to withdraw their money from a bank.

in the basic aggregate demand and aggregate supply model, a decrease in the expected price level (a decrease in inflationary expectations) would in the short run lead to _________ in the real GDP and ________ in the price level.

an increase; a decrease

Stagflation occurs when _________________________

a supply shock shifts the SRAS to the left, increasing the price level and decreasing actual GDP.

In the static aggregate demand- aggregate supply model, a decrease in interest rates will in the short run lead to ________ in real GDP and _________ in the price level.

an increase; an increase

In the basic aggregate demand and aggregate supply model, a decrease in net exports from a decline in real GDP in the BRIC nations would in the short run lead to ________ in the unemployment rate and a ________ in the inflation rate.

an increase; a decrease

To offset the effect of households and firms deciding to hold less of their money in checking account deposits and more in currency, the Federal Reserve could:

buy Treasury securities

Stagflation is a _____________________

combination of inflation and recession.

The adjustment of the economy to potential real GDP in the long run from a level of real GDP below potential real GDP occurs as nominal wages __________, shifting the short-run aggregate supply curve to the ____________.

fall; right

An increase in interest rates will cause a ____________ the aggregate demand curve.

leftward shift of

An increase in state income taxes will cause a _________ the aggregate demand curve.

leftward shift of

A faster income growth in other countries will cause a ___________ the U.S. aggregate demand curve.

rightward shift of

An increase in government purchases will cause a _____________ the aggregate demand curve.

rightward shift of

If the central bank can act as a lender of last resort during a banking panic, banks can:

satisfy customer withdrawal needs and eventually restore the public's faith in the banking system.

The SRAS curve will __________ if there is an increase in expected future prices.

shift to the left

The SRAS curve will __________ if there is an increase in the expected price of an important natural resource.

shift to the left

The SRAS curve will ___________ if there is an increase in the adjustment of workers' and firms' prior underestimation of the price level.

shift to the left

Technological change occurs. Because there is a change in the productive capacity of the economy, the LRAS will ___________

shift to the right

The Labor force increases. Because this is a change in the productive capacity of the economy, the LRAS will _________

shift to the right

The SRAS curve will _______ if there is a technological change.

shift to the right

The SRAS curve will ___________ if there is an increase in productivity.

shift to the right

The SRAS curve will ___________ if there is an increase in the labor force or capital accumulation.

shift to the right

There is an increase in the quantity of capital goods. Because this is a change in the productive capacity of the economy, the LRAS will ________

shift to the right

The aggregate demand-aggregate supply model considers:

the demand (spending side and the supply (producer) side of the economy.

In the short run, an increase in aggregate demand increases the price level and actual GDP beyond potential GDP, whereas in the long run, an automatic mechanism brings ________________________

the economy back to potential GDP but the price level remains higher.

When the Federal Reserve purchases Treasury securities in the open market,

the sellers of such securities deposit the funds in their banks and bank reserves increase.

Suppose a bank has $100 million in checking account deposits with no excess reserves and the required reserve ratio is 20 percent. If the Federal Reserve reduces the required reserve ratio to 15 percent, then the bank will now have excess reserves of:

$5 million.

Using the following information what is the velocity of money? Money supply- $1,000 Price level- 1.26 Real GDP- $15,000 The velocity of money is equal to:

18.9

If the money supply is growing at a rate of 10 percent per year, Real GDP (real output) is growing at a rate of 4 percent per year, and velocity is constant, what will the inflation rate be?

6%

There are __________ members of the Board of Governors, who the President of the United States appoints to ___________. One of the Board members is appointed Chairman for ____________.

7 14- year nonrenewable terms a 4- year nonrenewable term

If the money supply is growing at a rate of 10 percent per year, real GDP (real output) is growing at a rate of 4 percent per year, and velocity at 3 percent per year instead of remaining constant, what will the inflation rate be?

9%

If the economy adjusts through the automatic mechanism, then a decline in aggregate demand causes:

A recession in the short run and a decline in the price level in the long run.

How will the economy adjust back to long-run equilibrium?

A short-run aggregate supply will decrease (shift leftward) as firms and workers adjust to the new price level.

Using the Aggregate Demand- Aggregate Supply model, which of the following could cause a recession? A. Shift to the left of the aggregate demand curve. B. A movement up along the aggregate supply curve. C. A shift to the right of the aggregate demand curve. D. A shift to the right of the aggregate supply curve.

A. A shift to the left of the aggregate demand curve.

Using the Aggregate Demand- Aggregate Supply model, which of the following would cause inflation? A. A shift to the left of the aggregate supply curve. B. A shift to the left of the aggregate demand curve. C. A shift to the right of the aggregate supply curve. D. A movement along the aggregate demand curve.

A. A shift to the left of the aggregate supply curve

Which of the following scenarios would lead to reduction in real GDP and may even cause a recession? A. An increase in oil price that causes short- run aggregate supply to fall. B. A recession in a foreign trading partner's country causing aggregate supply to fall. C. An increase in oil prices that causes short-run aggregate supply to increase. D. A reduction in taxes causing aggregate demand to fall.

A. An increase in oil price that cause short-run aggregate supply to fall

In the basic aggregate demand and aggregate supply model, which of the following would cause a recession? A decrease in: A. firms' expectations of future profitability of investment spending. B. Oil prices. C. Interest rates. D. Income taxes.

A. Firms' expectations of future profitability of investment spending.

If the economy is initially at full-employment equilibrium, then an increase in aggregate demand causes ____________ in real GDP in the short run and ______________ in the price level in the long run.

An increase; an increase

In the static AD-AS model, which of the following would cause deflation? A. An increase in household wealth. B. A decrease in oil prices C. A decrease in the interest rate D. An increase in government purchases

B. A decrease in oil prices

Which of the following would cause an increase in the price level (i.e., a short-run inflation)? A. An increase in the exchange rate of the dollar in relation to foreign currencies that decreases short-run aggregate supply. B. An increase in government purchases that increases aggregate demand. C. A reduction in personal income taxes that reduces aggregate demand. D. An increase in government purchases that decreases short- run aggregate supply.

B. An increase in government purchases that increases aggregate demand.

In the basic aggregate demand and aggregate supply model, which of the following would cause deflation? An increase in: A. the expected future price level. B. Income taxes. C. oil prices. D. Government purchases.

B. Income taxes

Suppose there is a bank panic. Which of the following would not be a consequence of this bank panic? A. Bank total reserves would decrease. B. Required reserves would increase. C. Individual banks would have to shrink the value of loans they made. D. Bank checking account balances would decrease. E. The economy would likely enter into a recession.

B. Required reserves would increase.

An article on Bloomberg.com reported in 2012 that the People's Bank of China "cut the amount of cash that banks must set aside as reserves for the third time in six months, pumping money into the financial system to support lending after data showed a slowdown in growth is deepening." How would this action "pump money into the financial system to support lending"?

Banks can make more loans.

Which of the following is usually the cause of stagflation? A. An increase in investment as a result of a reduction in interest rates. B. A decline in net exports as a result of a change in the exchange rate. C. A supply shock as a result of unexpected increase in the price of a natural resource. D. A reduction in government purchases.

C. A supply shock as a result of an unexpected increase in the price of a natural resource

Which of the following scenarios would lead to an increase in the price level (i.e.., a short run inflation)? A. An increase in oil prices that leads to a reduction in aggregate demand. B. An increase in payroll taxes leading to an increase in aggregate demand. C. An increase in business optimism regarding future profitability that increases aggregate demand. D. An increase in business pessimism regarding future profitability that decreases short-run aggregate supply.

C. An increase in business optimism regarding future profitability that increases aggregate demand.

Which of the following would cause a decrease in real GDP and if, large enough, a recession? A. A reduction in consumer confidence that causes short-run aggregate supply to fall. B. An increase in government purchases that causes aggregate demand to rise. C. An increase in interest rates that causes aggregate demand to fall. D. An increase in interest rates that causes short-run aggregate supply to fall.

C. An increase in interest rates that causes aggregate demand to fall.

Which of the following is not a policy tool the Federal Reserve uses to manage the money supply?

Changing income tax rates

The most important role of the Federal Reserve in today's U.S. economy is:

Controlling the money supply to pursue economic objectives.

In the basic aggregate demand and aggregate supply model, which of the following would cause inflation? A decrease in: A. Government purchases. B. Household wealth. C. firms' expectations of future profitability of investment spending. D. Interest rates.

D. Interest rates

Congress passed legislation to create the Federal Reserve System in 1913 in order to

End the instability created by bank panics by acting as a lender of last resort.

In a speech delivered in June 2008, Timothy Geithner, then president of the Federal Reserve Bank of New York and later U.S. Treasury secretary, said: The structure of the financial system changed fundamentally during the boom... [The] non- banking financial system grew to be very large... [The] institutions in this parallel financial system [are] vulnerable to a classic type of run, but without the protections such as deposit insurance that the banking system has such risks. What did Geithner mean by the "non-bank financial system"?

Money market mutual funds, hedge funs, and other financial firms that raise money from investors and provided it to firms and households

In the basic AD-AS model, a decrease in the aggregate demand curve would in the LONG RUN lead to _______ in the unemployment rate and _________ in the price level.

No change; a decrease

An increase in aggregate demand causes an increase in _________ only in the short run, but causes an increase in _____________ in both the short run and long run.

Real GDP; the price level

An article on Bloomberg.com reported in 2012 that the People's Bank of China "cut the amount of cash that banks must set aside as reserves for the third time in six months, pumping money into the financial system to support lending after data showed a slowdown in growth is deepening." When the People's Bank of China "cut the amount of cash that banks must set aside as reserves," the monetary policy tool they used was a change in the:

Required reserve ratio

Why will the economy adjust back to long-run equilibrium?

Short-run aggregate supply will increase (shift rightward) as the recession makes firms and workers willing to accept lower wages and prices.

The text explains that the United States has a "fractional reserve banking system." Why most depositors seem to be unworried that banks loan out most of the deposits they receive?

The FDIC insures deposits up to $250,000

A movement from point A to point C could be the result of a change in:

The labor force

Based on the quantity theory of money, if velocity is constant, inflation is likely to occur when:

The money supply grows at a faster rate than real GDP.

Open market operations refer to the purchase or sale of ___________ to control the money supple

U.S. Treasury securities by the Federal Reserve

A supply shock is:

a sudden increase in the price of an important natural resource, resulting in a leftward shift of the SRAS curve.

A movement from point A to point B on SRAS1 could be the result of a:

change in the price level

Aggregate demand (AD) is comprised of expenditure components that include:

government spending, consumption, investment, and net exports.

An increase in the price level will cause a _____________ the aggregate demand curve.

movement up along

In the basic AD-AS model, a decrease in the aggregate demand curve would in the LONG RUN lead to ________ in the unemployment rate and _________ in the price level.

no change; a decrease

The price level increases. Because this is a change in the price level, the LRAS curve will __________

not change

At the new long-run equilibrium, _________________________________________________________________________

real GDP and the unemployment rate will remain the same, but price level will be higher compared to the initial equilibrium, prior to the increase in exports.

When the economy returns to long-run equilibrium again ___________________________________________________________________________

real GDP, the unemployment rate, and the price level will be the same as the initial equilibrium values prior to the increase in the price oil.

When the Federal Reserve sells Treasury securities in the open market,

the buyers of these securities pay for them wit h checks and bank reserves fall.