ECON-100 Midterm 2

If the Marginal Propensity to Spend (MPS) is 0.8, then an initial increase in autonomous spending of $120 billion will eventually shift the aggregate demand curve to the right by

$600 billion.

real wage

(Nominal wage) / (price level)

The economy is in a recession. Real GDP is well below potential GDP. If the government wants to increase real GDP so that it is closer to potential GDP, it could ____. - decrease taxes - decrease government spending - increase government spending - increase taxes

- decrease taxes - increase government spending

Indicate whether each is likely to increase or decrease the duration of unemployment for the worker. - the worker is older - the worker's spouse is employed - the unemployment rate in the economy is high - the worker is wealthy - there is generous unemployment insurance - the worker is highly skilled

- increase - increase - increase - increase - increase -decrease

The ____ model predicts that a decrease in wealth can cause a recession. (Select all that apply.)

-- Aggregate demand-aggregate supply -- Aggregate expenditure

The ____ model predicts that increasing government spending can help an economy recover from recession. (Select all that apply.)

-- Aggregate demand-aggregate supply -- Aggregate expenditure

You previously learned about the quantity equation of money and what it tells us about inflation. Which are correct? (Select all that apply.)

-- growth in price level + growth in real GDP = growth in money supply + growth in velocity of money -- price level x real GDP = money supply x velocity of money

The marginal propensity to spend is 0.6, and autonomous spending decreases by $500. What is the change in output predicted by the aggregate expenditures model? (Include a negative sign and comma if needed, but do not include a $.)

-1,250

If the multiplier is 2, and autonomous spending decreases by 4 million, what happens to real GDP? (Answer in millions. If GDP decreases, include a negative sign (e.g., enter 1 if GDP increases by 1 million, and enter -1 if GDP decreases by 1 million.)

-8

which of the following are unemployed? -a full-time student who also works part time in a store selling CDs -a worker who would like a job but has given up looking because she was unable to find one -an autoworker who was recently laid off and is looking for a new job -a woman on maternity leave from her job -a 70-year-old man who is actively applying for jobs

-an autoworker who was recently laid off and is looking for a new job -a 70-year-old man who is actively applying for jobs

Refer to the graph shown above. The economy is at point A. In that situation the economy is experiencing a ___, meaning that the unemployment rate is ___, and inflation ___. If you were to advise the monetary authorities, you would suggest ___, implying that the Fed would need to set __.

-contractionary -quite high -is rather stable -expansionary monetary policy -a lower level for the IORB rate

Comparative advantage

Ability to produce a good at a lower opportunity cost than another

According to the AS/AD model, if the economy is in a recession and the Fed wants to increase output and employment, it should:

Act to increase the money supply.

Which of the following are problems that can be caused by inflation?

All answer options

Medium of exchange

Anything that will be widely accepted in exchange

Firms in county A produce wheat at a lower cost than firms in county B. It is easy to transport wheat, and there are no tariffs on it. Which is correct?

Arbitrage in wheat will result in its price being the same in both countries

Monetary policy

Decision of a monetary authority to influence interest rates, taken to affect real GDP, unemployment, and the price level

According to the AS/AD model, an expansionary monetary policy:

Decreases interest rates, raises investment, and increases income.

The government balances its budget by reducing government spending. Use the aggregate supply-aggregate demand model to predict what happens to real GDP.

GDP decreases

What constitutes stagflation?

High unemployment and high inflation

Velocity of money

How rapidly money circulates around the economy; (nominal GDP) / (money supply)

Contractionary monetary policy

Increasing interest rate to control inflation

What is the IORB rate?

Interest on reserve banks rate

The price of a long-term bond is ___________ related to its interest rate.

Inversely

Price level

Measure of average prices in the economy

When a clerk gives you a pair of jeans for your $20 bill, money is serving which function?

Medium of exchange

Real GDP is 1200 units, and the velocity of money is 8. The money supply falls from $300 to $150 (a 50% decrease) at the same time real GDP increases by 5%. According to the quantity theory of money, what should happen to the price level?

The price level must fall by more than 50%

Firms in country A produce haircuts at lower cost than firms in country B. Which is correct?

The price of haircuts is always lower in country A than in country B

Which of the following is the correct action to take if the Fed wants to pursue expansionary monetary policy? How does that action affect aggregate demand?

They should lower interest rates, which will increase spending on investment, housing, and durable goods (all components of AD).

Planned spending

Total spending minus unplanned inventory investment

True or false? Policies that make it easier to fire people help to reduce the unemployment rate.

True

cyclical unemployment

Unemployment because of recession

Seasonal unemployment

Unemployment caused by predictable changes in demand during a year

Opportunity cost

What you must give up in order to do something else

The real interest rate tells you

how fast the purchasing power of your bank account changes over time.

Suppose over some period of time the money supply increases by 20%, velocity does not change, and real GDP increases by 15%. According to the quantity equation the price level will have

increased by 5%.

Fiat money

intrinsically worthless items that have value because everyone agrees they do

multiplier

1 / (1 - marginal propensity to spend)

Match the following changes with the appropriate shift. 1. The government increases taxes 2. The value of housing assets decreases 3. Domestically amde goods become more desirable abroad 4. The government begins a major new social safety net program 5. Prices of inputs go throughout the economy. Example: Wages

1. Decrease in aggregate (shifts left) 2. Decrease in aggregate (shifts left) 3. increase in aggregate (shifts right) 4. increase in aggregate (shifts right) 5. does not shift aggregate demand

If autonomous spending is $100 the marginal propensity to spend is 0.5 and income (real GDP) is $100, what is total spending?

150

Suppose that the money supply is $300, real GDP is 1200 units, and the velocity of money is 8. According to the quantity equation of money, what is the price level?

2

Asset A and asset B are equally risky and equally liquid. Asset A matures sooner than asset B. An exogenous event causes the interest rate on asset A to go up. Which is correct?

Because of arbitrage, soon the interest rate on asset B will also go up.

Asset A and asset B are equally risky, equally liquid, and have the same maturity. Right now, the interest rate on asset A is lower than the interest rate on asset B. Which is correct?

Because of arbitrage, soon the interest rates on the assets will be the same.

Arbitrage

Buying then selling to profit

How does a higher policy rate affect household spending?

By raising the cost of borrowing, households will spend less now.

If the economy is underperforming and there is a need to increase demand, which of the following policies is most appropriate to bring the economy to potential?

Cut in taxes

Inventory investment

Change in inventories of final goods

Non-durable goods

Consumption goods that do not last (examples: groceries, clothing)

Durable goods

Consumption goods that last (examples: cars, refrigerators)

Countercyclical

Moves in the opposite direction from change in real GDP

Procyclical

Moves in the same direction as growth in real GDP

Real variables

Not measured in terms of money, but goods and services; adjusted for inflation

Aggregate supply

Output produced and sold by firms at each price level

Ralph puts money in the bank and earns a 5 percent nominal interest rate. If the inflation rate is 2 percent, then after one year,

Ralph will have 5 percent more money, which will purchase 3 percent more goods.

Consumption

Spending by households on final goods and services (C)

Autonomous spending

Spending if income (real GDP) is zero

government purchases

Spending on goods and services by government (G)

Consumption smoothing

Steadying flow of consumption when income changes by borrowing and saving

The economy of a country is in long-run equilibrium when the legislature cuts taxes and increases government spending. What monetary policy should the central bank use to stabilize the economy? How does this policy affect aggregate demand?

The central bank should use contractionary policy (raising interest rates), which will decrease aggregate demand.

How is the federal funds rate determined?

The federal funds rate is determined in the federal funds market.

Inflation

an increase in the price level

Fiscal policy

decisions of a government about spending, taxes, and transfers

Assume that the minimum wage is set in nominal terms. If there is inflation, the unemployment rate is likely to ____ while the level of employment is likely to ____ .

decrease; increase

Law of one price

different prices for the same thing can't persist because of arbitrage

Civilian labor force

employed + unemployed, excluding military

Natural rate of unemployment

expected unemployment at potential GDP; unemployment after removing cyclical and seasonal variation

Net exports

exports minus imports (NX)

Other things equal, if the amount of money demanded is greater than the amount of money supplied, then the interest rate may fall.

false

Unemployment is procyclical

false

Search theory

framework for understanding how matching process results in frictional unemployment

Unemployment insurance

government payment to eligible unemployed

In the labor market, the product is the ___, demand for labor comes from ___, and the supply is provided by ___.

labor, firms, workers

An inflationary gap caused by a demand shock can be addressed by _____ to _____.

lowering government spending; lower the aggregate price level

Which function of money does Bitcoin best fulfill?

medium of exchange

Stabilization policy

monetary and fiscal policy undertaken to prevent fluctuations in real GDP

Investment

new purchases of capital goods by firms (examples: factories, machines, computers)

Before 2008, the Fed's main tool for targeting the fed funds rate was ____, but today its main tool is ___.

open market operations; the interest on reserve balances rate

Transfers

payment from government to individual or firm, not for a purchase (example: unemployment insurance, Social Security)

inflation rate

percentage change in the price index from one period of time to the next

Sticky prices

prices do not adjust immediately; markets are not always in equilibrium

National income identity

production = GDP = C + I + G + (X - M)

real interest rate

rate earned on $1 savings or paid on $1 borrowing, after correction for inflation

Nominal interest rate

rate earned on $1 savings or paid on $1 borrowing, no correction for inflation

yield curve

relationship between time to maturity and annualized return for similar assets with different maturities

Store of value

reliably maintains value over time

An increase in government purchases will:

shift aggregate demand to the right

Unit of account

standardized measure of value

unit of account

standardized measure of value

Aggregate spending

total spending (C + I + G + NX) at a given price level

aggregate spending

total spending (C + I + G + NX) at a given price level

Aggregate demand

total spending (C + I + G + NX) at each price level

If European countries made it easier to fire people, it could reduce the unemployment rate

true

People hold less cash in their wallets when the interest rate on checking accounts is high.

true

Unemployment rate

unemployed / (employed + unemployed)

Fictional umeployment

unemployment caused by workers moving between jobs

According to the quantity theory of money, if the money supply increases by 12 percent, then in the long run prices go:

up by 12 percent.

nominal wage

wage in currency per unit of time, no adjustment for inflation

Efficiency wages

wages in excess of equilibrium to incentivize workers to perform

Maturity

when final payment on a loan is due

credit market (or loan market)

where suppliers and demanders of credit meet and trade