ECON 111- Exam 3 #1

In a 100-percent-reserve banking system, if people decided to decrease the amount of currency they held by increasing the amount they held in checkable deposits, then

M1 would not change.

Which of the following is correct?

a. Economic fluctuations are easily predicted by competent economists. b. Recessions have never occurred very close together. c. Spending, income, and production do not fluctuate closely with real GDP. Correctd. None of the above is correct.

Which of the following would increase the price level?

an increase in the money supply.

In a system of 100-percent-reserve banking,

banks do not make loans.

At the end of World War II many European countries were rebuilding and so were eager to buy capital goods and had rising incomes. We would expect that the rebuilding increased aggregate demand in

both the United States and Europe.

A policy that raised the natural rate of unemployment would shift

both the short-run and the long-run Phillips curves to the right.

The value of money falls. This might be because the Federal Reserve

bought bonds, which increased the money supply.

When inflation causes relative-price variability,

consumer decisions are distorted and the ability of markets to efficiently allocate factors of production is impaired.

Changes in the price level affect which components of aggregate demand?

consumption, investment, and net exports

an important function of the U.S. Federal Reserve is to

control the supply of money.

Suppose stock prices rise. To offset the resulting change in output the Federal Reserve could

decrease the money supply. This decrease would also move the price level closer to its value before the rise in stock prices.

Assuming the Fisher Effect holds, and given U.S. tax laws, an increase in inflation

does not change the real interest rate but reduces the after-tax real rate of interest.

Other things the same, if the money supply rises by 2% and people were expecting it to rise by 5%, then some firms have

higher than desired prices, which depresses their sales.

Macroeconomic forecasts are

imprecise; this makes policy lags more relevant.

If consumption expenditures fall, then in the short run

inflation falls and unemployment rises.

You receive money as payment for babysitting your neighbors' children. This best illustrates which function of money?

medium of exchange

When the money market is drawn with the value of money on the vertical axis, an increase in the price level causes a

movement to the right along the money demand curve

According to the classical dichotomy, which of the following is influenced by monetary factors?

nominal wages

If the Fed wants to reverse the effects of a favorable supply shock on unemployment, it should

decrease the money supply growth rate which reduces the inflation rate.

An adverse supply shock causes output to

fall. To counter this a central bank would increase the money supply.

High and unexpected inflation has a greater cost

for those who save than for those who borrow.

A. W. Phillips' findings were based on data

from 1861-1957 for the United Kingdom.

The Fed is concerned about stock market booms because the booms

increase both consumption and investment spending.

When the price level rises, the number of dollars needed to buy a representative basket of goods

increases, and so the value of money falls

The aggregate demand and aggregate supply graph has

quantity of output on the horizontal axis. Output can be measured by real GDP.

The classical dichotomy refers to the separation of

real and nominal variables.

The restrictive monetary policy followed by the Fed in the early 1980s

reduced inflation significantly, but at the cost of a severe recession.

Assuming no crowding-out, investment-accelerator, or multiplier effects, a $100 billion increase in government expenditures shifts aggregate demand

right by $100 billion.

If inflation expectations rise, the short-run Phillips curve shifts

right, so that at any inflation rate unemployment is higher in the short run than before.

The value of money falls as the price level

rises, because the number of dollars needed to buy a representative basket of goods rises.

If the price level falls, the real value of a dollar

rises, so people will want to buy more.

Disinflation is like

slowing a car down, whereas deflation is like putting the car into reverse gear.

The long-run aggregate supply curve shifts right if

technology improves.

The supply of money is determined by

the Federal Reserve System.

Sometimes during wars, government expenditures are larger than normal. To reduce the effects this spending creates on interest rates,

the Federal Reserve could increase the money supply by buying bonds.

The theory of liquidity preference is most helpful in understanding

the interest-rate effect.

The idea that expansionary fiscal policy has a positive affect on investment is known as

the investment accelerator.

Suppose the economy is in long-run equilibrium. In a short span of time, there is a large influx of skilled immigrants, a major new discovery of oil, and a major new technological advance in electricity production. In the short run, we would expect

the price level to fall and real GDP to rise.

Which of the following is downward-sloping?

the short-run Phillips curve, but not the long-run Phillips curve

People hold $400 million of bank deposits but no currency. Banks have made $380 million dollars of loans and only hold enough reserves to satisfy reserve requirements. Because of uncertainty, banks choose to hold $10 million more in reserves. The Fed takes no action. What happens to bank loans?

they fall $200 million

The manager of the bank where you work tells you that the bank has $300 million in deposits and $255 million dollars in loans. If the reserve requirement is 8.5 percent, how much is the bank holding in excess reserves?

$19.5 million

Refer to Figure 35-4. Assume the figure depicts possible outcomes for the year 2018. In 2018, the economy is at point A on the left-hand graph, which corresponds to point A on the right-hand graph. The price level in the year 2017 was

110.

Refer to Scenario 29-1. Suppose the Central Bank of Namdia loaned the banks of Namdia 5 million dias. Suppose also that both the reserve requirement and the percentage of deposits held as excess reserves stay the same. By how much would the money supply of Namdia change?

40 million dias

Which of the following does the Federal Reserve not do?

It makes loans to any qualified business that requests one.

Marcus is of the opinion that the theory of liquidity preference explains the determination of the interest rate very well. Most economists would say that Marcus's opinion is

Keynesian in nature, and that his view is more valid for the short run than for the long run.

If P = 4 and Y = 200, then which of the following pairs of values are possible?

M = 400, V = 2

Savings deposits are included in

M2 but not M1

Which of the following is included in M2 but not in M1?

Savings deposits

Which of the following would shift the long-run aggregate supply curve right?

an increase in the capital stock, but not an increase in the price level