ECON-2

. If the public holds $300 billion in monetary purchasing power and the inflation rate is 5%, then the inflation tax that year is:

$15 billion

. If the money supply is $3 billion and inflation is 6%, the inflation tax is:

$180 billion

According to recent estimates of Okun's law, if the unemployment rate fell by a full percentage point, it would most probably be attributable to a:

2% increase in real GDP.

The Fed tries to keep the core inflation rate around:

2%.

During the early 1930s, approximately _______ of the banks in the United States failed.

40%

The natural rate of unemployment is 4%, and the economy is producing 95% of its potential output. Okun's law predicts an unemployment rate of:

6.5%

The relationship between the output gap and the unemployment rate can be summarized thus

When the output gap is positive, the unemployment rate is below the natural rate.

An increase in expected inflation will affect the short-run Phillips curve:

by shifting it upward, as a result the actual rate of inflation at any given unemployment rate will also be higher when the expected inflation rate is higher.

Investment banks differ from commercial banks because:

commercial banks accept deposits from customers, but investment banks do not.

The measure used by the Fed that excludes food and energy prices is the:

core inflation rate.

Which of the following are regulations intended to prevent bank runs?

deposit insurance

Most of a bank's short-term liabilities are:

deposits of customers' savings.

The U.S. government reports a core inflation rate that excludes _____ and _____ prices to remove the volatility of those two sectors from inflation estimates.

energy, food

Suppose actual aggregate output is equal to the potential output; the actual unemployment rate is:

equal to the natural rate of unemployment.

When Fed officials worried about the possibility of "Japanification" in the United States, it meant that they were worried that the U.S. economy would:

fall into a deflationary trap.

If the natural rate of unemployment _________, the NAIRU _________, and the long-run Phillips curve shifts to the left.

falls, falls

A vicious downward spiral among banks in which each institution's failure increases the likelihood that another will fail is a(n):

financial contagion

A shadow bank is a:

financial firm that is not closely watched or effectively regulated.

. The liquidity trap is associated with all of the following EXCEPT:

fiscal policy becomes ineffective

If the economy is in a liquidity trap:

fiscal policy is effective, but monetary policy is not.

. In the short run in periods of low inflation, an increase in aggregate demand from a position of full employment leads to:

higher prices and higher output

. If actual output growth is 5% when potential output growth is 5%, then the unemployment rate will:

not change

Suppose that the unemployment rate rises at the same time that the inflation rate declines. This situation would be consistent with a movement along the:

negatively sloped Phillips curve.

. Suppose the economy is in long-run equilibrium. The government has just decided to lower income taxes. The long-run impact of this policy will be:

no change in the natural rate of unemployment and an increase in inflation

. If a high inflation rate leads people to ______ their money holdings, this may lead to a further increase in the money supply and ______ inflation

reduce; higher

According to the classical model of the price level, an increase in the money supply will create:

inflation with no long-run increase in real GDP

What did the panic of 1893 in the United States and the Swedish banking crisis of 1991 have in common?

Each was followed by a deep recession and slow recovery.

Which of the following accurately describes disinflation?

It is the process of bringing down the inflation that has become embedded in expectations.

. Which of the following is an example of maturity transformation?

Justin takes $10,000 from his savings account and uses it to buy some Apple stock.

. The idea that a 1% increase in the output gap will decrease the unemployment rate by 0.5% is known as

Okun's law

To put an end to the vicious cycle of bank failures during the early 1930s:

President Franklin Roosevelt declared a bank holiday, temporarily closing all banks

Which of the following is an example of maturity transformation?

Tyler lends $1,000 to his roommate Nick for a year.

Which of the following is the BEST explanation for an upward-sloping short-run aggregate supply curve?

Wages and prices of some goods are sticky in the short run.

(Figure: AD-AS Model) Refer to the information in the figure. Suppose the economy is at YE with a price level of P1. Which of the following would represent the new long-run equilibrium position if the aggregate demand curve shifted to the right from AD1 to AD2 as a result of an increase in the money supply?

YE and P3

Okun's law suggests that:

a 1% increase in a positive output gap decreases the unemployment rate by 0.5%.

A supply shock caused by an increase in the price of gasoline causes:

a decrease in output and an increase in prices.

. Suppose an economy's aggregate price level increases and its aggregate level of real GDP decreases. This could arise from:

a negative supply shock.

When the output gap is negative, the actual unemployment rate is:

above the natural rate.

. If an economy has just had a serious recession but real GDP is expanding once again, we can conclude the unemployment rate will:

actually rise, if people who were previously discouraged enter the work force but do not find jobs right away

When an economy has debt deflation:

aggregate demand decreases as borrowers' real debts increase, which leads to less spending.

If an economy's short-run Phillips curve shifts up, this is most likely due to:

an increase in expected inflation.

Following the banking crises of the early 1930s:

real GDP and the price level both decreased.

Assume that the economy is contracting and unemployment is rising. Which of the following would be a logical explanation for a sudden fall in the unemployment rate even while the economy continues to contract?

an increase in the number of discouraged workers

. The short-run Phillips curve shows:

an inverse relationship between unemployment and inflation

. A negative output gap implies:

an unemployment rate above the natural rate

A negative output gap is associated with

an unusually high unemployment rate

In the classical model, it is thought that the long-run:

and short-run aggregate supply curves are both vertical.

. Shadow banks differ from commercial banks because shadow banks:

are not subject to as many regulations as commercial banks

Since the early 1980s, shadow banks have increased because they:

are not subject to capital requirements and reserve requirements.

All of the following are regulations designed to prevent bank runs EXCEPT:

asset bubbles

A financial intermediary that provides liquid assets in the form of deposits to savers and uses its funds to finance illiquid investment spending needs of borrowers is a(n):

bank

In a bank run

bank customers try to withdraw their deposits

Expecting the inflation rate to be 3%, Tony decides to put his savings in a 12-month certificate of deposit yielding a fixed 6% interest rate. If the actual inflation rate is ______, it can be argued that ________ is (are) worse off.

below 3%; the bank issuing the certificate

Depository banks:

borrow on a short-term basis from depositors and lend on a long-term basis to others

The problem of debt deflation deepens during an economic slump because

borrowers have to reduce spending to pay back burdensome debts.

During periods of deflation _____ will be hurt and _____ will be helped.

borrowers; lenders

When shadow banks engage in maturity transformation, they raise funds by ________ and invest in _________.

borrowing in short-term credit markets; longer-term speculative investments

. A shadow bank engages in maturity transformation by:

borrowing money short term and lending or investing long term

Without banks, people would:

hold more of their wealth as cash

Deflation:

hurts borrowers and helps lenders

. From 2000 to 2008 Zimbabwe's prices:

increased by 80 trillion percent.

. If the natural rate of unemployment is 5% and the actual rate of unemployment is 4%:

inflation will increase

A supply shock:

shifts the short-run Phillips curve.

During the 1950s and 1960s, the short-run Phillips curve for the U.S. economy showed a(n):

inverse relationship between unemployment and inflation.

In the long run, any given percentage increase in the money supply:

leads to an equal percentage increase in the overall price level

To bring disinflation to an economy, policy makers must:

lower expectations about inflation.

During a liquidity trap:

monetary policy is ineffective, since nominal interest rates cannot fall below zero

In the early 1990s, banking crises occurred in Finland, Sweden, and Japan because:

of real estate bubbles in each country.

Fiat money is:

paper money with no intrinsic value

When inflation is high:

people will decrease their level of real-money holdings.

Disinflation:

policy often results in plunging the economy into a major recession

A credit crunch causes a recession because:

potential borrowers can't get loans or must pay very high interest rates, so they cut back on spending.

In the long run, an increase in the money supply:

results in no change in real GDP.

Expectations of a higher inflation rate shift the short-run aggregate supply curve to the _________, changing the trade-off between inflation and unemployment. As a result, the short-run Phillips curve shifts _________.

right, up

Government's right to print money to finance deficits is referred to as:

seigniorage.

. In a vicious cycle of deleveraging, financial institutions:

sell assets at a deep discounts

Shadow banks offer their customers a higher rate of return than commercial banks because:

shadow banks are not subject to reserve and capital requirements, but commercial banks must hold reserves and meet capital requirements.

An increase in the expected rate of inflation:

shifts the short-run Phillips curve up.

Maturity transformation is converting:

short-term liabilities into long-term assets.

The "wholesale" funding that Irish banks used to fund real estate loans came primarily from:

short-term loans from other banks and private investors.

Analysis of the Phillips curve reveals that a __________ in unemployment, like that of the early 1980s, is needed to break the cycle of inflationary expectations.

temporary increase

To stabilize the banking crisis in Ireland:

the Irish government guaranteed all bank debt

As a consequence of the Irish banking crisis:

the Irish government has to pay high interest rates on money it borrowed in international markets, and its solvency is in question.

If a central bank pursues an expansionary monetary policy:

the aggregate price level will increase and the level of real GDP will decrease in the short run.

Zimbabwe's economic instability was caused primarily by:

the government's seizure of the country's farms, which disrupted production.

Along a Phillips curve:

the inflation rate varies inversely with the unemployment rate.

. When economists state that there is a zero bound on nominal interest rates, they mean that:

the nominal interest rate cannot go below zero.

The inflation tax is:

the reduction in the value of money that is held by the public caused by inflation.

As a result of a downturn in the economy, a firm cuts back on workers' hours but does not fire workers. Following Okun's law, this is one reason:

the relationship between the output gap and the unemployment is negative and less than a one-to-one relationship.

. The NAIRU is:

the unemployment rate at which inflation does not change over time

During an inflationary gap:

the unemployment rate is less than the natural rate of unemployment

In the long run, when the actual inflation rate gets embedded into people's expectation:

there is no longer a trade-off between inflation and unemployment

When workers and firms become aware of a rise in the general price level

they will incorporate higher prices into their expectations of future prices.

Stagflation is a combination of

unemployment and inflation.

. During periods of low inflation, the short-run aggregate supply curve is:

upward sloping

A liquidity trap is a situation in which:

using expansionary monetary policy is not effective because the nominal interest rate is almost zero.

When an economy has high inflation:

wage and price stickiness lessen or disappear.

A banking crisis occurs:

when a large part of the depository banking sector or the shadow banking sector fails or threatens to fail.

In economies with persistently high inflation, an increase in the money supply:

will translate into a proportional increase in the aggregate price level much faster than usual.

A liquidity trap results from the:

zero bound of the nominal interest rate