ECON 2 Final Tophat

Which of the following spending components of GDP will be affected by a change in the average price level?

Consumption Investment Net Exports

M (1) includes:

Currency. Demand deposits. Travelers checks.

What is the approximate GDP in 2017?

$19 trillion

Today you have $700. If the interest is 9 percent, what is the future value of $700 in one year from now?

$763

An increase in Aggregate Demand results in a ____________.

Higher GDP deflator and higher real GDP

An decrease in Aggregate Supply results in a __________.

Higher GDP deflator and lower real GDP

Which of the following changes would cause a shift in the aggregate demand curve? I. Increase in investment II. Decrease in productivity III. Increase in consumption

I and III only

A given amount of Fed bond purchases will be less effective if which of the following is true?

If individuals increase the amount of currency they wish to hold instead of deposits in checking accounts.

Consider an individual who has secure employment but who is concerned about inflation. Suppose that oil prices rise. Which of the following policies would this person be likely to favor?

Increase in taxes and decrease in government spending

A fall in interest rates is likely to change investment, real GDP, prices, and employment in the short run in the following manners.

Increase investment, real GDP, prices, and employment

An increase in the labor force will have which of the following results? Aggregate supply will ______________. Potential Real Gross Domestic Product will ______________.

Increase, increase

Inflation can result from a change in aggregate demand or a change in aggregate supply. How can one tell which of the two has caused the inflation?

Inflation caused by demand is accompanied by rising real GDP, while inflation caused by aggregate supply comes with relatively low real GDP.

If individuals hold less currency because it is easy to get currency from automatic teller machines, and everything else is the same, will the money supply be larger or smaller?

Larger, because banks will be able to make more loans given the amount of reserves.

A temporary income tax cut will be ______________ effective as a fiscal policy than a permanent change because ______________.

Less; because future income is not affected

A decrease in Aggregate Demand results in a _____________.

Lower GDP deflator and lower real GDP

As spending increases, there will be upward pressure on the price of inputs including wages. As the marginal cost of production rises, businesses start to increase prices as they attempt to produce more. This scenario best describes _____________.

Movement along the aggregate supply curve

What has the approximate rate of inflation been in 2017?

1.25%

Which of the following will result in a decrease in the supply of money in the economy?

A customer repaying a loan

People really dislike falling income and rising prices. What kind of change in our model will make people really unhappy?

A decrease in AS

Sudden drop in the stock market¸ reducing household wealth

AD

Economist's view of growth

Aggregate demand and aggregate supply increase

Journalist's view of growth

Aggregate demand increases

A booming stock market may affect consumption spending and be most likely to cause which of the following?

An increase in employment and perhaps an increase in inflation

Credit cards are part of

Neither M(1) or M(2)

Which of the following expressions does not describe the full employment level of output?

Non-accelerating inflation rate of real GDP

Assume that the economy is currently producing a level of real GDP above the full employment level of real GDP, and the government lowers taxes as part of a new economic policy. Which of the following monetary policies should the Federal Reserve undertake if it wants to encourage the economy to go to a full employment level of output?

Raise the federal funds rate target

The long-run effect of an increase in investment spending will be a shift of the aggregate demand curve to the ______________ and ______________ shift of the aggregate supply curve.

Right; a rightward

The most commonly used monetary policy instrument is _________.

The federal funds rate and open market operations

What is the opportunity cost of holding currency?

The opportunity cost is the interest that could have been earned if the currency was in the bank.

At the new level of output, is the economy above, below or at the full employment level of output?

at full employment

If total spending increases, tax receipts will ______________. If income tax rates increase, tax receipts will ______________, and total spending will ______________.

increase, increase, decrease

In economy A, we are in the middle of a recession. In economy B, we are experiencing a demand-pull inflation. Assume that total spending increases in both economies. Economy A's price level will change by ______________ economy B's price level. Economy A's real GDP will change by ______________ economy B's real GDP.

less than, more than

You have $5,000 in your pocket today. If the currency is deposited into a bank account paying 4 percent interest, what is the future value of that deposit in one year?

$5,200

What has the approximate rate of inflation been in 2017?

+1.5%

What approximately has been happening to real GDP over the 2017?

+2%

In our model of aggregate supply and aggregate demand, how does expansionary monetary policy work to increase real GDP and the price level? Sort the following in the order in which they occur.

1. The Federal Reserve buys bonds 2. The federal funds rate falls 3. Banks have excess reserves and lend more¸ causing the money supply to increase. 4. Planned investment spending rises as interest rates fall 5. Aggregate demand increases 6. The aggregate quantity demanded exceeds aggregate quantity supplied 7. Inventories begin to fall 8. Firms begin to increase production and some raise prices 9. A new equilibrium is reached¸ GDP is higher and the price level is higher

Assume there is only one bank and that all the people deposit all of their money into the bank. The people deposit $10 million and the bank holds 5 percent of the deposits as reserves. What is the simple money multiplier in this economy?

20

Assume that the U.S. economy is functioning at the natural level of unemployment. What would be the approximate level of unemployment?

4-4.5%

What will be the effect on the economy if the fiscal policy of reducing transfer payments is selected?

A decrease in disposable spending and total spending

Increased consumer worries about job security may affect consumption spending and be most likely to cause which of the following?

A decrease in employment and perhaps a decrease in inflation

If an economy appears to be growing rapidly and inflation appears to be becoming a serious problem, which of the following fiscal policies would be appropriate?

A decrease in government spending

Suppose the economy has unemployment levels close to 15%. A proper fiscal policy might be which of the following:

A decrease in income taxes

If the economy is currently at full employment, what will be the short-run effect of an increase in saving?

A decrease in real GDP, a decrease in the price level

A wave of consumer and business optimism

AD

Aggregate Demand

Downward sloping

Which of the following represents movement along the aggregate demand curve? Select all that apply.

Falling prices decreases the demand for money¸ decreasing interest rates¸ and investment spending rises. As the average price level falls¸ consumers have more financial wealth and decide to increase spending. People from around the world want to buy more Teslas as the price level in the U.S. falls.

In the long run, expansionary fiscal policy only leads to inflation, and has no other effects on the economy

False While it is true that expansionary fiscal policy does not affect real GDP in the long run, it does raise interest rates, which lowers investment. So, in the long run, expansionary fiscal policy leads to less investment as a percentage of real GDP.

Compare two possible situations: I. Current real GDP is above the full employment level of real GDP. II. Current real GDP is below the full employment level of real GDP. Given the two situations above, in which will the change take place more rapidly?

Faster in situation I

If the Federal Reserve wishes to minimize the fluctuations of interest rates, what will be the resulting effects on business cycles?

In response to an increase in spending, the money supply will be increased

Which of the following would cause AD to decrease, that is, shift to the left?

Increase in income taxes

An economy which is producing at its potential level of GDP has just experienced a quadrupling of oil prices. What will happen as a result?

Inflation will increase and unemployment will increase. Eventually prices will come back down and employment will rise.

Suppose that a federal budget requirement that the budget be balanced or in surplus passes. What will be the effect on fiscal policy?

It would make fiscal policy more difficult to use to stimulate an economy.

When the Federal Reserve announces that is increasing the federal funds rate, we would expect to see banks do which of the following?

Reduce their loans because they have fewer reserves due to the Fed's open market sales

f we have just experienced a negative supply shock and one is concerned about the current rate of inflation caused by the negative supply shock, then one:

Should recommend a tax increase or a policy of doing nothing

The broader definition of the money supply M(2) includes

Small time Certificates of Deposit (CD's) Checkable deposits

If everything else remains the same, a rise in the GDP deflator (a measure of the average price level) should cause _____________.

The real value of currency and deposits to fall The demand for money to rise Interest rates to rise Consumption spending to fall

Compare two possible situations: I. Current real GDP is above the full employment level of real GDP. II. Current real GDP is below the full employment level of real GDP. Which of the following is most likely?

Wages will rise in situation I and fall in situation II.

Cost-Push Inflation

When inflation is caused by changes in higher prices of inputs or higher costs of production

Demand-Pull Inflation

When the cause of inflation is aggregate demand increasing more rapidly than aggregate supply

If the economy were at a level of real GDP below the potential level of GDP, what are the forces that might bring the economy to full employment without any active fiscal policy?

With high unemployment, there will be a tendency for wages to fall, stimulating production, lowering prices, and increasing consumer spending.

An economy is initially in equilibrium. Suppose that the government decides to increase spending and that simultaneously, consumers become more optimistic. Sort the statements in order so that they describe what happens.

1. The aggregate demand curve shifts to the right 2. At the old price level¸ desired spending exceeds production 3. Business inventory begins to fall 4. Businesses respond by increasing output 5. Marginal costs begin to rise as production increases 6. Businesses start to increase price. 7. Spending on consumption¸ investment¸ and net exports decrease as the price level rises 8. A new equilibrium is reached at a higher price and higher level of real GDP

The quantity theory of money supports which of the following conclusions?

A decrease in the money supply will cause prices to fall in the long run.

If prisoners did not have dollars to use to purchase goods and services in prison but they had access to Top Ramen noodles that is then used as money by the prisoners, then Top Ramen becomes:

A medium of exchange and a unit of account.

Expansionary fiscal policy will cause which of the following?

A rise in interest rates

How would we model an increase in the amount of capital available in an economy?

A shift to the right of the AS curve

Why does the aggregate supply curve become very steep at high levels of real GDP?

At very high levels of production, capacity constraints become severe and more spending can only lead to higher prices.

The Federal Reserve System was set up to be a ______________ and politically ______________ institution.

Decentralized, independent

Which of the following is true, if nothing else changes?

If the Federal Reserve decreases the money supply, the federal budget deficit will likely get larger.

What happens to the price level as a result of an increase in spending?

Price increases

Aggregate Supply

Upward Sloping

Full employment level of output

Vertical line

An economy is initially in equilibrium. Suppose that a natural disaster destroys some of the physical capital in the economy. Sort the statements in order so that they describe what happens.

1. With less capital¸ businesses cannot produces as much as before the disaster. Output initially falls and the aggregate supply curve shifts left. 2. At the old price level¸ desired spending exceeds production. 3. Business inventory begins to fall. 4. Businesses respond by increasing output. 5. Marginal costs begin to rise as production increases. 6. Businesses start to increase prices. 7. Spending on consumption¸ investment¸ and net exports slows down as the price level rises. 8. A new equilibrium is reached at a higher price and lower level of real GDP.

Which is likely to be the easiest to pass Congress and be signed by a President - a fiscal stimulus or a fiscal restraint? Assume that both are the same absolute size.

A fiscal stimulus

In 2007, the price of houses fell dramatically across the country. As a result, the wealth of most households fell substantially. How would we model the effect of this change in terms of AS/AD?

A shift in the AD curve to the left

How would we model the effect of a new costly regulation on businesses?

A shift left of the AS curve

A flood damages factory equipment

AS

A sudden increase in the world price of oil (assume we are net importers of oil)

AS & AD

Increase in the payroll tax (tax businesses pay on wages paid)

AS & AD

Which of the following groups serve on the Federal Open Market Committee (select all that apply)?

All members of the Board of Governors Five of the regional Federal Reserve Bank presidents

People tend to like higher incomes and lower prices. What kind of change in our model results in higher incomes and lower prices?

An increase in AS

Which of the following likely will cause an increase in the supply of money?

An increase in bank reserves

An increase in spending in the economy will cause which of the following changes in interest rates?

An increase in interest rates as the demand for money increases

Assuming we are producing near full capacity, an increase in demand (a shift to the right in AD) will result in which of the following?

An increase in real GDP An increase in the price level Movement along the AS curve

Suppose the federal government reduces taxes on the profits earned from investment in physical capital. According to our model, this policy will eventually result in:

An increase in real GDP and an ambiguous effect on prices

Assume the economy is at full employment. An increase in government spending will have which of the following effects over time?

An increase in real GDP and prices, followed in the long run by a period of decreasing real GDP and increasing prices

Compare two situations: Year 1. Real GDP increases, and at the same time, interest rates increase. Year 2. Real GDP increases, and at the same time, interest rates decrease. What is a possible explanation of the difference?

An increase in spending may have caused the increase in GDP in year 1; an increase in the money supply may have caused the increase in GDP in year 2.

An increase in investment spending can ultimately cause ______________ in the aggregate demand curve, ______________ in the aggregate supply curve, and ______________ in the potential level of GDP.

An increase, an increase, an increase

Liquidity means

How quickly something can be converted to currency

The simple money multiplier will ______________ as the required reserve ratio ______________

Increases, decreases

What are the major factors in influencing economic growth in per capita real GDP?

Physical capital, technology, education

If the economy is currently at full employment, what will be the short-run effect of a fall in U.S. exports?

Real GDP and Price Level decrease

Compare two economies, A and B. Everything is the same except economy A is in recession and economy B is at full employment. Given an increase of $25 billion in exports in each of the two economies, analyze the changes (if any) in price levels and real GDP in economy A in the long-run equilibrium.

Real GDP and Price Level increase

Stagflation is characterized by which of the following?

Rising inflation and rising unemployment

Consider the following quote: "Over one and a half million people were laid off from jobs following the doubling of oil prices in 1979." What was the policy dilemma faced by monetary and fiscal policy makers?

Rising prices and rising unemployment

When the federal reserve announces that it is increasing the federal funds rate, it is actually going to ___________.

Sell bonds on the open market until the federal funds rate rises the new target

If the economy is in a recession, which of the following is true?

Short-run equilibrium output is less than the full employment level of output.

Aggregate demand slopes down because ______________.

The price level affects the real value of currency and deposits The price level affects interest rates The price level affects imports and exports

Which of the following would weaken the argument for the use of discretionary monetary policy and strengthen the argument for rules?

The term length for Fed board members is shortened from 14 years to 2 years.

An economy is producing at a level of output that is equal to the full-employment level of output. Prices of a fundamental resource, such as oil, increase significantly. After the short-run equilibrium is reached, what would be the best monetary policy?

There is no obviously correct policy, unless you can specify your goals.

During the Great Depression, unemployment was extraordinarily high for more than twelve years. Prices fell significantly. Which of the following is a possible explanation of the length of the Depression?

Wages must not have fallen. Aggregate demand must have decreased causing a new short-run equilibrium.

If banks wish to hold 20 percent of deposits in reserve and the Fed buys $100 billion in bonds, the M2 money supply could increase by as much as $______________ billion

change in reserves= change in deposits reserve ratio

In economy A, we are in the middle of a recession. In economy B, we are experiencing a demand-pull inflation. Assume that total spending increases in both economies. The real GDP level in economy A will ______________. The real GDP level in economy B will ______________.

increase, increase

Given a supply shock that moves the economy from a long-run equilibrium to a new short-run equilibrium at less than full-employment GDP, which of the following policies would be appropriate if the goal was to reduce inflation?

raise taxes