Econ 201 EXAM 3
Suppose that technological advancements stimulate $25 billion in additional investment spending. If the MPC = 0.85, how much will the change in investment increase aggregate demand?
$167.5 billion
Money Market Mutual Fund Balances Held by Businesses$ 100Money Market Mutual Fund Balances Held by Individuals220Currency in Banks10Currency in Circulation60Savings Deposits50Large-denominated ($100,000 or more) Time Deposits180Small-denominated ($100,000 or less) Time Deposits80Checkable Deposits70 Refer to the table. Money supply M1 for this economy is
$180.
Suppose that technological advancements stimulate $20 billion in additional investment spending. If the MPC = 0.5, how much will the change in investment increase aggregate demand?
$40 billion
A bond with no expiration date has a face value of $16,000 and pays a fixed 12 percent interest. If the market price of the bond rises to $17,000, the annual yield approximately equals
12 percent.
The price of a bond with no expiration date is originally $1,600 and has a fixed annual interest payment of $200. If the price of the bond then falls by $200, what will be the interest rate yield to a new buyer of the bond?
14.3 percent.
If the price index rises from 100 to 120, then the purchasing power of the dollar will fall by about
17 percent.
The Federal Reserve System was created in
1913.
Refer to the graph. If the initial equilibrium interest rate was 5 percent and the money supply increased by $150 billion, then the new interest rate would be
2 percent.
If the price index rises from 100 to 125, then the purchasing power of the dollar will fall by about
20 percent.
An appropriate fiscal policy for a recession is to
all of the above.
Assume the economy is at full employment and that investment spending declines dramatically. If the goal is to restore full employment, government fiscal policy should be directed toward
an excess of government expenditures over tax receipts.
In the figure, AD1 and AS1 represent the original aggregate supply-and-demand curves, and AD2 and AS2 show the new aggregate demand and supply curves. The changes in aggregate demand and supply in the diagram produce
an expansion of real output and a stable price level.
An appropriate fiscal policy for a severe recession is
an increase in government spending.
The interest-rate effect suggests that
an increase in the price level will increase the demand for money, increase interest rates, and decrease consumption and investment spending.
The seven members of the Board of Governors of the Federal Reserve System are
appointed by the president with the confirmation of the Senate.
If government increases the size of its cyclically-adjusted surplus, we can
assume that government is having a contractionary effect on the economy.
The central authority of the U.S. banking system is the
Board of Governors of the Federal Reserve.
The three key entities in the Federal Reserve System are the
Board of Governors, 12 Federal Reserve Banks, and the FOMC.
The horizontal axis is labeled real domestic output. The vertical axis is labeled price level. A vertical line labeled 1 and a horizontal line labeled 3 intersect at a point. The vertical line begins at a point on the horizontal axis and the horizontal line begins at a point on the vertical axis. A curve labeled 4 begins at the top-left, goes down and to the right with decreasing steepness, passes through the point of intersection of 1 and 3, and ends at the bottom right. Another curve labeled 2 begins at the bottom left, goes up and to the right, passes through the point of intersection of 1 and 3, and ends at the top-right. In the diagram, the economy's aggregate demand and short-run aggregate supply curves, respectively, are lines
4 and 2
The Board of Governors of the Federal Reserve has _________blank members.
7.
An inflation rate of 9 percent would erode the purchasing power of the dollar by
8.3.
Refer to the diagrams, in which AD1 and AS1 are the "before" curves and AD2 and AS2 are the "after" curves. Other things equal, a depreciation of the dollar is depicted by
C.
The group of three economists who provide fiscal policy recommendations to the president is the
Council of Economic Advisers.
The real-balances effect indicates that
a higher price level will decrease the real value of many financial assets and therefore reduce spending.
An asset's liquidity refers to its ability to be
a means of payment.
If you write a check on a bank to purchase a used Honda Civic, you are using money primarily as
a medium of exchange.
The long-run aggregate supply curve has
a slope that is vertical above full-employment output.
Money functions as
a store of value, a unit of account, and a medium of exchange.
An increase in the price level in the aggregate-expenditures model would
decrease aggregate-expenditures but would not shift the AD curve.
In a certain year, the aggregate amount demanded at the existing price level consists of $100 billion of consumption, $40 billion of investment, $10 billion of net exports, and $20 billion of government purchases. Full-employment GDP is $190 billion. To obtain price-level stability under these conditions, the government should
decrease taxes and increase government spending.
If the MPC in an economy is 0.80, government could shift the aggregate demand curve rightward by $60 billion by
decreasing taxes by $15 billion.
If the MPC in an economy is 0.8, government could shift the aggregate demand curve rightward by $160 billion by
decreasing taxes by $40 billion.
Discretionary fiscal policy will stabilize the economy most when
deficits are incurred during recessions and surpluses during inflations.
Fiscal policy refers to
deliberate changes in government spending and taxes to promote economic growth, full employment, and price level stability.
Demand-pull inflation is illustrated in the short-run aggregate supply-aggregate demand model as a shift of aggregate
demand to the right.
The size of the multiplier associated with an initial increase in spending will be
diminished if inflation occurs.
When the federal government takes budgetary action to stimulate the economy or rein in inflation, such policy is
discretionary fiscal policy.
The goal of expansionary fiscal policy is to increase
employment.
The determinants of aggregate demand
explain shifts in the aggregate demand curve.
Prices and wages tend to be
flexible upward but inflexible downward.
Expansionary fiscal policy
if successful, will lift the economy out of a recession.
The American Recovery and Reinvestment Act of 2009
implemented a $787 billion package of tax cuts and government expenditure increases.
The determinants of aggregate supply
include resource prices and changes in productivity.
The foreign purchases effect suggests that an increase in the U.S. price level relative to other countries will
increase U.S. imports and decrease U.S. exports.
Suppose the price level is fixed, the MPC is 0.80, and the GDP gap is a negative $280 billion. To achieve full-employment output (exactly), government should
increase government expenditures by $56 billion.
Suppose the price level is fixed, the MPC is 0.50, and the GDP gap is a negative $130 billion. To achieve full-employment output (exactly), government should
increase government expenditures by $65 billion.
The crowding-out effect of expansionary fiscal policy suggests that
increases in government spending financed through borrowing will increase the interest rate and thereby reduce investment.
If the MPS in an economy is 0.1, government could shift the aggregate demand curve rightward by $10 billion by
increasing government spending by $1 billion.
If the MPS in an economy is 0.25, government could shift the aggregate demand curve rightward by $72 billion by
increasing government spending by $18 billion.
The M2 money supply includes
individual shares in money market mutual funds.
Discretionary fiscal policy refers to
intentional changes in taxes and government expenditures made by Congress to stabilize the economy.
The value of money varies
inversely with the price level.
The purchasing power of money and the price level vary
inversely.
Contractionary fiscal policy is so named because it
is aimed at reducing aggregate demand and thus achieving price stability.
Expansionary fiscal policy is so named because it
is designed to expand real GDP.
An input whose price is often fixed in both the immediate-short-run and short-run is
labor, due to labor contracts.
One of the potential consequences of the public debt is that it may
lead to additional future taxes that reduce economic incentives.
A decline in investment will shift the AD curve to the
left by a multiple of the change in investment.
If investment decreases by $18 billion and the economy's MPC is 0.9, the aggregate demand curve will shift
leftward by $180 billion at each price level.
If investment decreases by $24 billion and the economy's MPC is 0.5, the aggregate demand curve will shift
leftward by $48 billion at each price level.
The largest component of the money supply (M1) is
liquid deposits other than checkable deposits at commercial banks.
If personal taxes were decreased and resource productivity increased simultaneously, the equilibrium
output would necessarily rise.
The term "bankers' banks" means that the Federal Reserve
performs essentially the same functions for banks and thrifts as those institutions perform for the public.
The political business cycle refers to the possibility that
politicians will manipulate the economy to enhance their chances of being re-elected.
When there is inflation in the economy, it implies that the
price index is rising and the purchasing power of money is falling.
A rightward shift in the aggregate supply curve is best explained by an increase in
productivity.
An important routine function of the Federal Reserve System is to
provide facilities by which commercial banks and thrift institutions may collect on checks.
Suppose the price level is fixed, the MPC is 0.50, and the GDP gap is a negative $84 billion. To achieve full-employment output (exactly), government should
reduce taxes by $84 billion.
A major advantage of the built-in or automatic stabilizers is that they
require no legislative action by Congress to be made effective.
If investment increases by $10 billion and the economy's MPC is 0.8, the aggregate demand curve will shift
rightward by $50 billion at each price level.
If investment increases by $12 billion and the economy's MPC is 0.8, the aggregate demand curve will shift
rightward by $60 billion at each price level.
The effect of expansionary fiscal policy is shown as a
rightward shift in the economy's aggregate demand curve.
Other things equal, an increase in nominal wages will
shift the aggregate supply curve to the left.
The aggregate-demand curve
shows the amount of real output that will be purchased at each possible price level.
There is an asset demand for money primarily because of which function of money?
store of value
If you place a part of your summer earnings in a savings account, you are using money primarily as a
store of value.
The federal budget deficit is found by
subtracting government tax revenues from government spending in a particular year.
Suppose that nominal wages fall and productivity rises in a particular economy. Other things equal, the aggregate
supply curve will shift rightward.
When current government expenditures exceed current tax revenues and the economy is achieving full employment,
the cyclically-adjusted budget has a deficit.
When current tax revenues exceed current government expenditures and the economy is achieving full employment,
the cyclically-adjusted budget has a surplus.
When current government expenditures equal current tax revenues and the economy is achieving full employment,
the cyclically-adjusted budget has neither a deficit nor a surplus.
If the price level increases in the United States relative to foreign countries, then American consumers will purchase more foreign goods and fewer U.S. goods. This statement describes
the foreign purchases effect.
Deflation refers to a situation where
the price level falls; it could be caused by a shift of AD to the left.
The Federal Open Market Committee (FOMC) is made up of
the seven members of the Board of Governors of the Federal Reserve System along with the president of the New York Federal Reserve Bank and four other Federal Reserve Bank presidents on a rotating basis.
Suppose that real domestic output in an economy is 20 units, the quantity of inputs is 10, and the price of each input is $4. Given an decrease in input price from $6 to $4, we would expect
the total input costs and per-unit costs to decrease.
Reserve balances are so-called because
they are the funds that the Federal Reserve keeps on deposit for banks and thrifts to take care of ongoing commercial bank and thrift operations.
Per-unit production cost is
total input cost divided by units of output.
To say "money is what money does" means that
whatever performs the functions of money extremely well is considered to be money.
If the price index rises from 100 to 110, the purchasing power value of the dollar
will fall by one-eleventh.
Stabilizing a nation's price level and the purchasing power of its money can be achieved
with both fiscal and monetary policy.
The paper money used in the United States is
Federal Reserve Notes.
The economy experiences an increase in the price level and an increase in real domestic output. Which of the following is a likely explanation?
Net exports have increased.
In the 4 graphs, the horizontal axis is labeled real domestic output and the vertical axis is labeled price level. Graph A. A falling line labeled A D intersects 2 parallel rising curves labeled A S 1 and A S 2. A S 1 is above A S 2 and shifts right to A S 2. Graph B. A falling line labeled A D intersects 2 parallel rising curves labeled A S 1 and A S 2. A S 1 is below A S 2 and shifts left to A S 2. Graph C. 2 parallel falling lines labeled A D 1 and A D 2 intersect A S at 2 different points. A D 1 is below A D 2 and shifts right to A D 2. Graph D. 2 parallel falling lines labeled A D 1 and A D 2 intersect A S at 2 different points. A D 1 is above A D 2 and shifts left to A D 2. Which of the diagrams for the U.S. economy best portrays the effects of a rise in excess capacity?
D.
During periods of rapid inflation, money may cease to work as a medium of exchange
because people and businesses will not want to accept it in transactions.
The short-run aggregate supply curve is flatter at outputs below the full-employment output. This is because below full-employment, there are
both A and B.
The immediate-short-run aggregate supply curve represents circumstances where
both input and output prices are fixed.
Suppose the government purposely changes the economy's cyclically-adjusted budget from a deficit of 3 percent of real GDP to a surplus of 1 percent of real GDP. The government is engaging in a(n)
contractionary fiscal policy.
To keep high inflation from eroding the value of money, monetary authorities in the United States
control the supply of money in the economy.
(Last Word) The Social Security program is designed to pay
current retirees, using funds from current contributions.
If the full-employment GDP for the economy is at L, then we can say with certainty that the
cyclically-adjusted budget will have a surplus.
