ECON 201 Final Study Guide

"Seigniorage" refers to governments borrowing from their citizens

false

A binding price ceiling will always raise consumer surplus

false

A cookie is a nonrival good

false

A fall in real interest rates lowers the price of future consumption relative to current consumption

false

A fall in the price of imported cookies will (by itself) raise nominal GDP

false

A rise in expected inflation should reduce the velocity of money

false

An unexpected decrease in the money supply will lead to a fall in the interest rate i (in the short run)

false

An unexpected increase in the money supply Ms will lead to a fall in output Y (in the short run)

false

Hyperinflations typically occur because the government loses control of the central bank

false

If GDP grows 5% a year it will double in approximately 7 years

false

If aggregate demand shocks were responsible for business cycle fluctuations we would expect the real wage to be procyclical

false

If demand is perfectly inelastic than a tax on sellers will reduce the effective price that sellers receive

false

If demand is relatively less elastic than supply, then a tax on buyers hurts sellers by more than a tax (of the same amount) on the sellers hurts buyers

false

If demand is relatively more inelastic than supply then it is more efficient to tax buyers than to tax sellers when raising revenue

false

If the "classical dichotomy" holds then when the money supply doubles the real wage will also double

false

If there is a positive aggregate demand shock (i.e the AD curve shifts right), then the real wage will go up (in the short run)

false

If there is a positive aggregate supply shock (i.e. labour productivity increases), then the interest rate i will go up (in the short run)

false

In Scandinavia, collective wage bargaining at the national level has led to excessive demands and high unemployment

false

In a 2 person/2 good economy, if nobody has a comparative advantage in the production of a good, then it must follow that nobody has an absolute advantage in the production of that good

false

In hyperinflations the money growth rate tends to exceed the inflation rate

false

In the fish/coconut model where production possibility frontiers are straight lines: if Crusoe has absolute advantage in both goods, then he must also have comparative advantage in both goods

false

It is a fact that, over long time horizons, countries with higher average inflation rates also tend to have higher average growth in real GDP

false

It is well known that Herbert George Wells introduced into economics the metaphor of the "invisible hand"

false

Maturity mismatch refers to senior investment bankers being older than their employees

false

Over long time horizons (decades) countries with higher money growth tend to have higher rates of real GDP growth

false

Structural unemployment is defined as any unemployment rate in excess of 4%

false

Suppose the marginal propensity to consume is less than 1/2. Then a rise in government spending G will lead to a rise in consumption C that is larger than the rise in G

false

Suppose there are no "leakages" and that the reserve requirement is r=0.4. Then if the central bank buys $25,000 worth of Treasuries from private banks, M=C+D will rise by $10,000

false

The concept of the invisible hand was first developed by Diego Maradona

false

The deadweight loss that arises from a proportional tax is always at least as great as the fall in consumer surplus that results

false

The emergency liquidity/lending programs that the Fed introduced during the 2007/8 financial crisis were designed to help the so-called primary dealers

false

The main reason barter is inefficient is that oxen (for example) are heavy things to carry

false

The more excess reserves banks choose to hold, the greater any increase in output Y that would arise as a result of an injection of reserves into the banking system

false

The more that individuals choose to hold in cash rather than deposits (holding their consumption fixed), the greater any increase in output Y that would arise as a result of an injection of reserves into the banking system

false

The term "efficiency wages" refers to employers cutting workers' salaries in order to increase profits

false

The theory of comparative advantage was initially formulated by Jahangir Khan

false

The short-term unemployment that results from the ordinary difficulties associated with matching workers with employers is known as ___________ unemployment

frictional

The phenomenon whereby apparently "temporary fluctuations" in the unemployment rate have permanent effects on the natural rate of unemployment is known as _____________

hysteresis

A binding price ceiling might lead to a rise in consumer surplus

true

A fall in the price of exported bull semen will lower the GDP deflator

true

A more stringent system of intellectual property rights (longer patent terms) might increase the rate at which new technologies are invented.

true

A rise in the price of exported donuts will (by itself) raise nominal GDP

true

A useful feature of the TAF was the anonymity it offered winners

true

An expected increase in the money supply will lead to a fall in the real wage (in the short run)

true

An unexpected increase in the money supply Ms will lead to a rise in investment

true

An unexpected, temporary increase in labor productivity will lead to a rise in investment I

true

Defaults on subprime mortgages led to falls in the values of assets like the CDOs

true

Empirically money does seem to be neutral, at least in the long run

true

Employers might deliberately pay wages higher than the market rate to make employees work harder

true

Firms might voluntarily pay employees higher wages (than they need to in order to get the employees to show up to work) because it is cheaper than monitoring the employees' effort levels

true

Higher rates of union membership could in theory increase unemployment

true

If I deposit a check at my bank, and the check was written by another customer of the same bank, then the bank will see no change in its excess reserves

true

If aggregate supply shocks were responsible for business cycle fluctuations we would expect the real wage to be procyclical

true

If an unemployed person leaves the labor force then the unemployment rate will fall

true

If demand is relatively less elastic than supply, then a tax on buyers hurts buyers by more than a tax on sellers hurts sellers

true

If demand is relatively less elastic than supply, then a tax on sellers hurts buyers by more than a tax on buyers hurts sellers

true

If someone who was previously "not in the labor force" enters paid employment then (assuming this is captured by the Bureau of Labor Statistics survey) the unemployment rate will fall

true

If the classical dichotomy holds when the money supply doubles the nominal wage will also double

true

If the nominal interest rate i=10%, then the present value of "%16,000 in 21 years time" is $2,000 (using the Rule of 70)

true

If there is a positive aggregate supply shock (i.e labor productivity increases), then the real wage will go up (in the short run)

true

In hyperinflations the price level P is usually growing more rapidly than the money supply (or monetary aggregate) M.

true

In the Solow model, the higher is the savings rate then the higher is the amount of investment I in the steady state

true

In the Solow model, the higher the depreciation rate then the lower is the amount of investment i in the steady state

true

Investment tax credits will tend to raise the equilibrium interest rate in the market for loanable funds

true

Paying the unemployed higher "unemployment benefits" might lead to both higher fictional unemployment and a better matching of firms with workers

true

Paying unemployment benefits could result in a better matching of workers to firms

true

Suppose the marginal propensity to consume is 1/3. Then an unexpected increase in the money supply will rise investment by twice as much as it raises consumption

true

Suppose there are no leakages and that the reserve requirement r=0.2. Then if the central bank wants to increase M=C+D by $10,000 it should buy $2,000 worth of Treasuries from private banks

true

Temporary shocks (e.g. to aggregate demand) can have permanent effects on the economy

true

The fish/coconut model where production possibility frontiers are straight lines: if Crusoe and Friday each has absolute advantage in one of the two goods, then they gain from trading with one another

true

The flatter the labor demand curve, the greater will be the effect of an increase in government spending G on consumption (in the short run). [You should assume that the marginal propensity to consume is greater than zero.]

true

The introduction of a minimum wage has an ambiguous effect on the employment level

true

The introduction of employment protection laws that make it more difficult to fire workers could in theory reduce the welfare of those currently unemployed

true

The more sensitive is investment I to the interest rate, the flatter will be the aggregate demand curve

true

The steeper is the short-run aggregate supply (SRAS) curve, the greater will be the effect of an increase in G on the nominal interest rate (in the short run)

true

if savers become more patient, real interest rates should fall

true

the GDP Deflator is a Paasche index

true

Why has the recent financial crisis posed a particular challenge for conventional monetary policy? How has the Federal Reserve responded in terms of policy, and why?

Banks are hoarding liquidity, meaning that any reserves the fed injects into the banking system fail to get recycled in the form of lending and deposits, this leakage means that conventional monetary policy does not work very well. Institutional features of monetary policy in "normal" times exacerbated this problem. The primary dealer problem the fact that the Fed could not buy AAA-related securities so instead they started new lending programs to get around these issues by making liquidity available more widely via loans of longer duration and anonymity

Why was the Term Auction Facility, which the Fed introduced during the 2007/8 financial crisis, an improvement over pre-existing monetary policy tools?

Conventional OMO went through primary dealers while TAF was open to a broader array of financial institutions; discount window was stigmatized whereas TAF winners were anonymous; discount window loans were typically short-term whereas TAF loans were longer term; auction mechanism allowed Fed to identify those most in need of liquidity. TAF also had weaker collateral requirements

Consider the following statement: "The larger is the marginal propensity to consume, the greater will be the long-run effect of a rise in government spending G on the price level P." Do you agree?

False. We need a given long-run fall in I, which is obtained with a given rise in r and i; the latter means that in the money market we need a given fall in M*/P and therefore a given rise in P, independent of the marginal propensity to consume c1

Explain the concept of 'hysteresis' and why economists in the United States were worried about the prospect of it following the financial crisis of 2007-8. Were their fears borne out by the subsequent behavior of the US labor market or not?

Is when temporary changes in unemployment have permanent effects on future employment. This case lowers the natural rate of employment and has lasting effects on the employees such as skill loss and discouragement. While unemployment rates can return to their pre-crisis level their employment can be a few % age points below but this i s determined from the length of the shock

Suppose you had been installed as a ruler of Zimbabwe when it was experiencing hyperinflation. How would you have stopped the hyperinflation?

Reduce money growth today; address fiscal situation today by cutting G-T. The latter is needed to reduce expectations of future seigniorage/money growth and thus stabilize the velocity of money today. Credit was given appropriately in the above three categories to answers that mentioned central bank independence and the adoption of a foreign currency.

Give a short definition of structural unemployment. Then briefly outline two causes of structural unemployment.

This is persistent, long-term unemployment that are caused by technological advancements as tech evolves, certain industries may become obsolete and require fewer workers leading to a surplus of workers no longer in demand. Another reason for this rate of unemployment is globalization, as the integration of the global economy has created new opportunities fir businesses to outsource jobs to countries with lower labor costs. This can result in the loss of jobs in certain industries and geographic regions.

Explain the dynamics behind the typical hyperinflation, such as the recent one in Zimbabwe. If you were the finance minister of an economy in the throes of major hyperinflation, how would you stop it?

Typical hyperinflation is when high inflation rates exceed the money supply. In Zimbabwe, there was excessive money supply growth, driven by the government printing money to finance its fiscal deficits and programs. In order to combat this they must eliminate the fiscal deficit in order to bring down expectations of future seigniorage and thus velocity.

Briefly, why might credible fiscal reform (for example an irreversible commitment to permanently lower government spending G) be a necessary part of combatting hyperinflations?

because the government's demand for seigniorage is typically what drives the money growth rate in hyperinflationary episodes, and removing this demand will bring down mu credibility is important thanks to expectations and money velocity

There are two basic types of money: _______________ money with intrinsic value and _______________ money with no intrinsic value

commodity, fiat

Explain how defaults on subprime mortgages led to the 2007-8 financial crisis, and why the Fed responded the way it did.

it was triggered by a large number if defaults on subprime mortgages. These were home loans given to borrowers with poor credit histories who were considered high-risk borrowers. These subprime mortgages were then bundled together and sold as securities to investors, who were attracted by the high interest rates offered (mispriced RMBs). These market securities were opaque; THE BORROWERS WERE NOT AWARE OF THE RISKS. There was also a maturity mismatch, where short term funding is used to finance long term assets. To address the crisis, the Fed aimed to restore confidence in financial markets and promoted economic stability. They implemented TAF liquidity programs that allowed banks to access longer term liquidity in an anonymous way in exchange for collateral that was less than AAA-rated

Explain 'maturity mismatch' and briefly outline its role in the recent financial crisis.

maturity mismatch is a situation in which a financial institutions or investor borrows funds with a shorter term than the term of loans they make or investments they hold. This creates a liquidity crisis for the institutions which were unable to pay their short-term debt obligations as they were due. The resulting panic led to a freeze in credit markets and a wave of bank failures and bailouts.