Econ 202 Exam 2

What are three tools the Fed uses to manage Money Supply?

open market operations discount policy reserve requirements

The three main monetary policy tools used by the Federal Reserve to manage the money supply are

open market operations, discount policy, reserve requirements.

The short run aggregate supply curve has a ________ slope because as prices of ________ rise, prices of ________ rise more slowly

positive; final goods and services; inputs

If banks do not loan out all their excess reserves then the real world multiplier is

smaller than 1/RR

If whole tomatoes were money, which function of money would be the hardest for tomatoes to satisfy?

store of value

Which function of money would be violated if inflation were high?

store of value

The problem with barter economies is that they require

that there be a double coincidence of wants

If an increase in autonomous consumption spending of $10 million results in a $50 million increase in equilibrium real GDP, then

the MPC is 0.8.

The key idea of the aggregate expenditure model is that in any particular year, the level of GDP is determined mainly by

the level of aggregate expenditure

Suppose a developing country receives more machinery and capital equipment as foreign entrepreneurs increase the amount of investment in the economy. As a result

the long run aggregate supply curve will shift to the right

If an increase in investment spending of $20 million results in a $200 million increase in equilibrium real GDP, then

the multiplier is 10.

If an increase in investment spending of $50 million results in a $400 million increase in equilibrium real GDP, then

the multiplier is 8.

Aggregate demand (AD) curve

the relationship between the price level and the quantity of real GDP demanded by households, firms, and the government.

Suppose the economy is at full employment and firms become more pessimistic about the future profitability of new investment. Which of the following will happen in the short run?

Unemployment will rise.

Which of the following is NOT a reason why the wages of workers and the prices of inputs rise more slowly than the prices of final goods and services?

Unions are successful in pushing up wages

Why does the short-run aggregate supply curve shift to the right in the long run, following a decrease in aggregate demand?

Workers and firms adjust their expectations of wages and prices downward and they accept lower wages and prices.

M1 includes

currency in circulation, checking account balances at banks, the value of traveler's checks.

Investment spending ________ during a recession, and ________ during an expansion.

declines; increases

If the marginal propensity to save is 0.25, then a $10,000 decrease in disposable income will

decrease consumption by $7,500.

The ________ illustrates the relationship between the price level and the quantity of planned aggregate expenditure, holding constant all other factors that affect aggregate expenditure.

aggregate demand curve

Commodity money

has value independent of its use as money.

When an economy experiences rapid increases in the price level such as what occurred in Zimbabwe, the economy is said to experience

hyperinflation.

What are the components of Aggregate Expenditure

net export spending. consumption spending. government spending.

If you transfer all of your currency to your checking account, then initially, M1 will ________ and M2 will ________.

not change; not change

Suppose Bill Gates deposits $20 million into his checking account at Wells Fargo Bank. If the required reserve ratio is 10 percent, what is the maximum change in money supply?

$180 million

Assumptions made by the dynamic model of aggregate demand and aggregate supply

-Potential real GDP increases continuously. -The short-run aggregate supply curve shifts to the right except during periods when workers and firms expect higher wages. -The aggregate demand curve shifts to the right during most periods.

The Five Most Important Variables that determine the level of Consumption are: WE-DIP

-Wealth -Expected future income -Disposable income -Interest rate -Price level

If the marginal propensity to consume is .60, the marginal propensity to save is

0.4

What is the MPC at equilibrium level of real GDP?

0.5

If disposable income increases by $100 million, and consumption increases by $60 million, then the marginal propensity to consume is

0.60

Using the quantity equation, if the velocity of money grows at 5 percent, the money supply grows at 10 percent, and real GDP grows at 4 percent, then the inflation rate will be

11%

An increase in the price level in the United States will have what effect on the aggregate expenditure line?

Aggregate expenditure will shift downward.

Short-run aggregate supply (SRAS) curve

A curve that shows the SR relationship between the price level and the quantity of real GDP supplied by firms.

An increase in the growth rate of domestic GDP relative to the growth rate of foreign GDP...

AD Shifts Left Because, imports will increase faster than exports, reducing net exports

An increase in household's expectations of their future incomes...

AD Shifts Right Because, consumption spending increases

An increase in firms' expectations of the future profitability of investment spending...

AD Shifts Right Because, investment spending increases

An increase in taxes or business taxes....

AD shifts Left Because, consumption spending falls when personal taxes rise, and investment falls when business taxes rise.

An increase in interest rates...

AD shifts Left Because, higher interest rates raise the cost to firms and households of borrowing, reducing consumption and investment spending

An increase in government purchases...

AD shifts Right Because, government purchase are a component of aggregate demand

If firms find that consumers are purchasing more than expected, what would you expect?

Aggregate expenditure will likely be greater than GDP.

________ in taxes will decrease consumption spending, and ________ in transfer payments will increase consumption spending.

An increase, An increase

What best describes how banks create money?

Banks create checking account deposits when making loans from excess reserves.

Household wealth is defined as the value of a household's

assets minus the value of liabilities

If full-employment GDP is equal to $4.2 trillion, what does the long-run aggregate supply curve look like?

It is a vertical line at $4.2 trillion of GDP.

If the Federal Reserve decided to include virtual money like Bitcoins in its measure of the money supply, what would be the effect on M1 or M2?

M1 would rise

If inflation in the United States is higher than inflation in other countries, what will be the effect on net exports for the United States?

Net exports will decrease as U.S. exports decrease

German luxury car exports were hurt in 2009 as a result of the recession. How would this decrease in exports have affected Germany's aggregate demand curve?

The aggregate demand curve would have shifted to the left.

Aggregate expenditure (AE)

The total amount of spending in the economy

Consumption is $5 million, planned investment spending is $8 million, government purchases are $10 million, and net exports are equal to $2 million. If GDP during that same time period is equal to $27 million, what unplanned changes in inventories occurred?

There was an unplanned increase in inventories equal to $2 million

Because of the slope the aggregate demand we can say that

a decrease in the price level leads to a higher level of aggregate spending

Hyperinflation is caused by

a high rate of growth in the money supply.

An unplanned increase in inventories results from

actual investment that is greater than planned investment

The process of an economy adjusting from a recession back to potential GDP in the long run without any government intervention is known as

an automatic mechanism.

Which of the following leads to a decrease real GDP?

an increase in interest rates

Investment spending will decrease when

business cash flow decreases

If the Federal Open Market Committee wants to increase the money supply through open market operations, it will

buy U.S. Treasury Securities

To decrease the money supply, the Federal Reserve could

conduct an open market sale of Treasury securities.

An increase in the price level results in a(n) ________ in the quantity of real GDP demanded because ________.

decrease; a higher price level reduces consumption, investment, and net exports.

When there is expansionary monetary policy, interest rates________and hence investment and consumption will________. We can also predict that unemployment will________.

decrease; increase; decrease

When the price level in the U.S. rises relative to the price level of other countries, ________ will rise, ________ will fall, and ________ will fall

imports; exports; net exports

In the dynamic aggregated demand and aggregate supply model, if AD shifts faster than AS,

inflation occurs.

Goods that have been produced but not yet sold are referred to as

inventories.

If firms are more optimistic that future profits will rise and remain strong for the next few years, then

investment spending will rise

You earn $500 a month, currently have $200 in currency, $100 in your checking account, $2,000 in your savings accounts, $3,000 worth of illiquid assets and $1,000 of debt. You have

money = $300, annual income = $6,000, and wealth = $4,300.

An increase in aggregate demand causes an increase in ________ only in the short run, but causes an increase in ________ in both the short run and the long run.

real GDP; the price level

To offset the effect of households and firms deciding to hold more of their money in checking account deposits and less in currency, the Federal Reserve could

sell Treasury securities.

If, due to a recession, foreign workers begin to leave the United States to search for temporary work in their home countries until the recession has ended, this will

shift the short-run aggregate supply curve of the home country to the right.

Reason for the decline in aggregate demand that led to the recession of 2007-2009?

the end of the housing bubble

U.S. net export spending rises when

the growth rate of U.S. GDP is slower than the growth rate of GDP in other countries.

The quantity theory of money implies that the price level will be stable (no inflation or deflation) when the growth rate of the money supply equals

the growth rate of real GDP.

According to the quantity theory of money, the inflation rate equals

the growth rate of the money supply minus the growth rate of real output

A bank holds its reserves as ________ and ________.

vault cash; deposits at the Federal Reserve