Econ 202 Exam 3 Macroeconomics

Stagflation

A combination of inflation and recession, usually resulting from a supply shock.

The economic definition of money​ is:

Any asset that people are generally willing to accept in exchange for goods and services.

Distinguish among​ money, income, and wealth.

A​ person's money is the currency held and the checking account​ balance, income is the earning and wealth is equal to value of assets minus all debts.

Suppose you decide to withdraw​ $100 in currency from your checking account. What is the effect on M1?

M1 remains unchanged.

Jill makes a deposit into her savings account at the local bank with​ $100 in cash. As a result of this​ transaction,

M1 will decrease by​ $100.

The M2 definition of the money supply includes

M1, savings accounts, small time deposits, and money markets

Suppose you withdraw​ $1,000 from a money market mutual fund and deposit the funds in your bank checking account. How will this action affect M1 and​ M2?

M2 will not be​ affected, but M1 will increase.

quantity theory of money

MV=PY

Which of the following is included in M2 but not​ M1?

Money market deposit accounts in banks

The value of the multiplier is larger when

the value of the MPC is larger.

If there is an increase in the marginal propensity to consume​ (MPC), then

the value of the expenditure multiplier will increase.

One advantage of using cryptocurrencies to buy and sell goods and services is that

there is no permanent record of the​ transaction, but they are unlikely to be widely used unless their values in terms of government issued money become more stable.

During the first oil shock

The U.S. Federal Reserve increased money supply to accommodate the fall in GDP and Japan just waited for the SRAS to shift back left

How do banks create money?

by making loans

Disposable Income

consumption + savings

The most important determinant of consumption is

current disposable income.

The U.S. dollar can best be described as

fiat money

It is possible for people to continue to use a currency when the government that issued it has replaced it with another currency because

it is still accepted as legal tender for transactions.

When sellers are willing to accept money in exchange for goods and​ services, money is acting as a

medium of exchange

Functions of Money

medium of exchange, unit of account, store of value, standard of deferred payment

Fiat Currency

money issued by a central bank that has no value except as​ money, such as paper currency.

Marginal propensity to consume (MPC)

the slope of the consumption function = The amount by which consumption spending changes when disposable income changes.

A stagflation happens when

- Inflation increases and GDP decreases - SRAS shifts left - Oil prices increase

Hyperinflation

- It can be hundreds—even thousands—of percentage points per year. - In the presence of​ hyperinflation, firms and households avoid holding money. - It is caused by central banks increasing the money supply at a rate much greater than the growth rate of real GDP.

The relationship between the marginal propensity to consume​ (MPC) and the marginal propensity to save​ (MPS) can best be described as:

- MPC = 1-MPS - MPC + MPS = 1 - MPS = 1 - MPC

The long run effect of a 50% increase in money supply is:

- Price level will increase by 50% - Nominal wage (W) will increase by 50% - Real Wage will not change - Employment and GDP will not change

Which of the following conditions make a good suitable for use as a medium of​ exchange?

- The good should be of standardized​ quality so that any two units are identical. - The good must be acceptable to​ (that is, usable​ by) most buyers and sellers. - The good should be​ durable, valuable relative to its​ weight, and divisible.

(examples) included in the calculation of total government purchases:

- The salaries of high school teachers paid for by state government - A new interstate highway purchased by the federal government - A local government installs a new stop sign

When the economy is in macroeconomic equilibrium:

- actual GDP = potential GDP - total unemployment = frictional unemployment + structural unemployment - SRAS = AD = LRAS

Explain the ​short-run effect of monetary policy that causes an increase in interest rates. As a result of higher interest​ rates, the The new equilibrium will be

- aggregate demand curve will shift left. - where the new aggregate demand curve intersects the original​ short-run aggregate supply curve.

The use of money

- allows for greater specialization. - reduces the transaction costs of exchange. - eliminates the double coincidence of wants.

An asset would be usable as a medium of exchange for all of the following reasons:

- the asset should be divisible since goods are valued at different amounts - the asset must be generally accepted by most people. - the asset should be durable and not lose value due to spoilage.

The sum of the marginal propensity to consume ​(MPC​) and the marginal propensity to save (MPS​) equals

1

Autonomous expenditure

An expenditure that does not depend on the level of GDP.

What can serve as money?

1. acceptable 2. standardized quality 3. durable 4. valuable 5. divisible

The formula for the multiplier is

1/(1-MPC)

Which of the following equalities is​ correct?

Disposable income is equal to national income minus net taxes.

Which of the following best explains the difference between commodity money and fiat​ money?

Fiat money has no value except as​ money, whereas commodity money has value independent of its use as money.

The Federal Reserve uses two definitions of the money​ supply, M1 and​ M2, because

M1 is a narrow definition focusing more on​ liquidity, whereas M2 is a broader definition of the money supply.

The Fed "takes the punch bowl when the party gets going" means that:

The Fed's main worry is that the economy is overheated and inflation will soon occur

How does the quantity theory provide an explanation about the cause of ​ inflation?

The quantity equation shows that if the money supply grows at a faster rate than real​ GDP, then there will be inflation.

consumption function

The relationship between consumption spending and disposable income.

Suppose the economy enters a recession. If government policymakers-​Congress, the​ president, and members of the Federal Reserve-do not take any policy actions in response to the​ recession, what is the likely​ result? Which of the following four possible outcomes best describes the likely effects on the unemployment rate and GDP in both the short run and the long​ run?

The unemployment rate will rise in the short run but return to the natural rate of unemployment in the long​ run, and real GDP will drop below potential GDP in the short run but return to potential GDP in the long run.

During the German hyperinflation of the​ 1920s, many households and firms in Germany were hurt​ economically; however, people with debt actually benefited some from the hyperinflation. T/F

True

If coins could have been easily used to purchase goods and services in other​ areas, the coins would also have some intrinsic value. T/F

True

Does Venmo fulfill the role of a medium of​ exchange? Does it matter for your answer that many retail stores​ won't accept it in payment for goods and​ services?

Yes, as long as some sellers are willing to accept it as payment for goods and​ services, even if other sellers are not.

bank run

a phenomenon in which many of a bank's depositors try to withdraw their funds due to fears of a bank failure

If the economy adjusts through the automatic​ mechanism, then a decline in aggregate demand causes

a recession in the short run and a decline in the price level in the long run.

Supply Shock

a sudden increase in the price of an important natural​ resource, resulting in a leftward shift of the SRAS curve. Increasing the price level and decreasing actual GDP.

if something is to be considered money, it has to fulfill

all 4 functions

Which of the following causes saving to​ increase?

an increase in the interest rate

If the economy is initially at​ full-employment equilibrium, then an increase in aggregate demand causes ____ in real GDP in the short run and _____in the price level in the long run.

an​ increase; an increase

Hyperinflation is caused by:

central banks increasing the money supply at a rate far in excess of the growth rate of real GDP

If government policymakers are more concerned with inflation than with​ unemployment, how would they react to​ stagflation? They would use monetary and fiscal policies that

decrease aggregate demand​, thereby reducing prices but increasing unemployment.

Induced expenditure

depends on the level of GDP

If the government raises the amount of​ taxes, holding everything else​ constant, then

disposable income will decrease.

Very high rates of inflation are called

hyperinflation

Credit cards are

included in neither the M1 definition of the money supply nor in the M2 definition.

If government policymakers are more concerned with unemployment than with​ inflation, how would they react to​ stagflation? They would use monetary or fiscal policies that:

increase aggregate​ demand, thereby reducing unemployment but increasing prices.

Money is an imperfect standard of deferred payment because ___ causes the value of money to decrease over time.

inflation

Money serves as a standard of deferred payment when

payments agreed to today but made in the future are in terms of money.

Money serves as a unit of account when

prices of goods and services are stated in terms of money.

A baseball fan with a Mike Trout baseball card wants to trade it for a Giancarlo Stanton baseball​ card, but every one the fan knows who has a Stanton card​ doesn't want a Trout card. Economists characterize this problem as a failure of the

principle of a double coincidence of wants

Compared to the narrow definition of the money​ supply, M1, the broader definition of the money​ supply, M2, also contains

savings account​ deposits, small-denomination time​ deposits, and balances individual investors hold in money market mutual funds.

GDP declined in Greece

the aggregate demand curve will shift to the left

A business that​ "ditches cash" means

the business no longer accepts currency as payment.

A double coincidence of wants refers to

the fact that for a barter trade to take place between two​ people, each person must want what the other one has.

The central bank of a country controls the money​ supply, which equals the currency held by

the public plus their checking acount balances.

The quantity theory of money is better able

to explain the inflation rate in the long run.

When money is acting as a store of​ value, it allows an individual to

transfer​ dollars, and therefore purchasing​ power, into the future.

Governments sometimes allow hyperinflation to occur because

when governments want to spend more than they collect in​ taxes, central banks increase the money supply at a rate higher than GDP​ growth, often resulting in hyperinflation.

Given the length of the economic expansion in​ 2019, should households and firms have expected that a recession would start​ soon? Briefly explain.

​No, real GDP is typically equal to potential​ GDP, so unless the economy experiences a shock to aggregate demand or aggregate​ supply, there is no reason for an economic expansion to end and a recession to begin.