Econ Macro Ch. 13-14
If the economy adjusts through the automatic mechanism, then a decline in aggregate demand causes 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. Which of the following is usually the cause of stagflation?
a recession in the short run and a decline in the price level in the long run. an increase; an increase a supply shock as a result of an unexpected increase in the price of a natural resource
Banks can continue to make loans until their
actual reserves equal their required reserves.
The ________ shows the relationship between the price level and quantity of real GDP demanded.
aggregate demand curve
Which of the following assets is most liquid?
money
Long-run macroeconomic equilibrium occurs when
the aggregate demand and short-run aggregate supply curves intersect at a point on the long-run aggregate supply curve.
Where the aggregate demand curve and the short-run aggregate supply curve intersect,
the economy is in short-run macroeconomic equilibrium.
In response to the destructive bank panics of the Great Depression, future bank panics are designed to be prevented by
the establishment of the Federal Deposit Insurance Corporation.
Increases in firms' expectations of their future profitability and investment spending will make the aggregate demand curve shift
to the right
When money is acting as a store of value, it allows an individual to Money is an imperfect standard of deferred payment because ---causes the value of money to decrease over time.
transfer dollars, and therefore purchasing power, into the future. inflation
In the long run,
unemployment is at its natural rate.
Which of the following would cause a decrease in aggregate demand?
a decrease in government spending
Open market operations refer to the purchase or sale of ________ to control the money supply.
U.S. Treasury securities by the Federal Reserve
When the price of oil rises unexpectedly, the equilibrium price level ________ and the unemployment rate ________ in the short run.
rises; rises
Suppose that you deposit $2,000 in your bank and the required reserve ratio is 10 percent. The maximum loan your bank can made as a direct result of your deposit is
$1,800
Imagine that Kristy deposits $10,000 of currency into her checking account deposit at Bank A and that the required reserve ratio is 20%. Refer to the scenario above. As a result of Kristy's deposit, Bank A's reserves immediately increase by
$10,000
Imagine that Kristy deposits $10,000 of currency into her checking account deposit at Bank A and that the required reserve ratio is 20%. Refer to the scenario above. As a result of Kristy's deposit, Bank A's required reserves increase by
$2,000
Suppose the reserve requirement is 15%. What is the effect on total checkable deposits in the economy if bank reserves increase by $50 billion?
$333 billion increase
Suppose a bank has $100 million in checking account deposits with no excess reserves and the required reserve ratio is 20 percent. If the Federal Reserve reduces the required reserve ratio to 15 percent, then the bank will now have excess reserves of
$5 million
Imagine that Kristy deposits $10,000 of currency into her checking account deposit at Bank A and that the required reserve ratio is 20%. Refer to the scenario above. As a result of Kristy's deposit, checking account deposits in the banking system as a whole (including the original deposit) could eventually increase up to a maximum of
$50,000
Imagine that Kristy deposits $10,000 of currency into her checking account deposit at Bank A and that the required reserve ratio is 20%. Refer to the scenario above. As a result of Kristy's deposit, Bank A can make a maximum loan of
$8,000
Imagine that Kristy deposits $10,000 of currency into her checking account deposit at Bank A and that the required reserve ratio is 20%. Refer to the scenario above. As a result of Kristy's deposit, Bank A's excess reserves increase by
$8,000
Which of the following is a monetary policy tool used by the Federal Reserve Bank?
- Buying $500 million worth of government securities, such as Treasury bills. - Increasing the reserve requirement from 10 percent to 12.5 percent. - Decreasing the rate at which banks can borrow money from the Federal Reserve. ** ALL OF THE ABOVE.
The United States is divided into -- Federal Reserve Districts. The Federal Reserve Bank's Board of Governors consists of -- members appointed by the president of the U.S. to 14-year, non-renewable terms. One of the board members is appointed to a -- year, renewable term as the chairman.
12 , 7 , 4
If the reserve requirement ratio (RR) is 0.20, the simple deposit multiplier is
5
Which of points A, B, C, or D can represent a long-run equilibrium? Suppose that initially the economy is at point A. Then aggregate demand increases from AD1 to AD2. The new short-run equilibrium will be at point --- The long-run equilibrium point will be at point --- Which of the following best explains how the economy will adjust from the short-run equilibrium point to the new long-run equilibrium point?
A and C D , C Due to the higher price level, workers will demand higher wages, and firms will raise prices and cause SRAS to shift to the left to point C.
Refer to the figure to the right. Ceteris paribus, a decrease in government spending would be represented by a movement from
AD2 to AD1.
Interest rates in the economy have fallen. How will this affect aggregate demand and equilibrium in the short run?
Aggregate demand will rise, the equilibrium price level will rise, and the equilibrium level of GDP will rise.
Distinguish among money, income, and wealth. The central bank of a country controls the money supply, which equals the currency held by
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. the public plus their checking acount balances.
Refer to the diagram to the right. Which of the points in the diagram are possible short run equilibria but not long run equilibria? Assume that Upper Y 1 represents potential GDP.
B and D
Which of the following best describes how banks create money?
Banks create checking account deposits when making loans from excess reserves.
How does an increase in the price level affect the quantity of real GDP supplied in the long run?
Changes in the price level do not affect the level of GDP in the long run.
Evaluate the following statement: Banks use deposits to make consumer loans to households and commercial loans to businesses. Banks will loan out every penny of their deposits in order to make a profit.
False. Banks must hold a fraction of their deposits as vault cash or with the Federal Reserve.
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.
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.
The Federal Reserve's narrowest definition of the money supply is
M1
Suppose you decide to withdraw $100 in currency from your checking account. What is the effect on M1?Ignore any actions the bank may take as a result of your having withdrawn the $100.
M1 remains unchanged
The M2 definition of the money supply includes
M1, savings accounts, small time deposits, and money markets.
Which of the following is not a correct statement about M2? If you move $100 from your savings account to your checking account, then M1 will --- and M2 will ---
M2 is the best definition of money as a medium of exchange. increase by $100, remain the same
Which of the following is included in M2 but not M1? The Federal Reserve uses two definitions of the money supply, M1 and M2, because
Money market deposit accounts in banks M1 is a narrow definition focusing more on liquidity, whereas M2 is a broader definition of the money supply.
Refer to the figure to the right. Ceteris paribus, an increase in the expected price of an important natural resource would be represented by a movement from
SRAS2 to SRAS1.
"An increase in aggregate supply causes a shift from SRAS1 to SRAS2. Because this shift in the aggregate supply curve results in a lower price level, consumption, investment, and net exports will increase. This change causes the aggregate demand curve to shift to the right from ADl to AD2. We know that real GDP will increase, but we can't be sure whether the price level will rise or fall because that depends on whether the aggregate supply curve or the aggregate demand curve has shifted farther to the right. I assume that aggregate supply shifts out farther than aggregate demand, so I show the final price level, P3, as being lower than the initial price level, P1." Which of the following is a correct statement about the student's analysis?
The student is incorrect because the aggregate demand curve does not shift because of the price level change.
Spending on the war in Afghanistan is essentially categorized as government purchases. How do increases in spending on the war in Afghanistan affect the aggregate demand curve?
They will shift the aggregate demand curve to the right.
The recession of 2007minus2009 made many consumers pessimistic about their future incomes. How does this increased pessimism affect the aggregate demand curve?
This will shift the aggregate demand curve to the left.
Which of the following best describes the "wealth effect"?
When the price level falls, the real value of household wealth rises.
How do the banks "create money"?
When there is an increase in checking account deposits, banks gain reserves and make new loans, and the money supply expands.
A supply shock is Stagflation is a Stagflation occurs when
a sudden increase in the price of an important natural resource, resulting in a leftward shift of the SRAS curve. combination of inflation and recession a supply shock shifts the SRAS to the left, increasing the price level and decreasing actual GDP
Which of the following will shift the aggregate demand curve to the right, ceteris paribus?
an increase in net exports
the SRAS curve will shift to the right if there is the SRAS curve will shift to the right if there is the SRAS curve will shift to the right if there is the SRAS curve will shift to the left if there is the SRAS curve will shift to the left if there is the SRAS curve will shift to the left if there is
an increase in the labor force or capital accumulation an increase in productivity a technological change an increase in the expected price of an important natural resource an increase in the adjustment of workers' and firms' prior underestimation of the price level an increase in expected future prices
Which of the following is considered a negative supply shock?
an unexpected decrease in the refining capacity for oil
Economies where goods and services are traded directly for other goods and services are called ________ economies.
barter
At the new short run equilibrium, the unemployment rate will --- compared to the unemployment rate at the initial equilibrium, prior to the increase in exports. Which of the following best explains how the economy will adjust back to long-run equilibrium? At the new long-run equilibrium,
be lower Short-run aggregate supply will decrease (shift leftward) as firms and workers adjust to the new price level. real GDP and the unemployment rate will remain the same, but price level will be higher compared to the initial equilibrium, prior to the increase in exports.
Look carefully at the following list. (a.) The coins in your pocket. (b.) The funds in your checking account. (c.) The funds in your savings account. (d.) The traveler's check that you have left over from a trip. (e.) Your Citibank Platinum MasterCard. Which of the things above are NOT included in the M1 LOADING... definition of the money supply?
c and e
The long-run aggregate supply curve is vertical because in the long run,
changes in the price level do not affect potential GDP, as potential GDP depends on the size of the labor force, capital stock, and technology.
Which of the following is not a policy tool the Federal Reserve uses to manage the money supply?
changing income tax rates
Silver is an example of a
commodity money
To increase the money supply, the Federal Reserve could
conduct an open market purchase of Treasury securities.
Which of the following is not counted in M1?
credit card balances
Higher personal income taxes
decrease aggregate demand
The required reserves of a bank equal its ________ the required reserve ratio.
deposits multiplied by
Compared to the U.S. aggregate demand curve, the reason that the demand curve for an individual product, such as bananas, slopes downward is
different, because consumers can substitute between individual products.
Changes in the price level
do not affect the level of aggregate supply in the long run.
Congress passed legislation to create the Federal Reserve System in 1913 in order to The most important role of the Federal Reserve in today's U.S. economy is
end the instability created by bank panics by acting as a lender of last resort. controlling the money supply to pursue economic objectives.
The long-run aggregate supply curve will shift to the right if the economy
experiences technological change.
The U.S. dollar can best be described as
fiat money
Give the three reasons the aggregate demand curve slopes downward. The U.S. aggregate demand curve slopes downward due to all of the following reasons except the
government-spending effect, where a change in the price level affects government purchases.
Aggregate demand (AD) is comprised of expenditure components that include
government spending, consumption, investment, and net exports.
In the new short-run equilibrium, the unemployment rate is --- the unemployment rate in the initial equilibrium prior to the increase in the price of oil. Which of the following best explains how and why the economy will adjust back to long-run equilibrium? After the adjustment of aggregate supply is complete, the economy returns to equilibrim at When the economy returns to long-run equilibrium again
higher than Short-run aggregate supply will increase (shift rightward) as the recession makes firms and workers willing to accept lower wages and prices. A real GDP, the unemployment rate, and the price level will be the same as the initial equilibrium values prior to the increase in the price of oil.
When the price level in the United States falls relative to the price level of other countries, ________ will fall, ________ will rise, and ________ will rise.
imports; exports; net exports
Deflation will
increase the quantity of real GDP demanded.
The purchase of Treasury securities by the Federal Reserve will, in general,
increase the quantity of reserves held by banks.
A decrease in the discount rate ________ bank reserves and ________ the money supply if banks respond appropriately to the change in the rate.
increases; increases
A decrease in the reserve requirement ________ bank reserves and ________ the money supply.
increases; increases
Stagflation occurs when
inflation rises and GDP falls.
Which of the following is not a function of the Federal Reserve System or the "Fed"?
insuring deposits in the banking system
The "interest rate effect" can be described as an increase in the price level that raises the interest rate and chokes off
investment and consumption spending
Firms become more optimistic and increase their spending on machinery and equipment. Because this is a change in --- it will cause a --- the aggregate demand curve. The federal government increases taxes in an attempt to reduce a budget deficit. Because this is a change in --- it will cause a --- the aggregate demand curve. The U.S. economy experiences 4 percent inflation. Because this is a change in --- it will cause a --- the aggregate demand curve.
investment, shift to the right in consumption, shift to the left in the price level, movement along
Which of the following about fiat money is false? Fiat money
is backed by gold
The long run aggregate supply curve
is vertical
Banks can make additional loans when required reserves are
less than total reserves.
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. Using the M1 measure of money, you have
money = $300, annual income = $6,000, and wealth = $4,300.
Which one of the following is not one of the policy tools the Fed uses to control the money supply? Which tool is the most important?
moral suasion The Fed conducts monetary policy principally through open market operations.
An increase in the price level will
move the economy up along a stationary aggregate demand curve.
In the diagram to the right, moving from point A to point B is called a --- the AD curve Moving from point A to point C is referred to as a --- the AD curve
movement along shift in
A change in the price level causes a --- the short-run aggregate supply (SRAS) curve. In the figure, this is shown by moving from point --- A change in any other factor causes a --- the SRAS curve. In the figure, this is shown by moving from point ---
movement along, A to B shift in, B to C
An increase in the price level will cause a ---- the aggregate demand curve. An increase in government purchases will cause a ---- the aggregate demand curve. An increase in state income taxes will cause a ---- the aggregate demand curve. An increase in interest rates will cause a ---- the aggregate demand curve. A faster income growth in other countries will cause a ---- the U.S. aggregate demand curve.
movement up along rightward shift of leftward shift of leftward shift of rightward shift of
If a person withdraws $500 from his/her checking account and holds it as currency, then M1 will ________ and M2 will ________.
not change; not change
Of the three primary tools the Federal Reserve uses to conduct monetary policy, the tool used most often is
open market operations
The three main monetary policy tools used by the Federal Reserve to manage the money supply are
open market operations, discount policy, and reserve requirements.
Dollar bills in the modern economy serve as money because
people have confidence that others will accept them as money.
Full-employment GDP is also known as
potential GDP
A baseball fan with a Mike Trout baseball card wants to trade it for a Giancarlo Stanton baseball card, but everyone 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.
An increase in the labor force or capital stock is illustrated as a An increase in the expected price of an important natural resource is indicated by An improvement in technology is shown as a An increase in the expected future price level causes
shift from A to B a shift from B to A shift from A to B a shift from B to A
In 2005, Hurricane Katrina destroyed oil and natural gas refining capacity in the Gulf of Mexico which subsequently drove up natural gas, gasoline, and heating oil prices. Three years later, once the refining capacity was restored, these prices came back down. The restoration of refining capacity should
shift the short-run aggregate supply curve to the right.
More capital accumulation will cause the long-run aggregate supply curve to
shift to the right
Which aggregate supply curve has a positive slope?
short run only
The formula for the simple deposit multiplier is If the required reserve ratio is 0.05, the maximum increase in checking account deposits that will result from an increase in bank reserves of $15,000 is
simple deposit multiplier = 1/RR $300,000
If whole tomatoes were money, which of the following functions of money would be the hardest for tomatoes to satisfy?
store of value
The position of the long-run aggregate supply (LRAS) curve is determined by
the number of workers, the amount of capital, and the available technology.
The seven members of the Board of Governors of the Federal Reserve are appointed by
the president
What relationship is shown by the aggregate demand curve? The aggregate demand curve shows the relationship between
the price level and the quantity of real GDP demanded by households, firms, and the government.
What relationship is shown by the aggregate supply curve? The short run aggregate supply curve shows the relationship in the short run between
the price level and the quantity of real GDP supplied by firms.
The price level increases. Because this is a change in --- the LRAS curve will --- The labor force increases. Because this is a change in --- the LRAS will --- There is an increase in the quantity of capital goods. Because this is a change in --- the LRAS will --- Technological change occurs. Because this is a change in --- the LRAS will
the price level, not change the productive capacity of the economy, shift to the right the productive capacity of the economy, shift to the right the productive capacity of the economy, shift to the right
The major shortcoming of a barter economy is
the requirement of a double coincidence of wants.
Bank reserves include
vault cash and deposits with the Federal Reserve.