Exam 3

If the reserve ratio is 10 percent, the money multiplier is

10

In 1979, when the Fed was deciding how aggressively to fight inflation, the typical estimate of the sacrifice ratio was

5

If the nominal interest rate is 8 percent and expected inflation is 2.5 percent, then what is the real interest rate?

5.5 percent

Which of the following illustrates how the investment accelerator works?

An increase in government expenditures increases aggregate spending so that Burgerville finds it profitable to build more new restaurants.

Which of the following correctly explains the crowding-out effect?

An increase in government expenditures increases the interest rate and so reduces investment spending

Which of the following is NOT implied by the quantity equation?

With constant money supply and velocity, an increase in output creates a proportional increase in the price level

Which of the following reduces the interest rate?

a decrease in government expenditures and an increase in the money supply

Treasury Bonds are

a store of value, but not a medium of exchange

inflation tax

a tax on everyone who holds money

On its web site, your bank posts the interest rates it is paying on savings accounts. Those posted rates

and a price index are both nominal variables

Bank runs

are a problem because banks only hold a fraction of deposits as reserves

An economic expansion caused by a shift in aggregate demand remedies itself over time as the expected price level

rises, shifting aggregate supply left

People hold money primarily because it

serves as a medium of exchange

An increase in the price of oil shifts the

short-run Phillips curve right and the unemployment rate rises

Imagine that the economy is in long-run equilibrium. Then, perhaps because of improved international relations and increased confidence in policy makers, people become more optimistic about the future and stay this way for some time. In the long run, the change in price expectations created by optimism shifts

short-run aggregate supply left

A problem that the Fed faces when it attempts to control the money supply is that

since the U.S. has a fractional-reserve banking system, the amount of money in the economy depends in part on the behavior of depositors and bankers

M1 includes

currency, demand deposits, travelers checks

An adverse supply shock causes output to

fall. To counter this a central bank would increase the money supply

Other things the same, as the price level rises, the real value of money

falls and the exchange rate rises

If the reserve ratio is 12.5 percent, then $2,000 of additional reserves can create up to

$16,000 of new money

If the marginal propensity to consume is 0.75, and there is no investment accelerator or crowding out, a $15 billion increase in government expenditures would shift the aggregate demand curve right by

$60 billion, but the effect would be larger if there were an investment accelerator.

is implied by the quantity equation

If velocity is stable and money is neutral, an increase in the money supply creates a proportional increase in nominal output. If velocity is stable and money is neutral, an increase in the money supply creates a proportional increase in the price level. With constant money supply and output, an increase in velocity creates an increase in the price level.

The misperceptions theory of the short-run aggregate supply curve says that if the price level is higher than people expected, then some firms believe that the relative price of what they produce has

Increased, so they increase production

Which of the following would we not expect if government policy moved the economy up along a given short-run Phillips curve?

Jackie gets fewer job offers

Long-run and short-run phillips curve placement

Long-run: vertical | Short-run: \

The money supply in Muckland is $100 billion. Nominal GDP is $800 billion and real GDP is $200 billion. What are the price level and velocity in Muckland?

The price level is 4 and velocity is 8

When deciding how much to save, people care most about

after-tax real interest rates

The initial impact of the repeal of an investment tax credit is to shift

aggregate demand left

Which of the following shifts aggregate demand to the right?

both an investment tax credit and a decrease in income tax rates

At the end of World War II many European countries were rebuilding and so were eager to buy capital goods and had rising incomes. We would expect that the rebuilding increased aggregate demand in

both the United States and Europe

Imagine that the government increases its spending by $75 billion. Which of the following by itself would tend to make the change in aggregate demand different from $75 billion?

both the multiplier effect and the crowding-out effect

A policy that raised the natural rate of unemployment would shift

both the short-run and the long-run Phillips curves to the right

Other things constant, which of the following would reduce unemployment and raise inflation?

businesses become more optimistic about the future of the economy. because of high growth abroad, net exports rise. the government cuts taxes.

The Fed increases the reserve requirement, but it wants to offset the effects on the money supply. Which of the following should it do?

buy bonds to increase reserves

Which of the following increase when the Fed makes open market purchases?

currency and reserves

Which of the following is a store of value?

cash and stocks

A surplus or shortage in the money market is eliminated by adjustments in the price level according to

classical theory, but not liquidity preference theory

The primary difference between commodity money and fiat money is that

commodity money has intrinsic value but fiat money does not

As the price level rises, the value of money

decreases, so people must hold more money to purchase goods and services

When the money market is drawn with the value of money on the vertical axis, as the price level decreases the quantity of money

demanded decreases

If you deposit $100 of currency into a demand deposit at a bank, this action by itself

does not change the money supply

The long-run aggregate supply curve shifts right if

either immigration from abroad increases or technology improves

A favorable supply shock will cause inflation to

fall and shift the short-run Phillips curve left

During the mid and last part of the 1990's both inflation and unemployment were low. In general this could have been the result of

favorable supply shocks that shifted the short-run Phillips curve left

If aggregate demand shifts right then in the short run

firms will increase production. In the long run increased price expectations shift the short-run aggregate supply curve to the left

The Board of Governors

has 7 members

Jim transfers money from his money market account to his savings account. This action

has no effect on M1 or M2

According to the Philips curve diagram, if a central bank takes action to reduce the inflation rate, unemployment is

higher in the short-run only

Other things the same, if the price level rises by 2% and people were expecting it to rise by 5%, then some firms have

higher than desired prices, which depresses their sales

Shoeleather costs arise when higher inflation rates induce people to

hold less money

Most economists believe that classical macroeconomic theory is a good description of the economy

in the long run, but not in the short run

Which of the following policy alternatives would be an appropriate response to a sharp increase in investment spending, assuming policymakers want to stabilize output?

increase taxes

Suppose households attempt to increase their money holdings. To stabilize output by countering this increase in money demand, the Federal Reserve would

increase the money supply

The misperceptions theory of the short-run aggregate supply curve says that the quantity of output supplied will increase if the price level

increases by more than expected so that firms believe the relative price of their output has increased

The multiplier effect states that there are additional shifts in aggregate demand from fiscal policy, because it

increases income and thereby increases consumer spending

According to the short-run Phillips curve, if the central bank increases the money supply, then

inflation will rise and unemployment will fall

When the Fed decreases the money supply, we expect

interest rates to rise and stock prices to fall

When the Fed conducts open-market purchases,

it buys Treasury securities, which increases the money supply.

If taxes rise, then aggregate demand shifts

left, making unemployment higher than otherwise

Which of the following is an asset of a bank and a liability for its customers?

loans to its customers but not the deposits of its customers

Other things the same, when the price level rises more than expected, some firms will have

lower than desired prices, which increases their sales

The sticky-price theory of the short-run aggregate supply curve says that if the price level rises by 5% and people were expecting it to rise by 2%, then firms have

lower than desired prices, which leads to an increase in the aggregate quantity of goods and services supplied

Marta lends money at a fixed interest rate and then inflation turns out to be higher than she had expected it to be. The real interest rate she earns is

lower then she had expected, and the real value of the loan is lower than she had expected

If the long-run Phillips curve shifts to the left, then for any given rate of money growth and inflation the economy has

lower unemployment and higher output

When the money market is drawn with the value of money on the vertical axis, an increase in the price level causes a

movement to the right along the money demand curve

Real GDP

moves in the opposite direction as unemployment

Monetary policy affects employment

only in the short run

According to classical macroeconomic theory,

output is determined by the supplies of capital and labor and the available production technology. for any given level of output, the interest rate adjusts to balance the supply of, and demand for, loanable funds. given output and the interest rate, the price level adjusts to balance the supply of, and demand for, money.

Which of the following lists includes only changes that shift aggregate demand to the right?

passing of an investment tax credit, an increase in the money supply

According to the classical dichotomy, which of the following is not influenced by monetary factors?

real GDP

The classical dichotomy refers to the separation of

real and nominal variables

real interest rate formula

real interest rate = nominal interest rate - inflation rate

Economic variables we are most interested in are

real variables, but we usually observe nominal variables

When we say that economic fluctuations are "irregular and unpredictable," we mean that

recessions do not occur at regular intervals

People can reduce the inflation tax by

reducing cash holdings

Market economies rely on which of the following to allocate scarce resources?

relative prices

The wealth effect helps explain the slope of the aggregate-demand curve. This effect is

relatively unimportant in the United States because money holdings are a small part of consumer wealth

Stagflation exists when prices

rise and unemployment rises

Which of the following institutions is a central bank?

the Bank of Japan the Federal Reserve System the Bank of England

If the money multiplier decreased from 20 to 12.5, then

the Fed increased the reserve ratio from 5 percent to 8 percent.

The supply of money increases when

the Fed makes open-market purchases.

Which of the following shifts aggregate demand to the right?

the Federal Reserve buys bonds

If a bank posts a nominal interest rate of 4 percent, and inflation is expected to be 3 percent, then

the expected real interest rate is 1 percent

According to liquidity preference theory, the opportunity cost of holding money is

the interest rate on bonds

The positive feedback from aggregate demand to investment is called

the investment accelerator

The position of the long-run Phillips curve depends on

the natural rate of unemployment, but not the inflation rate

Banks advertise

the nominal interest rate, which is how fast the dollar value of savings grows

When the money market is drawn with the value of money on the vertical axis, long-run equilibrium is obtained when the quantity demanded and quantity supplied of money are equal due to adjustments in

the price level

Suppose the economy is in long-run equilibrium. Concerns about pollution cause the government to significantly restrict the production of electricity. At the same time, taxes fall. In the short-run

the price level will rise, and real GDP might rise, fall, or stay the same

Which of the following groups is largely responsible for carrying out the Fed's tasks of regulating banks and ensuring the health of the financial system?

the regional Federal Reserve Banks

When the Consumer Price Index falls from 110 to 100

there is deflation of 9.1% and the value of money increases

By about 1973, U.S. policymakers had learned that

there is no trade-off between inflation and unemployment in the long run

The arguments of Friedman and Phelps would suggest that other things the same, a country that pursues a disinflationary policy that the public does not find completely credible

will having rising unemployment for a while, but then return to the natural rate of unemployment