Final Exam -Macro

If the economy is initially at long-run equilibrium (Y is at Y potential) and aggregate demand increases, without government intervention, in the long run the price level.

Is higher and output is the same as the original long-run equilibrium

Which of the following would shift aggregate demand to the right?

Stock market values increase by 20 percent.

The Volcker Recession occurred when?

The early 1980s

The period following World War II, where fluctuations in GDP have been smaller, is known as...

The great moderation

Aggregate demand is determined by adding up the spending of

consumers, firms, the government, and foreigners that buy goods and services produced in the United States.

An increase in the value of the dollar will

decrease aggregate demand.

The sale of existing U.S. Treasury securities (e.g., selling bonds) by the Federal Reserve will

decrease the money supply.

An increase in the value of the dollar will ________ exports and ________ imports.

decrease; increase

The supply of loanable funds comes from

households and is upward sloping.

The aggregate demand curve illustrates the

inverse relationship between the price level and the quantity demanded of real gross domestic product (GDP).

The demand for loanable funds is

investment, because firms are (on the aggregate) net borrowers.

Aggregate supply describes a relationship between

output and prices.

The interest rate represents ________ to ________

the cost of borrowing; firms, governments, and households who borrow

The government engages in more deficit spending. Ceteris paribus (all else equal), this would cause

the demand for loanable funds to increase.

The supply of loanable funds increases while the demand for loanable funds remains constant. This would cause

the equilibrium quantity of loanable funds to increase and the equilibrium interest rate to decrease.

To decrease the money supply, the Fed will?

the opposite - sell bonds

The interest rate is

the price of loanable funds.

An increase in the expected price level in the future shifts the

the short-run aggregate supply curve left

The long-run aggregate supply curve is

vertical at the level of full employment output.

The long-run aggregate supply curve is

vertical because full-employment output is independent of the price level.

In the short run, some prices are inflexible. Most often, the prices that are inflexible are

wages for workers.

The two types of monetary policy are

expansionary and contractionary.

If interest rates rise,

firms are willing to borrow less money because their costs of borrowing has increased.

Pick the chain of events that best describes the effects of government spending financed through borrowing

(1) G increase --> AE increase --> inventory falls --> Y increase (2) G increase --> Md increase --> r increase --> I falls --> AE falls --> inventory rises --> Y falls

Suppose the economy is given by the following, C = 500 + 0.9(Y-T) I_p = 400 - 1000r G = 400 T= 200 r=0.04 Solve for the equilibrium GDP

10,800 (go to problem set to work out)

the economy is given by the following, C = 500 + 0.9(Y-T) I_p = 400 - 1000r G = 400 T = 200 r=0.02 (now this is a lower interest compared to question 2, possibly caused by an expansionary monetary policy. Solve for the equilibrium GDP

11,000 (go to problem set to work out)

The Federal Reserve System was created in

1913

The aggregate demand curve is best represented by which of the following equations?

AD = C + Ip + G + X - M

If speculators lost confidence in foreign economies and so wanted to buy more U.S. bonds this will cause the US dollar to appreciate, which will then make US goods appear more expensive to foreign consumers. This event will cause

Aggregate demand to shift left.

At the end of World war 2 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 Stated and Europe

If the Fed wanted to increase the money supply, how would they do it?

Buy Bonds Explanation: They would BUY bonds if they wanted to increase the money supply. Imagine you are the Fed and your friends are the economy. If you (the Fed) wants to increase your friends (the economy) money, you would buy something from them, giving them money.So bonds are investment tools that people in the economy buy to earn interest. If the Federal Reserve wants to inject money into the economy, they would buy these bonds back from the people.

If the Fed decided to increase the money supply, which of the following chains of events best depicts what would happen?

Buy bonds --> Ms increase --> r falls --> I increases --> AE increases --> Inventory falls --> Y increases / unemployment falls

Which of the following best describes how contractionary monetary policy affects the aggregate demand curve in the aggregate demand-aggregate supply model?

Contractionary monetary policy directly pulls money out of the loanable funds market. This raises the interest rate, which provides a lesser incentive for firms to invest. Investment is a component of aggregate demand, so this shifts aggregate demand to the left.

Aggregate demand shifts left when the government

Cuts military expenditures

Suppose a fall in stock prices makes people feel poorer. The decrease in wealth would induce people to

Decrease consumption, shown by shifting the aggregated-demand curve to the left.

________ policy is when a central bank acts to increase the money supply in an effort to stimulate the economy.

Expansionary monetary

Which of the following best describes how expansionary monetary policy affects the aggregate demand curve in the aggregate demand-aggregate supply model?

Expansionary monetary policy directly puts money into the loanable funds market. This lowers the interest rate, which provides a larger incentive for firms to invest. Investment is a component of aggregate demand, so this shifts aggregate demand to the right.

From 2016 to 2020, Venezuela is experiencing an economic problem known as

Hyperinflation

Suppose unemployment was too high. What could the Fed do to lower unemployment?

Increase the money supply

If the Fed increases money supply, what happens to the interest rate?

Interest rate decreases (see below the expansionary monetary policy in the short run). ( go on problem set to see example)

If the interest rate increases, what happens to GDP?

It decreases because I decreases Explanation: Interest rate is the cost of borrowing/loans (most businesses are financed throughborrowing/loans). When interest rate goes up, cost of doing business goes up. Investment (I) goes down.AE goes down, inventory goes up, production goes down, GDP decreases.

What best describes the Fed's dual mandate?

Keep inflation low and stable; Keep employment high

The model of aggregated demand and aggregates supple explains the relationship between?

Real GDP (Y) and the price level

Based on the figure, which points represent long-run equilibrium?

a and c

Contractionary monetary policy occurs when

a central bank acts to decrease the money supply in an effort to control an economy that is expanding too quickly.

Expansionary monetary policy occurs when

a central bank acts to increase the money supply in an effort to stimulate the economy.

An increase in expected future prices causes

a decrease in short-run aggregate supply (shifts left)

A bond is

a security that represents a debt to be paid.

If you deposit money in the bank, in essence, you are

a supplier of funds, since the bank simply is an intermediary between those who want to borrow loanable funds and those who are willing to lend them (depositors).

The long run is best defined as a period of time such that

all prices have adjusted.

To increase the money supply, the Federal Reserve could

conduct an open market purchase of U.S. Treasury securities.

The demand for loanable funds increases while the supply of loanable funds remains constant.This would cause

both the equilibrium quantity of loanable funds and the equilibrium interest rate to increase.

Shifts in the long-run aggregate supply curve are caused by

changes in labor productivity.

Suppose the economy is still given by the following, C = 500 + 0.9(Y-T) I_p = 400 - 1000r G = 400 T = 200 Initially, r = 0.02 Suppose at the current level of GDP, the inflation level is too high and there is fear of escalating inflation going forward. What policy should the Fed consider?

contractionary monetary policy to increase the interest rate explanation: Rising inflation is typically a sign that demand for goods is outpacing the production of goods and the equilibrium output is likely above its long-run trend. Just like the Volcker recession we discussed, the Fed will need to make the difficult decision of temporarily cooling down the economy in order to lower inflation. To do that, they use the contractionary monetary policy (decrease money supply) to raise the interest rate. Once interest rate goes up, investment goes down, AE decreases, inventory rises, production decreases, GDP decreases and unemployment rises, but inflation will go down.

An interest rate best represents ________ to borrowers and ________ to savers.

cost; return

Input prices affect the firm's ________, and output prices affect the firm's ________.

costs; revenue

Which description implies a drop in interest rates?

either a leftward shift of the demand curve for loanable funds, or a rightward shift of the supply curve

Holding all else constant, in the short run, an increase in the money supply can cause a(n)

increase in real gross domestic product (GDP).

The purchase of existing U.S. Treasury securities (e.g., buying bonds) by the Federal Reserve will

increase the money supply.

When the money supply increases

interest rates fall and so aggregate demand shifts right

When the Fed buys bonds from financial institutions, new money moves directly

into the loanable funds market.

Expansionary monetary policy

lowers interest rates, causing aggregate demand to shift to the right.

Expansionary monetary policy ________ interest rates, which ________ the ________.

lowers; increases; quantity demanded for loanable funds

Central banks can use monetary policy to

make it easier for people and businesses to borrow.

The Federal Reserve generally uses ________ to implement monetary policy.

open market operations

Open market operations, by definition, involve the

purchase or sale of bonds by a central bank.

Contractionary monetary policy ________ interest rates, causing ________ to shift to the ________.

raises; aggregate demand; left

Contractionary monetary policy ________ interest rates, by ________ the ________.

raises; decreasing; supply of loanable funds

Central banks can use monetary policy to

reduce interest rates.

The long-run output (long-run AS) of an economy depends on

resources, technology, and institutions.

In the figure, line 1 represents ________, line 2 represents ________, and 5 percent represents ________.

savings; the demand for loanable funds; the equilibrium interest rate

Expansionary monetary policy makes the aggregate demand curve

shift to the right.

Aggregate demand is about ________ and aggregate supply is about ________.

spending; production