Macro Econ final
What are the 3 tools Fed uses to influence aggregate demand ?
(1) open market operations in which the Fed buys bonds, which increases the money supply and reduces interest rates, or the Fed sells bonds, which decreases the money supply and increases interest rates; (2) lending to banks and other financial institutions; and (3) changes in the interest rate paid on reserves.
Important shifters of aggregate demand ? (2)
- Fear - Confidence
Stocks
- Just as businesses fund their activities by taking out bank loans and selling bonds, they also issue shares of stock. - Stocks are shares of ownership in a corporation. - - Owners have a claim to the firm's profits, but remember that profit is revenue minus costs. - In other words, profit is what is left over after everyone else—creditors, bond holders, suppliers, and employees—have been paid. - If profits are high, shareholders benefit. They benefit directly if the firm pays out its profits in dividends or indirectly if the firm reinvests its profits in a way that increases the value of the stock. - But if profits are low or negative, shareholders suffer losses.
Four problems associated with inflation are:
- Price confusion and money illusion. - Inflation redistributes wealth. - Inflation interacts with other taxes. - Inflation is painful to stop.
The only thing that can cause us to have long run growth are shifts to _____?
- The only thing that can cause us to have long run growth are shifts to LRAS itself - let's say that there is a generic AD shock - if positive, you'll notice that inflation is higher and output is the same... in the long run - if there is a negative chock, you'll notice that inflation is lower and output is the same.. in the long run again the only thing that can cause us to have long run growth are shifts to LRAS itself ( the straight line)
Bond
- When a member of the public lends money to a corporation, the corporation acknowledges its debt by issuing a bond. - A bond is a corporate IOU. - The bond contract lists how much is owed to the bond's owner and when payment must be made. - In some cases, all the money is owed on a single day (the day of maturity); in other cases, periodic payments, called coupon payments, must be made in addition to a final payment.
M + V = Y + pi components of v: Changes to I: What kinds of things would affect I?
- corporate tax rate - investor sentiment
Taxes are what kind of shifters?
- if there is a long term regulation or long term tax that is imposed that could affect human or physical capital, then LRAS would shift - otherwise taxes are generally AD shifters
Suppose at equilibrium, the economy of wakanda had an equilibrium inflation rate of 4% and an equilibrium GDP growth rate at 6%. (d) suppose that half the money supply (perfectly balanced. As it should be.) was wiped out with the snap of Thanos' finger. what type of shock is this? answer E (e) in the long run, without any government intervention of any kind, how does the economy adjust? Is this adjustment fast or slow? Why? show this adjustment on an AD/SRAS/LRAS graph. What can you conclude about output and inflation?
- prices unstuck - SRAS moves down - pi decreases - Y increases
Jordan loaned Taylor $1,200 on March 15, 2009. Taylor returned $1,260 on March 14, 2010. Inflation was 2% over the 1-year period. What is the real interest rate that Taylor paid? A) 3% B) 2% C) 7% D) 5%
A) 3%
Which of the following is a problem with deflation? A) It raises the real cost of debt repayment. B) Stopping it will cause a recession. C) There is no problem with deflation; falling prices are good for the economy. D) It causes people to pay more taxes.
A) It raises the real cost of debt repayment.
A real price is: A) a price that has been corrected for inflation. B) a decrease in the average level of the price of a good. C) the average number of times a dollar is spent on final goods and services in a year. D) an increase in the average level of the price of a good.
A) a price that has been corrected for inflation.
The primary reason we think of inflation as bad even when wages rise with it is that it: A) distorts the information delivered by prices. B) leads to lower real wages. C) increases the velocity of money. D) makes things more expensive for consumers.
A) distorts the information delivered by prices.
Money illusion is: A) mistaking changes in nominal prices for changes in real prices. B) a decrease in the average level of prices. C) an increase in the average level of prices. D) the average number of times a dollar is spent on final goods and services in a year.
A) mistaking changes in nominal prices for changes in real prices.
When workers lose their jobs and become officially unemployed, the labor force participation rate: A)remains constant. B)changes unpredictably. C)increases. D)decreases.
A)remains constant.
18. You are given the following table detailing the economy of Pawnee Consumption: Investment: Government Spending: Exports: Imports: Fall Winter Consumption: $40 Million $45 Million Investment: $20 Million $10 Million Gov. Spending: $30 Million $30 Million Exports: $20 Million $ 5 Million Imports: $ 5 Million $40 Million Calculate the approximate GDP Growth rate between Winter and Fall for Pawnee A. -52% B. 52% C. 28% D. 110% E. -110%
A. -52%
10. Imagine an economy with production function Y =sqrtk and K = 400. If the fraction of output invested in new capital is s = 0.2 and the depreciation rate is = .05, what is the steady-state amount of capital? A. 16 units B. 64 units C. 100 units D. 225 units
A. 16 units
2. 1/4 Point Extra Credit: How many Infinity Stones are there in the Marvel Cinematic Universe? A. 6 B. 27 C. 14 D. 42
A. 6
12. Gains from trade are maximized at the: A. Equilibrium price and quantity. B. Midpoint on the demand curve. C. Point at which output is maximized. D. Vertical intercept on the supply curve.
A. Equilibrium price and quantity.
23. An investment tax credit will cause the interest rate to______and borrowing to _____ . A. Increases, Increases B. Increases, Decreases C. Decreases, Decreases D. Decreases, Increases
A. Increases, Increases
14. GDP per capita is GDP divided by: A. Population B. Price Level C. Capita D. Unemployment Rate
A. Population
11. A subsidy is : A. Reverse tax. B. Means of shifting the supply curve left. C. Form of tax increase. D. Movement along the supply curve.
A. Reverse tax.
7. In a free market setting where quantity supplied is 50 units and quantity demanded is 90 units, price will: A. Rise. B. Fall. C. Remain the same D. Move in an indeterminate direction.
A. Rise.
28. Which of the following chains of logic explain the functions of banks in the process of economic growth? A. Savers deposit their savings in banks. Banks direct these funds to firms that invest and engage in capital accumulation that furthers economic growth. B. Savers deposit their savings in banks. Banks engage in capital accumulation, which plays an important role in economic growth. C. Firms borrow from stock and bond markets issued through banks. These funds are used for investment, which leads to the capital accumulation that furthers economic growth. D. The demand for loanable funds is determined by banks and that demand fuels investment that in turn furthers economic growth.
A. Savers deposit their savings in banks. Banks direct these funds to firms that invest and engage in capital accumulation that furthers economic growth.
18. What is physical capital? A. Stock of tools, machines, structures, and equipment B. Knowledge of production C. What we know D. This class sucks and I hate you
A. Stock of tools, machines, structures, and equipment
The U.S. government limits the importation of Chinese-made bras. What effect does this trade restriction have on the market for bras? A. The equilibrium price will increase and the equilibrium quantity will decrease B. The demand for bras will increase, leading to a lower equilibrium price. C. The equilibrium price wil increase and the equilibrium quantity will increase D. The equilibrium price will decrease, leading to a higher equilibrium quantity
A. The equilibrium price will increase and the equilibrium quantity will decrease
17. The Law of Supply states that: A. The higher the price, the higher the quantity supplied B. The lower the price, the higher the quantity supplied C. The higher the quantity, the happier a producer is D. The lower the quantity, the less happy a producer becomes
A. The higher the price, the higher the quantity supplied.
24. Brazilian rosewood is renowned for its tonal qualities and gorgeous figuring on acoustic guitars. However, Brazilian rosewood is now banned from use in the construction of new guitars. What will likely happen to the price of used Brazilian rosewood guitars over time? A. The price for used Brazilian rosewood guitars will increase because there will be a smaller supply of those goods B. The price for used Brazillian rosewood guitars will decrease as fewer people decide to sell their rosewood guitars C. The price of used Brazillian rosewood guitars will increase at first and then decrease, since an increase in demand raises prices, causing people to buy less of the product D. The price for used Brazillian rosewood guitars will increase as more people try to cash in by selling their increasingly rare rosewood guitars
A. The price for used Brazilian rosewood guitars will increase because there will be a smaller supply of those goods
13. In the Solow model, an earthquake that destroys half of a nation's capital stock will cause: A. an increase in the country's growth rate in the years following the earthquake. B. a decrease in the country's growth rate in the years following the earthquake. C. a decrease in the country's steady-state capital stock. D. an increase in the country's steady-state output level.
A. an increase in the country's growth rate in the years following the earthquake.
30. Which of the following represents loaning money to a firm? A. Buying a bond B. Selling a bond C. Buying stock D. Selling a stock
A. buying a bond
6. Countries on a catching-up growth path are growing primarily through: A. capital accumulation. B. new technological knowledge. C. new ideas. D. foreign aid.
A. capital accumulation.
16. When a given bond's price increases, we know that the interest rate on this bond: A. must decrease. B. must increase. C. floats like a feather but stings like a bee. D. moves in some way, shape, or form.
A. must decrease.
In the AD-AS diagram, a "tight" monetary policy shifts the: a) AD curve to the right. b) LRAS curve to the right. c) AD curve to the left. d)LRAS curve to the left.
AD curve to the left.
M + V = Y + pi components of v: Changes to G: if the government cut back on its spending, what would happen to AD?
AD would decrease
Suppose at equilibrium, the economy of wakanda had an equilibrium inflation rate of 4% and an equilibrium GDP growth rate at 6%. (c) In the long run, without any government intervention of any kind, how does the economy adjust?
AD would increase back down pi would increase back down (inflation) Y would increase back down (output)
M + V = Y + pi components of v: Changes to I: Ex: let's say that the corporate tax rate decreased, then we can graphically show this shift of AD as?
AD would shift up to the right
M + V = Y + pi Suppose that the federal reserve decided to sell bonds - this decreases the money supply and increases interest rates: graphically what would this look like?
Ad1 would shift to AD2 down and to the left
M + V = Y + pi Suppose that the federal reserve decided to buy bonds - this increases the money supply and lowers interest rates graphically what would this look like?
Ad1 would shift to Ad1 Up and to the right
The time it takes for fiscal policy to work is called a(n): a) Effectiveness lag. b) Implementation lag. c) Legislative lag.
Answer: a - effectiveness lag.
Higher business taxes will shift the long run aggregate supply curve: a) To the left. b) To the right. c) Higher taxes will not shift the LRAS curve.
Answer: a - higher taxes will decrease LRAS, shifting the curve to the left.
An economy's potential growth rate is called: a) The Solow growth rate. b) Aggregate supply. c) Aggregate demand.
Answer: a - the potential growth rate is called the Solow growth rate.
Government borrowing causes a crowding out effect through: a) Decreased savings. b) Decreased consumption and investment. c) Decreased interest rates.
Answer: b - decreased consumption and decreased investment.
The government can increase AD by: a) Increasing taxes and government spending. b) Decreasing taxes and government spending. c) Decreasing taxes and increasing government spending.
Answer: c - decreasing taxes and increasing government spending.
M + V = Y + pi Any change to the money supply is a shock to ?
Any change to the money supply is an M shock
If the money supply is $375 million, the velocity of money is 5, and real GDP is $12.5 million, what is the average price level? A) 100 B) 150 C) 50 D) 12.5
B) 150
A country has 50 million people, 30 million of whom are adults. Of the adults, 5 million are not interested in working, another 5 million are interested in working but have given up looking for work, and 5 million are still looking for work. Of those who do have jobs, 5 million are working part time but would like to work full time, and the remaining 10 million are working full time. What is this country's unemployment rate? A) 40% B) 25% C) 16.7% D) 10%
B) 25%
Which of the following is an example of money illusion assuming that inflation is 5%? A) You receive a 10% raise at your part-time job and start spending extra money on entertainment every weekend. B) You receive a 5% raise at your part-time job and start spending extra money on entertainment every weekend. C) You do not receive a raise at your part-time job but cut out some expenses as you notice some prices rising. D) You receive a 5% raise at your part-time job but do not increase or decrease your spending.
B) You receive a 5% raise at your part-time job and start spending extra money on entertainment every weekend.
With respect to real output, in the long run, money is: A) velocity. B) neutral. C) temporary. D) expansionary.
B) neutral.
When the expected rate of inflation is higher than the actual rate of inflation, wealth is: A) redistributed from lenders to borrowers. B) redistributed from borrowers to lenders. C) not redistributed at all. D) redistributed at random.
B) redistributed from borrowers to lenders.
Frictional unemployment is best defined as: A) unemployment caused by cyclical conditions of an economy. B) short-term unemployment caused by difficulties of matching employees to employers. C) long-term unemployment caused by changing features of an economy. D) a normal level of unemployment caused by high wages.
B) short-term unemployment caused by difficulties of matching employees to employers.
During recessions the unemployment rate: A)remains relatively constant. B)increases. C)decreases. D)fluctuates randomly.
B)increases.
1. A decrease in demand refers to: A. A rightward shift of the demand curve. B. A leftward shift of the demand curve. C. An upward movement along the demand curve. D. A downward movement along the demand curve.
B. A leftward shift of the demand curve.
6. When there is a shortage in the market, competition will: A. Drive the price down to the equilibrium price. B. Drive the price up to the equilibrium price. C. Cause the demand curve to shift right. D. Cause the supply curve to increase.
B. Drive the price up to the equilibrium price.
9. When there is a shortage in the market, competition will: A. Drive the price down to the equilibrium price. B. Drive the price up to the equilibrium price. C. Cause the demand curve to shift right. D. Cause the supply curve to increase.
B. Drive the price up to the equilibrium price.
21. Which of the following is NOT an economic growth fact: A. Fact: GDP per capita varies amongst nations B. Fact: In the US, capital share takes more of national income than labor C. Fact: Amongst developing and developed countries, growth rates hover around 2-5% D. Fact: Everyone used to be really poor
B. Fact: In the US, capital share takes more of national income than labor
13. Gross domestic product is the market value of all: A.Goods and services sold within a country in a year. B.Final goods and services produced within a country in a year. C.Goods and services produced within a country in a year. D. Final goods and services produced by a country's permanent residents, wherever located, in a year.
B. Final goods and services produced within a country in a year.
34. During a financial crisis in the early 2000s, the government of Argentina partially froze bank accounts for a year. given the supply of saving and the demand to borrow functions, we would expect this action to cause the interest rate to: A. Increase and borrowing to increase B. Increase and borrowing to decrease C. Decrease and borrowing to decrease D. Decrease and borrowing to increase
B. Increase and borrowing to decrease
4. Suppose you spent $10,000 in 2010 remodeling your house, which you originally built for $200,000 in 2000. As a result, GDP in 2010 would: A. Not change. B. Increase by $10,000 C. Increase by $200,000 D. Increase by $210,000
B. Increase by $10,000
19. A recession is when: A. The economy experiences positive growth for at least 2 consecutive fiscal quarters B. The economy experiences negative growth for at least 2 consecutive fiscal quarters C. The economy is happy D. The economy is sad
B. The economy experiences negative growth for at least 2 consecutive fiscal quarters
16. The Law of Demand states that: A. The higher the price, the higher the quantity demanded B. The lower the price, the higher the quantity demanded C. The higher the quantity, the happier a consumer is D. The lower the quantity, the less happy a consumer becomes
B. The lower the price, the higher the quantity demanded
14. Which scenario has the greatest potential for free riding? A. an unstable political system B. a system in which work effort and pay are not connected C. a dishonest government that promotes corruption D. secure property rights
B. a system in which work effort and pay are not connected
10. What will happen to the supply of workers 18 to 21 years after a baby boom? A. It will decrease, since workers will cost more to hire. B. it will increase, because of the influx of new adults into the labor market. C. It will increase because workers will be needed to care for retirees. D. It will decrease because producer surplus will be lower.
B. it will increase, because of the influx of new adults into the labor market.
5. Economists speculate that China's rapid growth will eventually slow as: A. its excess labor supply becomes exhausted. B. its capital stock rises. C. other countries catch up to China. D. economies of scale diminish.
B. its capital stock rises.
33. An increase in government borrowing will cause the interest rate to: A. rise and private spending to rise B. rise and private spending to fall C. fall and private spending to fall D. fall and private spending to rise
B. rise and private spending to fall
35. An increase in government borrowing will cause the interest rate to: A. rise and private spending to rise. B. rise and private spending to fall. C. fall and private spending to fall. D. fall and private spending to rise.
B. rise and private spending to fall.
2. Diminishing returns to capital implies that ________ diminishes as more capital is added. A. savings B. the marginal product of capital C. the cost of producing goods and services D. technological knowledge
B. the marginal product of capital
M + V = Y + pi components of v: Changes to C: What is C?
C is private consumption- meaning you and everyone else. - Think about policies that could cause you to spend more (or less) money.
In a small economy, the money supply is $400,000, and the velocity of money is 3. The current average price level in the economy is 1. What is the level of real GDP in this economy? A) $400,000 B) $133,333 C) $1.2 million D) $1.6 million
C) $1.2 million
Suppose the nominal GDP of a country is $500 billion. If the velocity of money in the country is 10, then the country's money supply will equal: A) $510 billion. B) $5,000 billion. C) $50 billion. D) $490 billion.
C) $50 billion.
A country has 50 million people, 30 million of whom are adults. Of the adults, 5 million are not interested in working, another 5 million are interested in working but have given up looking for work, and 5 million are still looking for work. Of those who do have jobs, 5 million are working part time but would like to work full time, and the remaining 10 million are working full time. How many people in this country are in the labor force? A) 25 million B) 15 million C) 20 million D) 30 million
C) 20 million
A country has 50 million people, 30 million of whom are adults. Of the adults, 5 million are not interested in working, another 5 million are interested in working but have given up looking for work, and 5 million are still looking for work. Of those who do have jobs, 5 million are working part time but would like to work full time, and the remaining 10 million are working full time. What is this country's labor force participation rate? A) 50% B) 75% C) 66.7% D) 83.3%
C) 66.7%
Inflation is: A) the average number of times a dollar is spent on final goods and services in a year. B) when people mistake changes in nominal prices for changes in real prices. C) an increase in the average level of prices. D) a decrease in the average level of prices.
C) an increase in the average level of prices.
8. Unemployment correlated with the business cycle is called: A) seasonal unemployment. B) frictional unemployment. C) cyclical unemployment. D) structural unemployment.
C) cyclical unemployment.
As the baby boomers retire, the United States labor force participation rate will: A) increase. B) remain the same. C) decrease. D) fluctuate unpredictably.
C) decrease.
An unemployed person is one who: A) works for a job that pays less than he or she expected. B) stays at home and is not looking for work. C) does not have a job but is actively looking for one. D) is not willing to work even though he or she is able to.
C) does not have a job but is actively looking for one.
Someone who recently moved to Florida because of its warmer climate will need to spend some time looking for a new job. This is an example of: A) cyclical unemployment. B) structural unemployment. C) frictional unemployment. D) underemployment.
C) frictional unemployment.
Debt monetization means that a government pays off its debt by: A) lowering inflation. B) raising tax revenues. C) increasing the money supply. D) borrowing from foreigners.
C) increasing the money supply.
Minimum wage laws and unions tend to: A) lower wages and raise unemployment. B) lower wages and lower unemployment. C) raise wages and raise unemployment. D) raise wages and lower unemployment.
C) raise wages and raise unemployment.
The persistent, long-term unemployment caused by long-lasting shocks or permanent features of an economy is called: A) seasonal unemployment. B) frictional unemployment. C) structural unemployment. D) cyclical unemployment.
C) structural unemployment.
The quantity theory of money predicts that the main cause of inflation is increases in: A) real output. B) consumption. C) the money supply. D) prices.
C) the money supply.
The average number of times a dollar is spent on final goods and services during a year is the: A) consumption rate. B) quantity theory of money. C) velocity of money. D) money supply.
C) velocity of money.
What are the components of V?
C, I, G, N X c = private consumption I = investment - corporate tax rate G= government spending NX = exports - imports
components of aggregate demand?
C, I, G, NX
22. When business firms become more pessimistic about the state of the economy, the interest rate and the quantity of borrowing and lending . A. Increases, Increases B. Increases, Decreases C. Decreases, Decreases D. Decreases, Increases
C. Decreases, Decreases
29. Which of the following is not a problem with GDP? A. GDP does not include black market calculations B. GDP does not measure income distribution C. GDP does not measure intermediate goods D. I Don't Know
C. GDP does not measure intermediate goods
1/4 Point Extra Credit: What is the tallest mountain on the African Continent? A. Mount Gugu B. Drakensberg C. Kilamanjaro D. Mount Kenya
C. Kilamanjaro
17. Which of the following sets of determinants are identified as the primary determinants of economic growth: A. Luck, Money, Religion, and good food B. Geography, the black market, institutions, and a lot of physical capital C. Luck, geography, culture, and institutions D. Institutions, geography, culture, and religion
C. Luck, geography, culture, and institutions
15. Which of the the following is not included in US GDP calculations? A. The South Korean government buys a new THAAD missile defense system produced in the United States. B. Honda America sells 10,000 vehicles as a fleet delivery to England C. Prostitution D. Healthcare spending
C. Prostitution
20. The September 11 terrorist attacks turned many people away from flying. The supply and demand model would predict which of the following events in the airline travel market? A. The supply of airline travel would decrease, resulting in a higher equilibrium price and lower equilibrium quantity. B. The supply of airline travel would increase, resulting in a lower equilibrium price and higher equilibrium quantity. C. The demand for airline travel would decrease, resulting in a lower equi- librium price and lower equilibrium quantity. D. The supply and demand for airline travel would decrease, resulting in a higher equi- librium price and higher equilibrium quantity.
C. The demand for airline travel would decrease, resulting in a lower equi- librium price and lower equilibrium quantity.
8. 1/4 Point Extra Credit: What song do Jackie Chan and Chris Tucker sing at some point in every Rush Hour movie? A. Don't Stop Til' You Get Enough by Michael Jackson (Keep on, with the force don't stop. Don't stop till you get enough) B. I'll be Missing You by P. Diddy (Every move you make) C. War by Edwin Starr (What is it good for, absolutely nothing) D. Fantasy by Mariah Carey (Oh, when you walk by every night. Talkin' sweet and lookin' fine. I get kinda hectic inside)
C. War by Edwin Starr (What is it good for, absolutely nothing)
4. An increase in the savings/investment rate (I = sf(k)) results in: A. a lower steady-state capital stock and a lower steady-state output. B. a lower steady-state capital stock but a higher steady-state output. C. a higher steady-state capital stock and a higher steady-state output. D. a higher steady-state capital stock but a lower steady-state output.
C. a higher steady-state capital stock and a higher steady-state output.
8. Among countries with similar Solow steady states, poorer countries tend to grow ________ rich countries. A. more slowly than B. at the same rate as C. faster than D. sometimes faster and sometimes more slowly than
C. faster than
12. A country that has enforceable property rights, a noncorrupt political system, abundant factors of production, and a change in leadership and form of government every few years should suspect that economic growth will be _____ because _____ A. slow; of a lack of a dependable legal system B. slow; of uncertainty due to an unstable political system C. high; most of the institutions needed for growth are in place D. high; once a group comes to power all the institutions needed for growth exist
C. high; most of the institutions needed for growth are in place
3. The 2003 Iraq War destroyed large amounts of capital. Later, insurgent activity continued to destroy capital and created instability in the government. Today, hostilities have waned and the government has become more stable. According to the Solow growth model, over the next few years we would expect to see growth rates in Iraq __________ those of high-income countries with similar institutions, followed by growth rates that are _______ the growth rates in those countries. A. higher than; much higher than B. lower than; similar to C. higher than; similar to D. similar to; lower than
C. higher than; similar to
9. Good institutions tend to: A. decrease the rate of investment. B. leave the rate of investment unchanged. C. increase the rate of investment. D. have an ambiguous effect on investment.
C. increase the rate of investment.
15. A rural village in a developing country has an economy based on agriculture. Then the government of the country provides the village with newly developed hybrid seeds that more than double the agricultural yield per acre. This story illustrates the growth of per capita GDP in the village through which factor(s) of production? A. physical capital B. human capital C. technological knowledge D. both human capital and technological knowledge
C. technological knowledge
29. Which of the following best explains the crowding-out effect? A. the decrease in the supply of loanable funds that results from an increase in budget deficits B. an increase in consumption amongst households that crowds out savings C. the decrease in investment from higher interest rates that results from increased government borrowing to finance larger budget deficits D. the decrease in investment opportunities for small businesses resulting from increased borrow- ing by larger corporations
C. the decrease in investment from higher interest rates that results from increased government borrowing to finance larger budget deficits
11. In the Solow model with constant technological knowledge (A), if investment equals depreciation: A. economic growth will occur. B. economic decline will occur. C. the economy will remain at its current output level. D. depreciation will cause the capital stock to decline.
C. the economy will remain at its current output level.
What are the four major limits to fiscal policy. Three of these limits have to do with the difficulty of using fiscal policy to shift aggregate demand (AD).
Crowding out: If government spending crowds out or leads to less private spending, then the increase in AD is reduced or neutralized on net. A drop in the bucket: The economy is so large that government can rarely increase spending enough to have a large impact. A matter of timing: It can be difficult to time fiscal policy so that the AD curve shifts at just the right moments. Real shocks: Shifting AD doesn't help much to combat real shocks.
If the average price level rises from 120 in year 1 to 130 in year 2, the inflation rate between years 1 and 2 will be: A) 9.23%. B) 7.69%. C) 10%. D) 8.33%.
D) 8.33%.
Which of the following is NOT true of structural unemployment? A) It results from industry restructuring. B) It is long-term in duration. C) It is persistent over time. D) It results from scarcity of information.
D) It results from scarcity of information.
Which of the following would the BLS define as a discouraged worker? A) Susan, who has been unemployed for the past three years and is looking for a part-time job B) Quinton, who has a doctorate in chemistry, but works full time as a taxi driver C) Robert, a retired teacher, who works full time as a greeter at a discount store D) Mary, who was laid off last year and who was looking for a full-time job until last month
D) Mary, who was laid off last year and who was looking for a full-time job until last month
Which of the following statements highlights the difference between the CPI (consumer price index) and the GDP deflator? A) The CPI measures the average prices of inputs in the production process, whereas the GDP deflator measures the average prices of goods and services purchased by consumers. B) The CPI measures the average prices of all final goods and services purchased by consumers, whereas the GDP deflator measures the average prices of all inputs used in the economy. C) The CPI measures the average prices of retail goods and services, whereas the GDP deflator measures the average prices of wholesale goods. D) The CPI measures the average prices of goods and services consumed by typical consumers, whereas the GDP deflator measures the average prices of all goods and services in the economy.
D) The CPI measures the average prices of goods and services consumed by typical consumers, whereas the GDP deflator measures the average prices of all goods and services in the economy.
If you earned $10-an-hour in 2005 when the CPI was 100, and you earn $11-an-hour today when the CPI is 120, then your real wage rate has _____ since 2005. A) increased 10% B) increased 20% C) remained the same D) decreased
D) decreased
When the price of a good in Russia increases from 20 rubles to 20 million rubles in a single year, the nation is experiencing: A) high disinflation. B) deflation. C) falling GDP per capita. D) hyperinflation.
D) hyperinflation.
According to the quantity theory of money, an increase in the money supply causes an increase in _____ over the long run. A) the velocity of money B) real GDP C) production D) prices
D) prices
. Which of the following is considered unemployed? A) Jason, a full-time college student, is looking for a part-time job. B)Joe, a retired college professor, does community volunteer work. C)Julie, a full-time housewife, is searching for a part-time position. D)John, on temporary layoff from his work, awaits recall
D)John, on temporary layoff from his work, awaits recall
2. Which of the following is NOT part of natural unemployment? A)frictional unemployment B)frictional and structural C)structural unemployment D)cyclical unemployment
D)cyclical unemployment
2. If in 2010, nominal GDP was $220 Million and real GDP was $200 Million, the GDP deflator in 2010 was: A. 88 B. 91 C. 100 D. 110
D. 110 **** ask professor how to calculate
27. Consumption smoothing is: A. Never borrowing B. Borrowing every year to consume more than one earns C. Borrowing to consume during one's high-income years and then consuming less during low- income years D. Borrowing to consume during low-income years and consuming less during the high-income years
D. Borrowing to consume during low-income years and consuming less during the high-income years
1. Which statement is NOT an explanation for why Germany and Japan both grew faster than the United States following World War II? A. Both countries had very little capital stock remaining after the war. B. Both countries had a high marginal product of capital after the war. C. Both countries had strong incentive to put new capital stock into place. D. Both countries were experiencing cutting-edge growth at the time.
D. Both countries were experiencing cutting-edge growth at the time.
20. Which of these is NOT an institution of economic growth: A. Clear property rights B. A dependable legal system C. Political stability D. Communal economic systems
D. Communal economic systems
8. When GDP is calculated, goods are valued using: A. Magic B. Consumer Price Index C. Producer Price Index D. Current Market Price
D. Current Market Price
5. Economists assume that people respond to: A. Other people. B. Social interest. C. Benevolence. D. Incentives.
D. Incentives.
30. If the GDP deflator is given as 89, which of the following is the correct interpretation? A. Prices have increased by 89% B. Prices have increased by 11% C. Prices have decreased by 89% D. Prices have decreased by 11%
D. Prices have decreased by 11%
7. 1/4 Point Extra Credit: In 1999, Saving Private Ryan was commonly believed to be snubbed for Best Picture at The Oscars by which movie? A. The Big Lebowski B. Mulan C. Rush Hour D. Shakespeare in Love
D. Shakespeare in Love
19. What are institutions? A. The government B. A place where we send the mentally ill C. Any organization D. The rules of the game that structure economic incentives
D. The rules of the game that structure economic incentives
24. If the interest rate in the market for loanable funds is below the equilibrium rate, then: A. Individuals become more impatient B. Individuals become less impatient C. There will be a surplus of savings and there is downward pressure on interest rates D. There will be a shortage of savings and there is upward pressure on interest rates
D. There will be a shortage of savings and there is upward pressure on interest rates
7. Property rights encourage: A. saving. B. investment in physical capital. C. investment in human capital. D. saving and investment in both physical and human capital.
D. saving and investment in both physical and human capital.
Factor Income Approach:
Factor income approach to GDP: Y = Wages + Rent + Interest + Profit
True or False: If money supply increases, then inflation decreases. Select one: True False
False
Suppose at equilibrium, the economy of wakanda had an equilibrium inflation rate of 4% and an equilibrium GDP growth rate at 6%. (b) suppose that King T'challa after opening up Wakanda to the world, lowers the corporate tax rate from 100% for foreign countries to 25%. What kind of shock is this? What happened to the new equilibrium in the short run? What can you conclude about inflation and output?
IF corporate tax rate was lowered from 100 --> 25 % This would be a positive V shock: - AD would move up and to the right - new equilibrium in the short run: pi would increase Y would increase
M + V = Y + pi components of v: Changes to C: - Ex: If consumers are fearful of a worsening economy, consumers spend less and this causes consumption to (increase/decrease) How does AD line move?
If consumers are fearful of a worsening economy, consumers spend less and this causes consumption C to drop AD line moves down and to the left
M + V = Y + pi components of v: Changes to G: let's say that the government wants to build a giant space station. To pay for it, the government needs to increase it's spending to fund the project, thus this is a (positive/negative) V shock? And AD would shift?
If the government wants to build a giant space station. To pay for it the government needs to increase it's spending to fund the project, this is a positive V shock AD would shift up and to the right
Demand Shifters (6):
Income Population Price of substitutes Price of complements Expectations Tastes
Quantity theory M + V = P + Yr what does each letter stand for?
M = growth rate of money supply V = growth in velocity ( how quickly money is turning over) P = growth rate of prices Yr =
Money pyramid: M1: refers to
M1: - Currency - checkable deposits
Money pyramid M2 refers to?
M2: - M1 - savings deposits - money market mutual funds - small time deposits
Money Pyramid: MB: refers to ?
MB: - currency - reserves held by banks at the fed
Which is a limitation of monetary policy in stabilizing the economy? a) Monetary policy is subject to uncertain lags. b) Central banks have no discretion over policy tools. c) Most central bank policymakers are controlled by the government. d) Central banks have too much control over the money supply.
Monetary policy is subject to uncertain lags.
The two common ways of splitting GDP?
National spending approach to GDP: Y = C + I + G + NX Factor income approach to GDP: Y = Wages + Rent + Interest + Profit
Suppose at equilibrium, the economy of wakanda had an equilibrium inflation rate of 4% and an equilibrium GDP growth rate at 6%. (d) suppose that half the money supply (perfectly balanced. As it should be.) was wiped out with the snap of Thanos' finger. what type of shock is this?
Negative shock M shock AD would move down and to the left pi would decease y would decrease
If the economy is hit by a negative real shock that raises inflation and unemployment, which fiscal policy action should the government take in order to keep inflation and unemployment stable? a) increase government spending b) raise taxes c) No government action can achieve those goals. d) cut taxes
No government action can achieve those goals.
On the graph where is consumer surplus?
On a graph, total consumer surplus is the shaded area beneath the demand curve and above the price
Policies that can enhance future productivity would shift LRAS to the?
Policies that can enhance future productivity would shift LRAS to the right - because if new tech promises to bring us more productivity, then we have higher potential for GDP growth in the long run
What are real shocks? and examples?
Real shocks are unexpected changes to economic conditions that severely diminish the ability of human and physical capital ex: - war - oil price shocks - natural disasters - bad weather
Suppose at equilibrium, the economy of wakanda had an equilibrium inflation rate of 4% and an equilibrium GDP growth rate at 6%. (a) calculate spending growth rate
SRAS (E x pi ) = 4% AD (M +V ) = 10
Which describes one of the difficulties that make it hard for the Fed to effectively implement monetary policy? a) All monetary policies must be approved by Congress before being implemented. b) The Fed's control of the money supply is incomplete and subject to uncertain lags. c) The Fed has too much data to sort through quickly. d) The effects of monetary policy always offset those of fiscal policy.
The Fed's control of the money supply is incomplete and subject to uncertain lags.
In the short run, increases to M⃗ lead to a increase in inflation and an increase in output. In the long run, increases to M⃗ lead to a decrease in inflation and an increase in output. This is called the quantity theory of money and monetary neutrality in the long run. Select one: True False
The correct answer is 'False'.
If M⃗ = 10% and V⃗ = 2%, how much is spending growth in this economy? (Do not input the percent sign in your answer.)
The correct answer is: 12
If C = 10%, I = -23%, G = 40%, and NX = -12%, what is the cumulative shock to V⃗ ? Select one: a. 15% b. 85% c. 42% d. -65% e. -15%
The correct answer is: 15%
Suppose that Wakanda's economy was hit by a recession -- citizens in Wakanda began fearing that the banks would collapse, thus private consumption fell, people began to withdraw all the money from the banks, and banks lended out less money to businesses. This is shown as AD1 decreasing to AD2 . What would be the appropriate monetary policy response by the Wakandan Central Bank? Select one: a. Because King T'Challa "nevah freez[es]", the Wakandan Central Bank buys bonds, thereby creating a positive M⃗ M→shock, returning aggregate demand back to AD1 AD1 through a rightward shift of AD. b. King T'Challa directs the Council of Elders to begin building Vibranium projects, thus increasing government spending. This creates a positive G shock, and thus a positive V⃗ V→shock. This shifts AD from AD1 AD1 to AD2 AD2 c. The Wakandan Central Bank believes that since it's citizens are "being responsible" with their money, the central bank should too. Thus, they implement a bond selling strategy in an effort to offload the now worthless Wakandan bonds due to recession. This causes AD1 AD1 to increase to AD2 AD2 since foreign demand for bonds increases. d. Since Wakanda is Forever, they do nothing. Since AD will always bounce back over the long run, the best monetary policy is to do nothing.
The correct answer is: Because King T'Challa "nevah freez[es]", the Wakandan Central Bank buys bonds, thereby creating a positive M⃗ shock, returning aggregate demand back to AD1 through a rightward shift of AD.
Which of the following is not a v shock? Select one: a. C: Consumption b. NX: Net Export (Exports - Imports) c. G: Gas Prices d. G: Government Spending e. I: Investment
The correct answer is: G: Gas Prices
Suppose that the US Economy is doing a little too well. We are overutilizing our resources and this is shown by AD shifting past our long run potential GDP, Y1 increasing Y2 . What would be a fiscal policy solution to an overheated economy? a. The government can decrease spending, G , thus causing AD2 to decrease back to AD1 b. The government can sell treasury bonds through open market operations, thus causing AD2 to decrease back to AD1 c. The government can decrease both the personal and corporate income taxes, thus causing AD2 to decrease back to AD1 d. The government buy treasury bonds through open market operations, thus causing AD2 to decrease back to AD1
The correct answer is: The government can decrease spending, G , thus causing AD2 to decrease back to AD1
Select all of the reasons why fiscal policy has limitations. Select one or more: a. Crowding Out Effect b. Drop in the bucket Effect c. Timing Effect d. Real Shocks e. Only monetary policy can affect AD, not fiscal policy f. Fiscal policy doesn't work because it is proactive. g. Fiscal policy doesn't work in countries like the US due to a lack of a central bank. h. Fiscal policy doesn't work because the policies are never implemented correctly.
The correct answers are: Crowding Out Effect, Drop in the bucket Effect, Timing Effect, Real Shocks
two general categories of fiscal policy are used to fight a recession are:
The government spends more money The government cuts taxes, giving people more money to spend.
In what way are monetary and fiscal policies similar? a) They are both effective when the economy suffers from real shocks. b) They both target aggregate demand to overcome business fluctuations. c) Both involve a multiplier effect. d) Neither involves a lag.
They both target aggregate demand to overcome business fluctuations.
The dynamic form of the quantity theory of money can be written as: M⃗ +V⃗ =Y⃗ +π⃗ True or False?
True
Why is monetary policy not fully effective in combating a negative supply shock? a) When countering a negative supply shock, Fed action will cause deflation. b) When countering a negative supply shock, Fed action will raise unemployment. c) When countering a negative supply shock, Fed action will raise inflation. d) The Fed has no tools that stimulate an economy after a negative supply shock.
When countering a negative supply shock, Fed action will raise inflation.
So let's sum up when fiscal policy is most likely to matter: (3)
When the economy needs a short-run boost, even at the expense of the long run When the problem is a deficiency in aggregate demand rather than a real shock When many resources are unemployed
When the government buys securities, the interest rate increase or decrease. And this stimulates what?
When the government buys securities, the interest rate decreases and that stimulates consumption and investment borrowing
When the government sells securities, the interest rate increase or decreases ? And this has what kind of affect?
When the government sells securities, the interest rate increases, thereby reducing borrowing for either consumption or investment.
What is the recipe for reducing inflation rate?
a decrease in M
In a recession, automatic stabilizers cause: a) a decrease in tax revenues and an increase in government spending. b) an increase in both tax revenues and government spending. c) a decrease in both tax revenues and government spending. d) an increase in tax revenues and a decrease in government spending.
a decrease in tax revenues and an increase in government spending.
Disinflation is: a) an increase in prices. b) an increase in the rate of inflation. c) a reduction in the rate of inflation. d) a decrease in prices; that is, a negative inflation rate.
a reduction in the rate of inflation.
9. Suppose the Fed carries out an open market purchase and credits the account of a bank by $160,000. Further suppose that the reserve ratio (RR) is 10%. By how much is the money supply expected to change? a) $1.6 million b) $160,000 c) $1.76 million d) $16 million
a) $1.6 million
A slower growth in the money supply will: a) Decrease AD. b) Increase AD. c) Not affect AD.
a) Decrease AD.
A negative real shock poses difficulties for monetary policy because: a) Policymakers can reduce inflation or unemployment but not both. b) Increasing the money supply is politically unpopular. c) Increasing the money supply is illegal.
a) Policymakers can reduce inflation or unemployment but not both.
Deflation is: a) a decrease in prices; that is, a negative inflation rate. b) a reduction in the rate of inflation. c) an increase in prices. d) an increase in the rate of inflation.
a) a decrease in prices; that is, a negative inflation rate.
10. To increase the money supply in the economy, the Fed would: a) carry out open market purchases and/or lower the discount rate. b) increase the discount rate. c) carry out open market sales and/or raise the reserve ratio. d) carry out open market sales.
a) carry out open market purchases and/or lower the discount rate.
1. The Federal Reserve is the: a) federal government's bank, central bank, and banker's bank in the United States. b) federal government's bank. c) U.S. central bank. d) banker's bank in the United States.
a) federal government's bank, central bank, and banker's bank in the United States.
The natural rate of inflation is: Select one: a. Frictional + Structural b. Cyclical + Frictional c. Frictional Only d. Structural + Cyclical
a. Frictional + Structural
Debt monetization means that a government pays off its debt by: Select one: a. Increasing the money supply b. raising tax revenues c. lowering inflation d. borrowing from foreigners
a. Increasing the money supply
What is the correct formulation of the quantity theory of money? Select one: a. MV=pYr b. MPYr=V c. MYr=PV d. Yr=MVP
a. MV=pYr
Why did 36,000 travel agents lose their jobs between 1999 and 2006? a. More people started making their travel arrangements online b. There was a large decline in tourism in those years c. They became professional athletes d. They spent too much time taking vacations of their own and got fired
a. More people started making their travel arrangements online
What is frictional unemployment? Select one: a. Unemployment caused by the ordinary difficulties in matching employee to employer b. Unemployment caused by Tinder c. Unemployment caused by large, economy-wide shocks. d. Unemployment caused by business cycles
a. Unemployment caused by the ordinary difficulties in matching employee to employer
Aggregate demand is just a reformation of the what theory?
aggregate demand is just a reformulation of the quantity theory of money but in dynamic form M + V = Y + pi spending growth = Y + pi
If the Federal Reserve wishes to avoid short-run increases in the unemployment rate, the correct response to a negative AD shock would be: a) an increase in government spending growth. b) an increase in money supply growth. c) a lower goal for inflation. d) a tax cut.
an increase in money supply growth.
Fiscal policy lags: a) are generally longer than monetary policy lags. b) are generally the same length as monetary policy lags. c) may be shorter or longer than monetary policy lags. d) are generally shorter than monetary policy lags.
are generally longer than monetary policy lags.
A decrease in the rate of inflation is called: a) Deflation. b) Disinflation. c) Recession.
b) Disinflation.
Money is best defined as: a) the total amount of fixed assets we own. b) anything that is a widely accepted means of payment. c) only the amount we spend in a given period. d) anything that has a high nominal value.
b) anything that is a widely accepted means of payment.
What is the unemployment rate for a nation with 6 million employed and 2 million unemployed? Select one: a. 20% b. 25% c. 15% d. 10%
b. 25%
Discouraged workers are workers who have: Select one: a. not given up looking for work and still would like a job b. Given up looking for work but would still like a job c. not given up looking for work but are not available for work d. given up looking for work and are not available for work
b. Given up looking for work but would still like a job
Inflation refers to an increase in the: Select one: a. standard of living b. average level of prices c. average level of nominal output d. relative prices of some goods as compared to other goods
b. average level of prices
In the long run, money: Select one: a. will not affect prices b. is neutral with respect to quantity produced c. will lift the standard of living for everyone in a nation d. Always increases real GDP
b. is neutral with respect to quantity produced
If the Federal Reserve offsets a negative shock to aggregate demand with increased money growth: a) inflation will fall, but real GDP growth will remain unchanged. b) both inflation and real GDP growth will rise. c) both inflation and real GDP growth will fall. d) inflation will rise, but real GDP growth will remain unchanged.
both inflation and real GDP growth will rise.
In the FED buying and selling bonds, the Fed changes what? And this change has what affect ?
by buying and selling bonds, the FED changes bank reserves a change in reserves changes the money supply through a multiplier process of rippling loans and deposits
How can the federal reserve increase the aggregate demand ?
by increasing the money growth rate
M +V = ? + ? a) Real growth. b) Inflation + nominal growth. c) Inflation + real growth.
c) Inflation + real growth.
Which of the following is NOT fiscal policy: a) Taxation. b) Government spending. c) Managing the money supply.
c) Managing the money supply.
The costs associated with changing the prices of goods and services are called: a) Inflation costs. b) Inflationary expectations. c) Menu costs.
c) Menu costs.
Which of the following should the Fed have used to limit the recent housing bubble? a) Decrease the money supply. b) Lower interest rates. c) Regulate subprime mortgages.
c) Regulate subprime mortgages.
8. Which of the following limits the effectiveness of fiscal policy? a) free riding behavior b) the big bucket effect c) crowding out d) the multiplier effect
c) crowding out
4. The monetary base (MB) refers to: a) currency plus checkable deposits b) currency. c) currency plus total reserves held at the Fed. d) currency, savings deposits, money market mutual funds, and small time deposits.
c) currency plus total reserves held at the Fed.
As a result of the multiplier effect, a tax cut causes a: a) smaller shift of the aggregate demand curve to the left. b) smaller shift of the aggregate demand curve to the right. c) larger shift of the aggregate demand curve to the right. d) larger shift of the aggregate demand curve to the left.
c) larger shift of the aggregate demand curve to the right.
The money illusion is: Select one: a. an increase in the average level of prices b. decrease in the average level of prices c. Mistaking changes in nominal prices for changes in real price d. the average number of times a dollar is spent on final goods and services in a year
c. Mistaking changes in nominal prices for changes in real price
Which of the following is an example of a cause of structural unemployment: Select one: a. Economic growth b. Low Minimum Wage c. Strong Unions d. Recessions
c. Strong Unions
When the government of Zimbabwe ran out of money, President Robert Mugabe: Select one: a. slashed spending b. raised taxes c. printed more money d. fell asleep
c. printed more money
The reserve ratio is the ratio of bank reserves to: a) the monetary base. b) bank loans. c) currency demand. d) bank deposits.
d) bank deposits.
If the Fed wants to increase the money supply, it will _____ Treasury securities. a) hold b) issue c) sell d) buy
d) buy
When an increase in government spending leads to a decrease in private spending it is called: a) bad timing. b) a drop in the bucket. c) the implementation lag. d) crowding out.
d) crowding out.
A country has 50 million people, 30 million of whom are adults. Of the adults, 5 million are not interested in working, another 5 million are interested in working but have given up looking for work, and 5 million are still looking for work. Of those who do have jobs, 5 million are working part time but would like to work full time, and the remaining 1 million are working full time. How many discouraged workers does this country have? Select one: a. 20 million b. 10 million c. 15 million d. 5 million
d. 5 million
All else equal, according to the quantity theory of money, an increase in the money supply will cause: Select one: a. Deflation b. Long Run economic growth c. Economic collapse d. Inflation
d. Inflation
Which of the following is NOT a downside of inflation? Select one: a. It mixes up price signals b. It redistributes wealth c. It hurts to reduce inflation d. It harms both borrowers and lenders
d. It harms both borrowers and lenders
Which of the following individuals can be counted as unemployed? Select one: a. a woman who works only part time b. a temp worker, who is currently responding to job advertisements from the newspaper c. a husband who stays at home to raise his two children d. a man who was laid off from an auto manufacturing plant in Detroit Correct
d. a man who was laid off from an auto manufacturing plant in Detroit Correct
The labor force consists of: Select one: a. Employed workers only b. adults who do not have a job but who are looking for work c. All adult noninstitutionalized civilians d. employed workers and adults who do not have jobs but who are looking for work
d. employed workers and adults who do not have jobs but who are looking for work
Episodes of hyperinflation are caused by: Select one: a. severe recessions b. moderately high rates of real GDP growth c. extreme economic booms d. extremely high rates of money growth
d. extremely high rates of money growth
Frictional unemployment is best defined as: Select one: a. unemployment caused by cyclical conditions of an economy b. a normal level of unemployment caused by high wages c. Long term unemployment caused by changing features of an economy d. short term unemployment caused by difficulties of matching employees to employers
d. short term unemployment caused by difficulties of matching employees to employers
Paying a higher interest rate on reserves held at the Fed will tend to: a) have an ambiguous effect on the money supply. b) decrease the money supply. c) increase the money supply. d) not change the money supply.
decrease the money supply.
2. Which asset would you classify as being most liquid? a) small-time deposits b) demand deposits c) a home d) gold bullion
demand deposits
M + V = Y + pi components of v: Changes to G: What are examples that would affect G?
direct gov spending would directly affect G: - buying new tanks - social security spending - infrastructure spending
When countries have severe debt problems: a) they can continue to borrow forever without any adverse consequences. b) fiscal policy is an especially good idea. c) it makes no difference for fiscal policy. d) expansionary fiscal policy can reduce real growth.
expansionary fiscal policy can reduce real growth.
M + V = Y + pi components of v: Changes to NX: Occurrence of negative NX shocks would be whenever?
exports < imports
M + V = Y + pi components of v: Changes to NX: Occurrence of positive NX shocks would be whenever?
exports > imports
For day to day operations the Fed focuses on:
for day to day operations the Fed focuses its attention on the: - federal funds rate - the interest rate on overnight loans between major banks.
1. The primary tools of fiscal policy are: a) taxation and interest rates. b) government expenditure and taxation. c) money supply and money demand. d) government expenditure and money supply.
government expenditure and taxation.
A problem that makes fiscal policy less effective is that: a) government spending does not directly affect aggregate demand. b) higher taxes or increased borrowing to fund government spending can reduce aggregate demand. c) government spending is a relatively small portion of GDP. d) fiscal policy must be offset by monetary policy.
higher taxes or increased borrowing to fund government spending can reduce aggregate demand.
If the economy is too hot, the central bank does what kind of M shock?
if the economy is too hot, the central bank does a negative shock.
M + V = Y + pi components of v: Changes to NX: IF tomorrow, exports were 50 million dollars and imports were 10 million dollars, this would be a positive/negative shock which translate to a positive V shock. Thus shifting AD how ?
if tomorrow exports = 50 million dollars and imports are 10 million dollars this would be a positive NX shock, which translates to a positive V shock Thus AD shifts up and to the right
How can the central bank boost the economy in the short run?
in the short run the central bank can boost the economic output by simply printing our more money and giving a positive M
If the economy is in a recession, the most appropriate fiscal policy would be to: a) decrease both government spending and taxes. b) increase government spending and increase taxes in order to keep the budget balanced. c) increase government spending and cut taxes, thus running a higher budget deficit. d) decrease government spending in order to balance the budget.
increase government spending and cut taxes, thus running a higher budget deficit.
In the case of a negative shock to aggregate demand, the central bank should: a) decrease the rate of growth of the price level to keep real growth high. b) increase the rate of growth of the money supply to restore spending growth. c) decrease the rate of growth of the money supply to control inflation. d) do nothing.
increase the rate of growth of the money supply to restore spending growth.
In the short run, an increase in government spending growth will cause the real GDP growth to: a) decrease. b) increase. c) become unpredictable. d) remain unchanged.
increase.
9. If businesses react to a pessimistic outlook and decrease spending, the Fed can counteract this by: a) increasing government expenditures to spur the economy out of the recession. b) decreasing corporate taxes to encourage firms to increase their spending. c) decreasing money supply growth to spur the economy out of the recession. d) increasing money supply growth, lowering real interest rates, and encouraging borrowing.
increasing money supply growth, lowering real interest rates, and encouraging borrowing.
When the Fed increases the money supply to counteract a negative real shock: a) growth remains stuck at the level of the negative real shock. b) growth usually returns to the level it was before the shock. c) inflation increases a lot and growth increases a little. d) half of the increase is seen in growth and half in inflation.
inflation increases a lot and growth increases a little.
Ricardian equivalence: a) will occur more when consumers practice consumption smoothing. b) is less significant when consumers deem tax cuts or rebates as permanent. c) does not occur when a political administration is set to change. d) has not occurred in the United States.
is less significant when consumers deem tax cuts or rebates as permanent.
Which is regarded as a policy rule? a) making policy on the fly b) adjusting policy actions to deal with the nature of the economic shocks c) changing the money supply growth with discretion d) keeping the money supply growth rate consistent with a given inflation rate
keeping the money supply growth rate consistent with a given inflation rate
Increases in government spending financed through additional borrowing will typically: a) lead to higher interest rates. b) stimulate both consumption and investment. c) lead to higher taxes. d) provide more stimulus than when government spending is financed through higher taxes.
lead to higher interest rates.
Fiscal policy is: a) not effective in dealing with either real shocks or aggregate demand shocks. b) less effective in dealing with real shocks than with aggregate demand shocks. c) equally effective in dealing with real shocks as with aggregate demand shocks. d) more effective in dealing with real shocks than with aggregate demand shocks.
less effective in dealing with real shocks than with aggregate demand shocks.
If the Fed reduces M to fight inflation after a negative real shock, which of the following should occur? a) no change in real growth b) higher inflation c) lower real growth d) higher real growth
lower real growth
When is money neutral? short run or Long run?
money is neutral in long run
When banks take on too much risk with the hope that the Fed will eventually bail them out, a condition of _____ exists. a) liquidity risk b) a solvency crisis c) systemic risk d) moral hazard
moral hazard
The most appropriate monetary policy response to an asset price bubble for a central bank is to: a) react to asset price bubbles because they can easily be identified. b) not react to asset price bubbles because its actions will lead to a recession. c) not react to asset price bubbles because monetary policy can only affect aggregate demand, not demand in a specific market. d) react to asset price bubbles aggressively because they cannot be popped any other way.
not react to asset price bubbles because monetary policy can only affect aggregate demand, not demand in a specific market.
13. The Federal Funds rate is the: a) interest rate on short-term Treasury securities. b) overnight lending rate on loans from one major bank to another. c) ratio of reserves to deposits. d) interest rate banks pay when they borrow directly from the Fed.
overnight lending rate on loans from one major bank to another.
As a result of an increase in the growth rate of the money supply: a) real GDP growth increases in both the short run and the long run, and the inflation rate increases only in the short run. b) both the real growth and the inflation rate increase only in the short run. c) real GDP growth increases only in the long run, and the inflation rate increases only in the short run. d) real GDP growth increases only in the short run, and the inflation rate increases in both the short run and the long run.
real GDP growth increases only in the short run, and the inflation rate increases in both the short run and the long run.
In addition to monetary policy, the Fed also has the power to: a) regulate banks. b) oversee Treasury transactions. c) control the mortgage market. d) monitor the housing market.
regulate banks.
Where does short run equilibrium occur ?
short run equilibrium occurs where AD meets SRAS
How does the FED control the money supply?
the FED controls the money supply by buying and selling government bonds in what are called open market operations
If the Fed attempts to pop a bubble on a boom such as housing, what sector of the economy is it most sure of having the ability to influence? a) consumer spending in general b) residential and commercial real estate c) the GDP of the broader economy d) residential real estate
the GDP of the broader economy
An increase in government spending causes: a) a downward movement along the aggregate demand curve. b) the aggregate demand curve to shift to the left. c) the aggregate demand curve to shift to the right. d) an upward movement along the aggregate demand curve.
the aggregate demand curve to shift to the right.
Open market operations refer to: a) the buying and selling of government bonds by the Fed. b) decisions by the Fed to raise or lower interest rates. c) decisions by the Fed to increase or decrease the money multiplier. d) the buying and selling of stocks in the stock market.
the buying and selling of government bonds by the Fed.
What should/do central bank do in response to a negative AD shock?
the central bank simply needs to expand the money supply ( by buying bonds, lowering fed fund rate, lowering discount rate, etc). by the same amount as the fall in AD
The crowding out effects of fiscal policy are smaller if: a) the spending multiplier is also smaller. b) real GDP growth is above the economy's long-run potential rate. c) the economy is in a recession caused by low aggregate demand. d) nominal wages and prices are flexible.
the economy is in a recession caused by low aggregate demand.
Systemic risk is present when: a) the U.S. government defaults on Treasury securities. b) the Fed increases the money supply when it should decrease it. c) a bank or other financial institution acts recklessly, hoping that the Fed and regulators will later bail them out. d) the failure of one financial institution will bring down other institutions as well.
the failure of one financial institution will bring down other institutions as well.
When the Fed sells government bonds in the open market: a) both the monetary base and interest rates increase. b) the monetary base increases and interest rates decrease. c) both the monetary base and interest rates decrease. d) the monetary base decreases and interest rates increase.
the monetary base decreases and interest rates increase.
M + V = Y + pi components of v: Changes to C: - Ex: changes to the personal income tax and fear/optimism about the economy as a whole -Ex: if your income tax was higher that means you will spend less- this causes C to (increase/decrease) as a result, AD will (increase/decrease)
this causes C to decrease as a result, AD will decrease.
If the price of oil increased 2000000%, civilization would come to a grinding halt shifting LTAS how?
to the left
The Fed's power to influence aggregate demand is constrained by: a) the significant amount of U.S. dollars held in foreign reserves. b) contracting fiscal policy. c) uncertainty and an inability for everyone to fully understand the complexity of the economy. d) the President and Congress.
uncertainty and an inability for everyone to fully understand the complexity of the economy.
