Macro Exam 3

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. anything that has a high nominal value. d. only the amount we spend in a given period.

b. anything that is a widely accepted means of payment.

The Federal Reserve can influence the economy by shifting: a. the Solow growth curve. b. the AD curve. c. the SRAS curve. d. All of the answers are correct.

b. the AD curve.

A positive real shock causes a shift of the: a. aggregate demand curve to the right. b. aggregate demand curve to the left. c. Solow growth curve to the left. d. Solow growth curve to the right.

d. Solow growth curve to the right.

Assume that the economy is initially at point Y. In the best case scenario, the Fed will: increase money supply to take the economy to point X. decrease money supply to take the economy to point W. increase money supply to take the economy to point W. decrease money supply to take the economy to point X.

increase money supply to take the economy to point X.

What part of the money pyramid does the Fed have direct control over? the monetary base M1 the monetary base plus M1 M2

the monetary base

The Solow growth curve is represented by a vertical line at the Solow growth rate because: I. it does not depend on the rate of inflation. II. there is an underlying assumption of strong money neutrality. III. it does not depend on the stock of factors of production.

. I and II only

Which of the following would be an example of running monetary policy by rules? A 5% increase in money supply automatically leads to a 2% increase in real GDP. An increase in money supply automatically leads to an increase in inflation. The Fed will increase money growth to different levels, depending on the severity of the recession. A 1% drop in real GDP will automatically elicit a 2% increase in money supply.

A 1% drop in real GDP will automatically elicit a 2% increase in money supply.

Imagine that a government starts out with the budget surplus. If in the next period the government temporarily runs a budget deficit, what would you expect to happen to aggregate demand? AD would increase. AD would lie on the Solow growth rate. AD would stay the same. AD would decrease.

AD would increase.

Expansionary fiscal policy today might mean: increased taxes in the future. contractionary fiscal policy in the future. increased public borrowing in the future. All of the answers are correct.

All of the answers are correct.

Insolvent banks: have liabilities that are greater than their assets. have loan values that are too low compared to what they owe their depositors. have on some occasions been recapitalized by the Treasury. All of the answers are correct.

All of the answers are correct.

How can the Fed offset a positive shock to aggregate demand? Increase the growth rate of the money supply. Decrease the growth rate of the money supply. Increase the growth rate of government spending. Decrease the growth rate of government spending.

Decrease the growth rate of the money supply

When the U.S. Treasury borrows, the borrowing is managed by the: Treasury itself. Senate Banking Committee. Comptroller of the Currency. Federal Reserve.

Federal Reserve.

Examples of automatic stabilizers include: I. food stamps. II. unemployment benefits. III. implementation lags.

I and II only

Which of the following causes a shift of the dynamic AD curve to the left? I. increased taxes II. increased consumer confidence III. increased import growth

I and III only

How do conservative politicians who want smaller government impact the economy's expenditures? It is an increase in taxes. It is a decrease in consumer expenditures. It is a decrease in government expenditures. It is an increase in government expenditures.

It is a decrease in government expenditures.

Suppose that the original real growth rate of the economy is 3% and that a negative aggregate demand shock causes a shift of the AD curve from AD 1to AD 2. As a result of the Fed's policy response, the AD curve in the short run shifts to AD 5. Which of the following is TRUE about the Fed's policy response? The Fed responded too little to the shock. The Fed responded too much to the shock. The Fed provided just the right amount of response to the shock. The Fed was too fast in responding to the shock.

The Fed responded too much to the shock.

Using the dynamic AD-AS model, if a country decreases government expenditures there would be a decrease in real GDP growth rates and an increase in inflation. a decrease in real GDP growth rates and a decrease in inflation. an increase in real GDP growth rates and an increase in inflation. an increase in real GDP growth rates and a decrease in inflation.

a decrease in real GDP growth rates and a decrease in inflation.

In a recession, automatic stabilizers cause: an increase in tax revenues and a decrease in government spending. a decrease in tax revenues and an increase in government spending. an increase in both tax revenues and government spending. a decrease in both tax revenues and government spending.

a decrease in tax revenues and an increase in government spending.

Using the dynamic AD-AS model, if a country decreases government expenditures there would be an increase in the aggregate demand. a decrease in the aggregate demand. an increase in the Solow Growth curve. a decrease in the Solow Growth curve.

a decrease in the aggregate demand.

If the Fed sets a target rate of inflation below 4%, it is an example of the Fed using: a monetary policy rule. discretion. unofficial influence. the bully pulpit.

a monetary policy rule.

If spending growth is 3%, and real GDP growth is 2%, what is the inflation rate? a. 1% b. 2% c. 5% d. 3%

a. 1%

Why does so much U.S. currency circulate in other countries? a. All of the answers are correct. b. Several countries use the U.S. dollar as their official currency. c. The U.S. dollar is frequently used in drug trafficking. d. Dollars hold their value in unstable countries.

a. All of the answers are correct.

To increase the money supply in the economy, the Fed would: a. carry out open market purchases and/or lower the discount rate. b. carry out open market sales and/or lower the discount rate. c. carry out open market purchases and/or raise the reserve ratio. d. increase the discount rate, and/or lower the reserve ratio.

a. carry out open market purchases and/or lower the discount rate

When a negative shock to aggregate demand occurs, the inflation rate will: a. decrease. b. remain the same. c. increase. d. be automatically adjusted by the Fed.

a. decrease.

Which of the following choices can explain the shift of the Solow growth curve from Ato B in the figure above? a. development of new technology b. war c. negative supply shock d. oil crisis

a. development of new technology

What is taking place when an economy experiences quick changes that have large effects on productivity? a. economic shocks b. decreases in aggregate demand c. geographic capital fluctuations d. time bunching

a. economic shocks

Rapid changes in economic conditions that have large effects on the productivity of capital and labor are called: a. shocks. b. business cycles. c. transmission mechanisms. d. recessions.

a. shocks.

When the Fed buys U.S. government bonds to affect the money supply, it is conducting: discount rate lending. discount rate borrowing. an open market sale. an open market purchase.

an open market purchase.

Bank A has $100 million in deposits, $15 million in required reserves, and $85 million in loans. Bank A's reserve ratio is: a. 10%. b. 15%. c. 75%. d. 20%.

b. 15%.

Point A on this dynamic aggregate demand curve represents a real GDP growth rate of: a. 3%. b. 5%. c. 2%. d. 7%.

b. 5%.

From point X in the accompanying dynamic aggregate demand model, a negative supply shock will change the inflation rate to: a. 3%. b. 7%. c. 10%. d. 5%.

b. 7%.

The Federal Reserve is the: a. federal government's bank. b. All of the answers are correct. c. U.S. central bank. d. banker's bank in the U.S.

b. All of the answers are correct.

A negative real shock causes: a. a higher inflation rate and a higher real growth rate. b. a higher inflation rate and a lower real growth rate. c. a lower inflation rate and a higher real growth rate. d. a lower inflation rate and a lower real growth rate.

b. a higher inflation rate and a lower real growth rate

Suppose the growth rate of the money supply is fixed, then an increase in the growth rate of exports will cause: a. a downward movement along the dynamic AD curve. b. a shift of the dynamic AD curve to the right. c. a shift of the dynamic AD curve to the left. d.an upward movement along the dynamic AD curve.

b. a shift of the dynamic AD curve to the right.

In the New Keynesian model, changes in the growth rate of C, I, G, and NX tend to be changes in: a. All of the answers are correct. b. money velocity. c. money supply. d. price levels.

b. money velocity.

Using the AD-Solow growth curve model, the internet revolution of the 1990s caused: a. real growth to decrease and inflation to increase. b. real growth to increase and inflation to decrease. c. both real growth and inflation to increase. d. both real growth and inflation to decrease.

b. real growth to increase and inflation to decrease.

Who is Jerome Powell? a. the Vice President of the United States b. the Chair of the Federal Reserve c.the Secretary of the U.S. Treasury d.the Chair of the President's Council of Economic Advisors

b. the Chair of the Federal Reserve

The Fed has the most control over: a. M1. b. the monetary base. c. M2. d. money market mutual funds.

b. the monetary base.

The lags associated with monetary policy make its implementation of monetary policy more difficult during: recessions only. contractions only. both expansions and contractions. None of the answers are correct.

both expansions and contractions.

An increase in money growth will cause inflation to increase in: the short run only. the long run only. both the short run and the long run. neither the short run nor the long run.

both the short run and the long run.

Refer to the figure above; what is the long-run growth rate in this economy after a positive money shock? a. 4% b. 6% c. 2% d. 3%

c. 2%

Which of the following can shift the Solow growth curve? a. strikes b. wars c. All of the answers are correct. d. increases in technology

c. All of the answers are correct.

From point X in the accompanying dynamic aggregate demand model, an increase in the supply of oil will cause the economy to move to point: a. Y. b. Z. c. W. d. X.

c. W.

A decrease in oil prices is an example of: a. a negative productivity shock. b. a deflationary productivity shock. c. a positive productivity shock. d. a neutral productivity shock.

c. a positive productivity shock.

If wages are not as flexible as prices, an increase in money growth will lead to: a. no change in inflation, but a fall in firms' profits. b. an increase in inflation and a rise in real long-run GDP growth. c. an increase in inflation and in firms' profits. d. an increase in inflation but no rise in real short-run GDP growth.

c. an increase in inflation and in firms' profits.

Holding reserves is costly for banks because: a. the Fed charges banks interest on required reserves. b. it leads to the risk of bank robberies. c. it leads to fewer profits. d. it forces banks to pay for ATM machines.

c. it leads to fewer profits.

Wages that do not respond quickly to changes in the inflation rate are: a. flexible wages. b. real wages. c. sticky wages. d. decreasing wages.

c. sticky wages.

Which of these would help a government fight a recession? raising taxes cutting taxes cutting spending paying down the national debt

cutting taxes

Suppose you deposit $1,000 in your checking account. If the reserve ratio is 10%, how much of your deposit can the bank loan? a. $0. b. $100. c. $1,000. d. $900.

d. $900.

If the required reserve ratio is 4%, the money multiplier is: a. 16. b. 4. c. 20. d. 25.

d. 25.

Beginning at point A in the accompanying diagram, can you say what is the short-run growth rate in this economy after a positive money shock? a. 1.2% b. 6% c. 2% d. 3%

d. 3%

Wages are sticky when: a. they are not changed as often as prices. b. labor unions have set wages for a certain period of time. c. they are set according to inflation expectations that end up differing from actual inflation rates. d. All of the answers are correct.

d. All of the answers are correct.

Referring to these two SRAS curves, which of the following is TRUE of point A? a. The actual inflation rate is 5% and the expected inflation rate is 3%. b. The actual inflation rate and the expected inflation rate are both 3%. c. The actual inflation rate is 3% and the expected inflation rate is 5%. d. The actual inflation rate and the expected inflation rate are both 5%.

d. The actual inflation rate and the expected inflation rate are both 5%.

A hurricane that damages buildings and roadways in the Gulf Coast is considered a: a. negative transmission mechanism. b. positive transmission mechanism. c. positive shock to the economy. d. negative shock to the economy.

d. negative shock to the economy.

The Solow growth rate is the rate of economic growth that occurs when: a. prices and wages are sticky. b. inflation is moderate. c. the money supply is growing. d. prices and wages are flexible.

d. prices and wages are flexible.

A major hurricane hitting the East Coast of the United States is an example of a: a. GDP deflator. b. productivity neutralizing event. c. geographic distress. d. real shock.

d. real shock.

Which of the following are examples of negative shocks to the economy? a. tax cuts b. decreases in oil prices c. new technology d. terrorist attacks

d. terrorist attacks

In the dynamic AD- AS model, an increase in money growth will cause the growth rate of real GDP to increase in: a. both the short run and the long run. b. the long run only. c. neither the short run nor the long run. d. the short run only.

d. the short run only.

When a positive shock to aggregate demand occurs, the inflation rate will: increase. remain the same. decrease. be automatically adjusted by the Fed.

increase.

Suppose the economy is initially at point A. If an increase in investment spending causes a shift of the AD curve from AD 1 to AD 4, then the government can avoid a short run increase in inflation by: increasing taxes so that the AD curve shifts back to AD1. increasing taxes so that the AD curve shifts further out to AD5. increasing government spending so that the AD curve shifts back to AD1. increasing government spending so that the AD curve shirts further out to AD5.

increasing taxes so that the AD curve shifts back to AD1.

The implementation lag is likely to be: longer for changes in government spending than for changes in taxation. shorter for changes in government spending than for changes in taxation. indefinitely long for both changes in government spending and changes in taxation. similar in length for both changes in government spending and changes in taxation.

longer for changes in government spending than for changes in taxation.

Suppose that the original real growth rate of the economy is 3% and that a positive aggregate demand shock causes a shift of the AD curve from AD 1to AD 4. The correct monetary policy response is to: lower money supply growth, so that the AD curve shifts back to AD1. lower money supply growth, so that the AD curve remains at AD4. raise money supply growth, so that the AD curve shifts to AD3. raise money supply growth, so that the AD curve shifts to AD5.

lower money supply growth, so that the AD curve shifts back to AD1.

The relationship between bond prices and interest rates is: neither positive nor negative. positive. negative. sometimes positive and sometimes negative.

negative.

Which of the following is not a function of the Federal Reserve? serving as the lender of last resort regulating the U.S. financial system regulating the U.S. money supply providing loans to small businesses

providing loans to small businesses

A decrease in consumption growth will cause the Solow growth curve to shift inward. shift outward. remain unchanged. first shift outward and then shift inward.

remain unchanged.

When the Federal Reserve buys bonds, the demand curve for bonds: does not shift. shifts outward. shifts inward. sometimes shifts inward and sometimes shifts outward.

shifts outward.

Assume that the economy is initially at point Y. If the Fed takes the appropriate action with monetary policy, but banks are slow to lend: the Fed action would be magnified and the economy would move to point X. the Fed action would be nullified and the economy would remain at point Y. the Fed action would be partially effective and the economy would move to point Z. the Solow growth curve would shift to the left.

the Fed action would be partially effective and the economy would move to point Z

An open market operation occurs when: banks loan funds to each other. banks increase the reserve ratio. the Fed buys or sells government bonds. the Fed enforces regulations on the banking industry.

the Fed buys or sells government bonds.

The financial crisis of 2008 illustrates that: systemic risk is no longer a serious concern for the U.S. economy. the Fed does not concern itself with the actions of investment banks. the Fed has the power to control the President's responses to a financial and economic crisis and supervise fiscal policy. the Fed has the power to step outside its normal functions and lend to investment banks as well as traditional commercial banks if it perceives the risk of financial contagion.

the Fed has the power to step outside its normal functions and lend to investment banks as well as traditional commercial banks if it perceives the risk of financial contagion.

Assume that the economy is initially at point Y. If the Fed takes the appropriate action with monetary policy, but overestimates how serious the recession is: the Solow growth curve would shift to the left. the Fed would take the economy to point X. the Fed would fail to stimulate the economy and it would remain at point Y. the Fed would overshoot and the economy would move to point W.

the Fed would overshoot and the economy would move to point W.

Other things being equal, a decrease in government spending growth causes: the dynamic AD curve to shift to the right. the dynamic AD curve to shift to the left. the Solow growth curve to shift to the right. the Solow growth curve to shift to the left.

the dynamic AD curve to shift to the left.

Suppose the economy is growing at the Solow growth rate of 3% and the inflation rate is 4%. Suppose a positive aggregate demand shock occurs and the Fed responds to the shock by decreasing the money supply. If the Fed's response fails to offset the aggregate demand shock, then in the short run: the real growth rate will be 3% and the inflation rate will be 4%. the real growth rate will be lower than 3% and the inflation rate will be lower than 4%. the real growth rate will be higher than 3% and the inflation rate will be lower than 4%. the real growth rate will be higher than 3% and the inflation rate will be higher than 4%.

the real growth rate will be higher than 3% and the inflation rate will be higher than 4%.

An increase in money growth will cause output growth to increase in: the short run only. the long run only. both the short run and the long run. neither the short run nor the long run.

the short run only.

An increase in velocity growth will cause inflation to increase in: the short run only. the long run only. both the short run and the long run. neither the short run nor the long run.

the short run only.

An increase in velocity growth will cause output growth to increase in: the short run only. the long run only. both the short run and the long run. neither the short run nor the long run.

the short run only.

Fiscal policy can best be defined as: the use of government expenditure and taxation to mitigate recessions only. the use of government expenditure, government borrowing, and taxation to influence the business cycle. the manipulation of the money supply to influence the business cycle. the use of international political relations to influence the business cycle.

the use of government expenditure, government borrowing, and taxation to influence the business cycle.

When consumers cut back on spending what falls? the velocity of money the money supply interest rates tax rates

the velocity of money

When hit with a real negative economic shock, the Fed must make its policy choice between: too low of a growth rate and too high of an unemployment rate. too low of a growth rate and too high of an inflation rate. too high of a growth rate and too low wages. too high of a growth rate and too low of a savings rate.

too low of a growth rate and too high of an inflation rate.

To be considered money, an asset must be: backed by gold or other precious metals. widely accepted as a means of payment. currency. All of the answers are correct.

widely accepted as a means of payment.