Macro Exam #4 Dr. Nath

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Suppose the price level rises, but the number of dollars you are paid per hour stays the same. This means your

Real wage is lower

The aggregate quantity of goods and services demanded changes as the price level rises because

Real wealth falls, interest rates rise, and the dollar appreciates

On bank's T-Account

Reserves are assets and deposits are liabilities

Stagflation exists when prices

Rise and output falls

Other things the same, if the price level rises, then domestic interest rates

Rise, so domestic residents will want to hold fewer foreign bonds

Other things the same, when the price level rises, interest rates

Rise, so firms decrease investment

Based on the quantity equation, if M=150, V=4, and Y=200, then P=

3

If M=10,000, P=2, and Y= 20,000, then velocity=

4. Velocity will rise if money changes hands more frequently

If money is neutral and velocity is stable, an increase in the money supply creates a proportional increase in

Both the price level and nominal output

The interest rate that the Fed charges banks that borrow reserves from it is the

Discount Rate

The prices of a Honda Accord

Is a nominal variable and the price of a Honda Accord divided by the price of a Honda Civic is a real variable

Suppose a bank has a 10% reserve requirement, $4,000 in deposits, and has loaned out all it can, given the reserve requirement

It has $400 in reserves and $3,600 in loans

The banking system currently has $100 billion of reserves, none of which are excess. People hold only deposits and no currency, and the reserve requirement is 10%. If the Fed lowers the reserve requirement to 8% and at the same time buys $10 billion of bonds, then by how much does the supply change?

It rises by $375 billion

In a fractional-reserve banking system, a bank

Keeps only a fraction of its deposits in reserve

Other things the same, if the Fed raises the discount rate, then banks choose to borrow

Less from the Fed so reserves decrease

Other things the same, an increase in the price level makes consumers feel

Less wealthy, so the quantity of goods and services demanded falls

Which of the following lists two things that both increase the money supply?

Make open market purchases, lower the reserve requirement

The costs of changing price tags and price listings are known as

Menu costs

The effect of an increase in the price level on the aggregate-demand curve is represented by a

Movement to the left along a given aggregate-demand curve

Economic variables whose values are measured in monetary units are called

Nominal variables

According to the classical dichotomy, which of the following is affected by monetary factors?

Nominal wages

A decrease in the expected price level shifts

Only the short-run aggregate supply curve right

Which tool of monetary policy does the Federal Reserve use most often?

Open-Market Operations

Inflation can be measured by the

Percentage change in the consumer price index

Which of the following is not included in aggregate demand?

Purchases of stock and bonds

If the Fed wanted to increase the money supply, it would make open market

Purchases or lower the discount rate

The aggregate demand and aggregate supply graph has

Quantity of output on the horizontal axis. Output can be measured by real GDP

The model of short-run economic fluctuations focuses on the price level and

Real GDP

If the reserve ratio for all banks is 20%, then $100 of new reserves can generate

$500 of new money in the economy

You put money into an account that earns a 5 percent nominal interest rate. The inflation rate is 3 percent, and your marginal tax rate is 20 percent. What is your after-tax real rate of interest?

1.0 percent

Last year, Tealandia produced 50,000 bags of green tea, and tea was the only good Tealandia produced. Each bag sold at 4 units each of Tealandia's currency -- the Leaf. Tealandia's money supply was 40,000. What was the velocity of money in Tealandia?

5

If the nominal interest rate is 5 percent and there is a deflation rate of 2 percent, what is the real interest rate?

7 percent

If the reserve ratio is 12.5%, the money multiplier is

8

Which of the following shifts aggregate demand to the left?

A decrease in the money supply

Which of the following combinations of real interest rates and inflation implies a nominal interest rate of 7 percent?

A real interest rate of 6 percent and an inflation rate of 1 percent

The long-run aggregate supply curve shifts right if

A. Immigration from abroad increases B. The capital stock increases C. Technology advances D. All of the above are correct Answer: D

Suppose that banks desire to hold no excess reserves. If the reserve requirement is 5% and a bank receives a new deposit of $400, it

A. Must increase required reserves by $20 B. Will initially see reserves increase by $400 C. Will be able to use this deposit to make new loans amounting to $380 D. All of the above are correct. Answer. D

Which of the following is included in the aggregate demand for goods and services?

A. Net exports B. Consumption demand C. Investment demand D. All of the above are correct Answer: D

According to the classical dichotomy, when the money supply doubles, which of the following also doubles?

A. Nominal GDP B. The price level C. Nominal wages D. All of the above are correct Answer: D

The inflation tax

A. Transfers wealth from the government to households B. Is the increase in income taxes due to lack of indexation C. Is a tax on everyone who holds money D. All of the above are correct Answer: D

When deciding how much to save, people care most about

After-tax real interest rates

Interest rates adjusted for the effects of inflation

Are real variables; inflation is a nominal variable

In a system of 100% reserve banking,

Banks do not make loans

According to the quantity theory of money, a 2% increase in the money supply

Causes the price level to rise by 2 percent

If inflation is higher than what was expected,

Creditors receive a lower real interest rate than they had anticipated

When the Fed conducts open market purchases, reserves

Decrease and banks must decrease lending

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

Decreased consumption, shifting the aggregate-demand curve to the left

During recessions, banks typically choose to hold more excess reserves relative to their deposits. This action

Decreases the money multiplier and decreases the money supply

A sale of government bonds by the Fed

Decreases the money supply and increases the federal funds rate

When taxes increase, consumption

Decreases, so aggregate demand shifts left

Other things the same, if reserve requirements are decreased, the reserve ratio

Decreases, the money multiplier increases, and the money supply increases.

Other things the same, when the price level falls, interest rates

Fall, so firms increase investment

During recessions investment

Falls by a larger percentage than GDP

If V and M are constant, and Y doubles, the quantity equation implies that the price level

Falls to half its original level

Wealth is redistributed from borrowers to lenders when inflation was expected to be

High and it turns out to be low

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

Higher than desired prices which depresses their sales

Shoe leather costs arise when higher inflation rates induce people to

Hold less money

Printing money to finance government expenditures

Imposes a tax on everyone who holds money

Monetary neutrality implies that an increase in the quantity of money will

Increase the price level

Which of the following is not a tool of monetary policy?

Increasing the government budget deficit

Which of the following would cause prices to fall and output to rise in the short run?

Short-run aggregate supply shifts right

Most economists use the aggregate demand and aggregate supply model primarily to analyze

Short-run fluctuations in the economy

The velocity of money is

The average number of times per year a dollar is spent

Menu costs refers to

The cost of more frequent price changes induced by higher inflation

As the price level falls

The exchange rate falls, so net exports rise

The discovery of a large amount of previously-undiscovered oil in the U.S. would shift

The long-run aggregate-supply curve to the right

The Fisher effect says that

The nominal interest rate adjusts one for one with the inflation rate

Which of the sentences concerning the aggregate demand and aggregate supply model is correct

The price level and quantity of output adjust to bring aggregate demand and supply into balance

The sticky-wage theory of the short-run aggregate supply curve says that the quantity of output firms supply will increase if

The price level is higher than expected making production more profitable

The aggregate demand and aggregate supply graph has

The price level on the vertical axis. The price level can be measured by the GDP deflator

According to the assumptions of the quantity theory of money, if the money supply increase 5 percent, then

The price level would rise by 5 percent and real GDP would be unchanged

Aggregate demand includes

The quantity of goods and services households, firms, the government, and customer abroad want to buy

Real and nominal variables are highly intertwined, and changes in the money supply change real GDP. Most economists would agree that this statement accurately describes

The short run, but not the long run

When production costs rise,

The short-run aggregate supply curve shifts to the left

Which of the following will both make people spend more?

Wealth rises and interest rates fall

Which of the following is correct?

When real GDP falls, the rate of unemployment rises

Policymakers who control monetary and fiscal policy and want to offset the effects on output of an economic contraction caused by a shift in aggregate supply could use policy to shift

aggregate demand to the right

The source of hyperinflations is primarily

increases in money-supply growth

Recession come at

irregular intervals. During recessions consumption spending falls relatively more than investment spending


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