MacroEcon Chapters 12-16

Suppose the reserve requirement is 15%. What is the total checkable deposits in the economy if bank reserves increased by $50 billion?

$333 billion increase.

Consider the figure to the right. This economy is in macroeconomic equilibrium at what level of real GDP? What is the level of planned inestment?

$80bil. $10bil.

Relating to Q45, Refer to the diagram to the right. Given the economy is at point A in year 1, what is the inflation rate between year 1 and year 2?

1.8% Inflation rate = CPI2-CPI1/CPI1

Multiplier effect

1/1-MPC

In the diagram above, LRAS1 and SRAS1 denote LRAS and SRAS in year 1, while LRAS2 and SAS2 denote LRAS and SRAS in year 2. Given the economy is at point A, Macroecon Equil, in year 1, what is the growth rate in potential GDP in year 2?

10%

The United States is divided into __ Federal Reserve Districts. The Federal Reserve Bank's Board of Governors consists of __ members appointed by the president of the US to 14-year, non-renewable terms. One of the board members is appointed to a __ year, renewable term as the chairman.

12 7 4

Relating to Q45, In the figure to the right, AD1, LRAS1 and SRAS1 denote AD, LRAS and SRAS in year 1, while AD2, LRAS2 and SRAS2 denote AD, LRAS and SRAS in year 2. Given the economy is at point A in year 1, what is the actual growth rate in GDP in year 2?

7.3% Actual Growth = Actual Real GDP- initial real GDP/Initial real GDP

In a fractional reserve banking system, what is the difference between a "bank run" and "bank panic"?

A bank run involves one bank; a bank panic involves many banks.

Which of the following events would cause a movement along the AD curve?

A decrease in the price level

On the LRAS curve

A decrease in the price level has no effect on the aggregate quantity of GDP supplied.

SR macroeconomic equilibrium occurs when

AD and SRAS intersect.

The graph to the right shows the AD curve for an economy. Show the effect of a monetary policy change that causes a decrease in interest rates. _____ would cause a similar shift in the AD curve

AD shift right.

Suppose that initially, the economy is in LR macroeconomic equilibrium at point A. If there is increased pessimism about the future of the economy, the AD curve will shift The new SR macroeconomic equilibrium occurs LR adjustment will shift the SRAS curve from _____ as workers adjust to lower-than-expected prices. The new LR macroeconomic equilibrium occurs at

AD0 - AD1, shifting left Point B, behind LRAS SRAS0 - SRAS1, shifting right Point C, lower on LRAS

The aggregate expenditure model can be written in terms of four spending categories. Which equation shows the relationship between aggregate expenditure and the four spending categories?

AE=C+E+G+NX

The Aggregate expenditure model can be written in terms of four spending categories. Which equation shows the relationship between aggregate expenditure and the four spending categories?

AE=C+I+G+NX

Which of the following is NOT a function of money?

Acceptability

When the Federal Open Market Committee FOMC decides to increase the money supply, it _____ US Treasury securities. If the FOMC wishes to decrease the money supply, it _____ US Treasury securities.

Buys; Sells

Planned aggregate expenditure = Unplanned Change in Inventories =

C+I+G+NX Real GDP - AE

Total change in real GDP = What is the effect on real GDP of a $150bil change in planne dinvestment if MPC is 0.50?

Change in planned investment X (1/1-MPC) $300bil.

Indicate which of the following would cause a shift in the AD curve from point A to point C.

Change in the US exchange rate relative to other currencies. Monetary Policy Increased Consumer Optimism Lower taxes

How does an increase in the price level affect the quantity of real GDP supplied in the long run?

Changes in the price level do not affect the level of GDP in the long run.

We can use the diagram to the right to compare movements in real consumption between 1979 and 2012. Note: The values are seasonally adjusted at an annual rate.

Consumption follows a smooth, upward trend.

When the price level rises from 104 to 124, real GDP falls from 5tril to 4 tril. What is a possible explanation for this event?

Falling exports Less investment Decreased consumption

Evaluate the following statement: Banks use deposits to make consumer loans to households and commercial loans to businesses. Banks will loan out every penny of their deposits in order to make a profit.

False. Banks must hold a fraction of their deposits as vault cash or with the Federal Reserve.

We can use the diagram to the right to compare movements in real government purchases between 1979 and 2006. Note: The values are seasonally adjusted at an annual rate.

Government purchases grew steadily for most of the period shown, w/ the exception of the mid-1990s.

AD iscomprised of expenditure components that include

Government spending Consumption Investment Net exports

In addition to the Federal Reserve Bank, what other economic actors influence the money supply?

Households, firms, and banks.

When people become less concerned with the underlying value of their houses and instead focused on the expectations of the prices of their houses increasing, _____ occurred.

Housing Bubble

Which of the following events would cause an increase in LRAS?

Increase in Labor force.

In the figure to the right, which of the following events is most likely to cause a shift in teh money demand curve from MD1 to MD2. Shifted right.

Increase in real GDP or increase in the price level.

Deflation will

Increase the quantity of real GDP demanded.

In the figure to the right, when the money supply increased from MS1 to MS2, the equilibrium interest rate fell from 4% to 3%. Why?

Initially, firms hold more money than they want relative to other financial assets. Increased demand for Treasury securities drives down their interest rate. Increased demand for Treasury securities drives up their prices.

Consider the downward-sloping AD curve to the right. Which of the following results in a movement from point A to point B, up along AD curve, or from point A to point C, down AD curve.

Interest rate effect Wealth effect

What is the effect on inventories, GDP, and employment when aggregate expenditure exceeds GDP?

Inventories decrease, GDP increases, and employment increases.

In 2008, the required reserve ration for a bank's first $9.3 million in checking account deposits was zero. It was 3 percent on deposits between $9.3 million and $45.9 million, and 10% on all deposits. Therefore, the simple deposit multiplier is 10.

Less. The simple deposit multiplier is a model with assumptions that keep it higher than the real-world multiplier.

Which of the following is NOT a monetary policy goal of the Fed?

Low prices.

If the Federal Reserve decided to include virtual money like Bitcoins in its measure of the money supply, what would be the effect on M1 or M2?

M1 would rise.

The M2 definition of the money supply includes

M1, savings accounts, small time deposits, and money markets.

In the diagram to the right, moving from point A to point B is called a _____ the AD curve. Moving from point A to point C is referred to as a _____ the AD curve

Movement Along Shift in

Which of the following is a major difference between the AD-AD model and the dynamic AD-AS model? They dynamic AD-AS model assumes

Potential GDP increases continually, while the AD-AS model assumes the LRAS does not change.

Consider the figure to the right. Why does the SRAS curve slope upward?

Prices of final goods rise more quickly than the prices of inputs. Contracts keep wages "sticky". Firms and workers fail to predict changes in the price level.

The following graph shows AD and SRAS. Show SR effect of an increase in investor optimism

SRAS shift right

An increase in labor force or capital stock is illustrated as a _____. An increase in the expected price of an important natural resource is indicated by _____. An improvement in technology is shown as a _____. An increase in the expected future price level causes _____.

SRAS shift right SRAS shift left SRAS shift right SRAS shift left

The LR adjustment to a negative supply shock results in

SRAS shifting to the right.

We can use the diagram to the right to compare movements in real net exports between 1979 and 2006.

The US has imported more goods and service than it exported during most of the years shown.

Almora, a developing open economy, is experiencing an economic boom since it discovered oil reserves off its coast two years ago. Bill Hudson, an economist with the Finance Ministry of Almora, said in an interview that the oil boom has improved the average standard of living in the economy. Robin Peters is an industry analyst who does not agree with Hudson's view. In one of his recent articles in the country's leading business daily, Robin claimed that the high rate of inflation following the boom has actually weakened the expansionary impact on the economy. Which of the following statements is Bill and Robin likely to agree with?

The discovery of oil reserves has result din a rightward shift of the long-run aggregate supply curve.

As the figure to the right indicates, the Fed can affect both the money supply and interest rates. However, in recent years, Fed targets interest rates in monetary policy more often than it does the money supply. Which interest rate does the Fed target?

The federal funds rate.

According to the quantity theory of money the inflation rate equals

The growth rate of the money supply minus the growth rate of real output.

The position of LRAS curve is determined by

The number of workers, the amount of capital, and the available technology.

According to the dynamic AD-AS model, what is the most common cause of inflation?

Total spending increases faster than total production. The AD increases by more than LRAS.

Which of the following is not included in the calculation of total government purchases?

Unemployment insurance benefits paid for by the federal government.

Suppose the economy is at full employment and firms become more pessimistic about the future profitability of new investment. Which of the following will happen in the short run?

Unemployment will rise.

Which of the following is true with respect to Irving Fisher's quantity equation, MxV=PxY?

V=PxY/M V=Average number of times a dollar is spent on goods and services P=the GDP deflator M=M1 definition of money supply

In the aggregate expenditure model, when is planned investment > actual investment?

When there is an unplanned decrease in inventories.

Suppose an economy experiences technological progress and this causes a shift in the LRAS curve. Which of the following should NOT occur?

You shift both

We say that the economy as a whole is a macroeconomic equilibrium if

aggregate expenditure = GDP Total spending = total production Aggregate expenditure = total production Total spending = GDP

An increase in: The US price level relative to other countries' price levels... Growth rate of US GDP relative to other countries'... Exchange rate between the dollar and other currencies..

decrease decrease decrease tax imports.

In the figure to the right, the opportunity cost of holding money _____ when moving from pt A to pt B on the money demand curve. (Curving down)

decrease.

The use of money

eliminates the double coincidence of wants. Allows for greater specialization. Reduces the transaction costs of exchange.

According to the US Treasury,

firms do not have to accept cash as payment for goods and services.

The goals of monetary policy tend to be interrelated. For example, when the Fed pursues the goal of _____, it also can achieve the goal of _____ simultaneously.

high employment; economic growth.

Credit Cards are

included in neither the M1 definition of the money supply nor in the M2 definition.

A decrease in: The price level will... Household wealth will... Expected future income will... Current disposable income will... The interest rate will...

increase decrease decrease decrease increase consumption.

Banks can make additional loans when required reserves are

less than total reserves.

When people became _____ concerned with the underlying value of their houses and became _____ with the expectations of the prices of their houses increasing, a housing bubble occurred.

less; more

A change in the price level causes a _____ the SRAG curve. In the figure, this is shown by moving from point _____ A change in any other factor causes a _____ the SRAS curve. In the fiure, this is shown by moving from point _____.

movement along; A-B shift in; B-C

Actual investment spending includes spending by consumers on

new houses.

The _____ is considered the most relevant interest rate when conducting monetary policy.

short-term nominal interest rate.

Taylor Rule

Fed funds target rate=Inflation rate+Real equilibrium fed funds rate+(1/2 X Inflation gap)+(1/2 X Output gap).

The US dollar can best be described as

Fiat Money

Which of the following is the truth with respect to hyperinflation?

In the presence of hyperinflation, firms and households avoid holding money. It is caused by central banks increasing the money supply at a rate much greater than the growth rate of real GDP. It can be hundreds--even thousands--of percentage points per year.

Which of the following will increase planned investment spending on the part of firms?

Increased optimism about future demand for its product. A lower real interest rate.

Which of the following will increase planned investment spending on the part of firms?

Increased optimism about future demand for product. Lover real interest rate.

Which of the following is a monetary policy tool used by the Federal Reserve Bank?

Increasing the reserve requirement from 10% to 12.5 percent. Buying $500 million worth of government securities, such as Treasury bills. Decreasing the rate at which banks can borrow money from the Federal Reserve.

The federal funds rate

Is the rate that banks charge each other for short-term loans of excess reserves.

Indicate which of the following is correct about the multiplier effect.

It ignores the effect on real GDP of imports, inflation, and interest rates. The larger the MPC, the more additional consumption that occurs. A decrease in autonomous spending decreases real GDP by a multiple of the change.

THe relationship between the marginal propensity to consume MPC and the marginal propensity to save MPS can best be described as

MPC+MPS=1 MPS=1-MPC MPC=1-MPS

The figure to the right shows a breakdown of the M1 definition of the money supply. Which are corresponds to the amount of checking account deposits?

Majority are. Dark green. C?

Consumption: 1200 2100 3000 Disposable Income: 3000 4000 5000

Marginal propensity to save = .1

In the figure at right, a $20tril increase in planned investment increase the AE line from AE1 to AE2. However, real GDP increased by $40tril. Why?

Multiplier effect.

The process of bundling financial assets together and buying and selling these bundles in a secondary financial market is called

Securitization

During the German hyperinflation of the 1920s, the large increases in the money supply were generated by the German government

Selling large quantities of government bonds to the central bank, the Reichsbank.

At macroeconomic equilibrium, total _____ equals total _____.

Spending; production

If rapid increases in oil prices caused price levels to increase and real GDP to decrease in the short run, the economy would experience

Stagflation.

German luxury car exports were hurt in 2009 as a result of the recession. How would this decrease in exports have affected Germany's AD curve?

The AD curve would have shifted to he left.

Suppose a developing country receives more machinery and capital equipment as foreign entrepreneurs increase the amount of investment in the economy. As a result,

The long run aggregate supply curve will shift to the right.

According to the quantity theory of money, inflation results from which of the following?

The money supply grows faster than real GDP. Equation = MxV=PxY M = M1 V = Velocity P = GDP deflator Y = Real GDP

Paul Schumer and Jim Miller, two analysts at a research institute, discuss the rising cost of higher edu in the country. Paul feels that escalating tuition fees in colleges and universities are indicative of a bubble in the higher market. According to Jim, however, the rising costs are the result of better quality edu being provided by institutions in recent years. Which of the following, if true, will strengthen Jim's claim?

The number of foreign students enrolling in domestic universities has increased steadily in the last three years.

Consumption is $5mil, planned investment spending is $8mil, government purchases are $10mil, and net exports are $2mil. If GDP during that time period = $23mil, what unplanned changes in inventories occurred?

There was an unplanned decrease in inventories = to $2mil.

Your roommate argues that he can think of no better situation than living in a deflationary economy, as prices of goods and services would continuously fall. You disagree and argue that during a deflation people can be made worse off because

borrowers will have to pay increasing amounts in real terms over time.

An initial increase in a bank's reserves will increase checkable deposits

by an amount greater than the increase in reserves.

Money's most narrow definition is based on its function as a

medium of exchange.

An increase in AD causes an increase in _____ only in the SR, but causes an increase in _____ in both the SR and L.

real GDP; the price level

When potential real GDP is = to 70, this economy is in The amount of shortfall in planned aggregate expenditure is = to

recession The vertical distance between AE and 45 degree line at level of potential real GDP.

When potential real GDP is angled under 45 degrees, the economy is in The amount of the shortfall in planned aggregate expenditure is equal to

recession. The vertical distance between AE and 45degree line at the level of potential real GDP.

If, due to a recession, foreign workers begin to leave the US to search for temporary work in their home countries until the recession has ended, this will

shift the SRAS curve of the home country to the right.

John Maynard Keynes argued that if many households decide at the same time to increase saving and reduce spending,

this may benefit the economy in the long run, but could be counterproductive in the short run.

When the economy enters a recession, your employer is _____ to reduce your wages because _____.

unlikely; lower wages reduce productivity and morale.