Macroeconomics Final Review

money is valuable because: -____ -legal ____ -relative ____

acceptability; tender; scarcity

excess reserves equals ____ - ____

actual reserves, required reserves

excess reserves = ____ - ____

actual reserves; required reserves

difficulty in changing policy once the problem has been recognized

administrative lag

real GDP desired at each level; inverse relationship

aggregate demand

schedule or curve that shows the amount of a nation's output (real GDP) that buyers collectively desire to purchase at each possible price level

aggregate demand

schedule or curve showing the relationship between a nation's price level and the amount of real domestic output that firms in the economy produce

aggregate supply

to the extent that they want to hold money as an asset, disadvantage is to earns no or very little interest

asset demand for money

taxes vary directly w/ GDP; transfers vary inversely w/ GDP

automatic stabilizers

statement of assets- things owned by the bank or owed to the bank and claims on those assets, summarizes the financial position of the bank at the a certain time, assets must balance with liabilities and net worth

balance sheet

interest rates and ____ ____ are inversely related

bond prices

government spending in excess of tax revenues; used when economy faces a recession

budget deficit

tax revenues in excess of government spending; used when economy faces demand-pull inflation

budget surplus

automatic response; anything that increases the government's budget deficit (or reduces its budget surplus) during a recession and increases its budget surplus (or reduces its budget deficit) during an expansion w/out requiring explicit action by policymakers

built-in stability

reduces severity of business fluctuations

built-in stability

the Federal Reserve requires banks (and thrifts) to deposit in their regional Federal Reserve Bank a certain percentage of their ____ ____ as ____

check able deposits, reserves

required reserves = ____ x ____

checkable deposits; reserve ratio

reserve ratio equals ____ / ____

commercial's bank's required reserves, commercials bank's check able-deposit liabilities

changes in aggregate demand can cause shift factors affecting ____, ____, ____, and ____

consumer spending; investment spending; government purchases; net exports

making loans ____ money while loan repayment ____ money

creates; destroys

most common thrift institutions?

credit unions

____ cards not considered money, but ____ cards are

credit; debit

an expansionary fiscal policy (deficit spending) may increase the interest rate and reduce investment spending, thereby weakening or cancelling the stimulus of the expansionary policy

crowding-out effect

can occur w/ gov't deficit spending; may increase the interest rate and reduce private spending which weakens or cancels the stimulus of fiscal policy

crowding-out effect

____ held in a bank is not part of the economy's ____ supply ____ not total supply of money changes

currency, money, compensation

Federal Reserve Functions: -issue ____ -set ____ requirements -lend money to ____ -collect ____ -act as a ____ ____ for the US government -supervise ____ -control the ____ ____

currency; reserve; banks; checks; fiscal agent banks; money supply

any large imbalance in economic factors that occur due to purely cyclical reactions by a market or nation

cyclical asymmetry

use tax increases to ____ consumer spending

decrease

to reduce the size of the government: if recession, then ____ government spending -if inflation, then ____ taxes

decrease; decrease

Built-in stability means that: A. an annually balanced budget will offset the pro-cyclical tendencies created by state and local finance and thereby stabilize the economy. B. with given tax rates and expenditures policies, a rise in domestic income will reduce a budget deficit or produce a budget surplus while a decline in income will result in a deficit or a lower budget surplus. C. Congress will automatically change the tax structure and expenditure programs to correct upswings and downswings in business activity. D. government expenditures and tax receipts automatically balance over the business cycle, though they may be out of balance in any single year.

B.

restrictive monetary policy supply of federal funds ____, raising the federal funds rate to the new ____ ____ ____ shift of supply curve multiple ____ of the nation's money supply ____ investment ____ aggregate demand ____ demand-pull inflation

decreases, targeted rate, upward, discourage, lower, restrain

increase in money supply ____ interest rate, thereby ____ investment and aggregate demand and vice versa

decreases; increases

If you place a part of your summer earnings in a savings account, you are using money primarily as a: A. medium of exchange. B. store of value. C. unit of account. D. standard of value.

B.

The difference between M1 and M2 is that: A. the former includes time deposits. B. the latter includes small-denominated time deposits, noncheckable savings accounts, money market deposit accounts, and money market mutual fund balances. C. the latter includes negotiable government bonds. D. the latter includes cash held by commercial banks and the U.S. Treasury.

B.

The foreign purchases effect suggests that an increase in the U.S. price level relative to other countries will: A. increase the amount of U.S. real output purchased. B. increase U.S. imports and decrease U.S. exports. C. increase both U.S. imports and U.S. exports. D. decrease both U.S. imports and U.S. exports.

B.

The transactions demand for money is most closely related to money functioning as a: A. unit of account. B. medium of exchange. C. store of value. D. measure of value.

B.

Which of the following represents the most expansionary fiscal policy? A. A $10 billion tax cut. B. A $10 billion increase in government spending. C. A $10 billion tax increase. D. A $10 billion decrease in government spending.

B.

contractionary fiscal policy: -use during ____ ____ ____ -____ government spending -____ taxes -creates a ____ -____ aggregate demand and ____ or eliminate inflation

demand-pull inflation; decrease; increase; surplus; decrease; decrease

commercial banks have 2 basic functions 1) to accept ____ of ____ 2) to make ____

deposits of money, loans

political business cycle can ____ the economy e.g. election years

destabilize

the interest rate the Federal Banks charge interest on loans they grant to commercial banks

discount rate

changes w/ shifts in the money supply and money demanded

equilibrium interest rate

the rate at which the amount of money demanded and the amount of supplied are equal

equilibrium interest rate

the intersection of demand and supply determines the ____ ____ in the market for money

equilibrium price

intersection of the aggregate demand curve AD and the aggregate supply curve AS; aggregate demand and aggregate supply jointly establish the price level and level of real GDP

equilibrium price level and equilibrium real output

Contractionary fiscal policy is so named because it: A. involves a contraction of the nation's money supply. B. necessarily reduces the size of government. C. is aimed at reducing aggregate demand and thus achieving price stability. D. is expressly designed to expand real GDP.

C.

The aggregate supply curve: A. is explained by the interest rate, real-balances, and foreign purchases effects. B. gets steeper as the economy moves from the top of the curve to the bottom of the curve. C. shows the various amounts of real output that businesses will produce at each price level. D. is downsloping because real purchasing power increases as the price level falls.

C.

The asset demand for money is most closely related to money functioning as a: A. unit of account. B. medium of exchange. C. store of value. D. measure of value.

C.

maximum check able- deposit creation equals ____ x ____

excess reserves, money multiplier

functions of money: -medium of ____ -unit of ____ -store of ____ -is ____

exchange; account; value; liquid

"easy money policy", policy will lower the interest rate to bolster borrowing and spending, which will increase aggregate demand and expand real output

expansionary monetary policy

factors that affect expected returns

expectations about future business conditions, technology, degree of excess capacity, and business taxes

dollar depreciation encourages US ____ and discourages ____

exports; imports

the interest rate paid on these overnight loans

federal funds rate

the rate of interest that banks charge one another on overnight loans made from temporary excess reserves

federal funds rate

aggregate supply: -in the immediate short run, both input prices and output prices are ____ -in short run, input prices are ____, but output prices are ____ -in long run, input prices as well as output prices are ____

fixed; fixed; vary; vary

when US price level rises relative to foreign price levels, foreigners buy fewer US goods and Americans buy more foreign goods; US exports fall and US imports rise; rise in price level reduces quantity of US goods demanded as net exports

foreign purchases effect

when price level falls, other things being equal, US prices will fall relative to foreign prices, which will tend to increase spending on US exports and also decrease import spending in favor US products that compete with imports

foreign purchases effect

a portion (fraction) of check-able deposits are backed up by the reserves of currency in bank vaults or deposits at the central ban

fractional reserve banking system

fiscal policy is designed to achieve ____ ____, control ____, and encourage ____ ____

full employment; inflation; economic growth

fiscal policy involves deliberate changes in ____ ____ and ____

government spending; taxes

____ renders money unacceptable

hyperinflation

The cyclically adjusted budget refers to: A. the inflationary impact that the automatic stabilizers have in a full-employment economy. B. that portion of a full-employment GDP that is not consumed in the year it is produced. C. the size of the federal government's budgetary surplus or deficit when the economy is operating at full employment. D. the number of workers who are underemployed when the level of unemployment is 4 to 5 percent.

C.

The factors that affect the amounts that consumers, businesses, government, and foreigners wish to purchase at each price level are the: A. real-balances, interest-rate, and foreign purchases effects. B. determinants of aggregate supply. C. determinants of aggregate demand. D. sole determinants of the equilibrium price level and the equilibrium real output.

C.

The four main tools of monetary policy are: A. tax rate changes, the discount rate, open-market operations, and the federal funds rate. B. tax rate changes, changes in government expenditures, open-market operations, and interest on reserves. C. the discount rate, the reserve ratio, interest on reserves, and open-market operations. D. changes in government expenditures, the reserve ratio, the federal funds rate, and the discount rate.

C.

to expand the size of the government: -if recession, then ____ government spending -if inflation, then ____ taxes

increase; increase

higher expected returns on investment projects will ____ the demand for capital goods and shift the aggregate demand curve to the ____

increase; right

if government spending increases, aggregate demand ____ and vice versa

increases

raising the reserve ratio ____ the amount of required reserves banks must keep

increases

reduction in personal income tax rates ____ consumer purchases at each possible price level

increases

increase in real interest rates ____ borrowing costs, ____ investment spending, and ____ aggregate demand

increases; decreases; decreases

restrictive monetary policy: -periods of rising ____ -____ Federal funds rate -____ money supply -____ other interest rates

inflation; increases; increases; increases

____ prices stickier than ____ prices

input; output

the price paid for the use of money, the price that borrowers need to pay lenders for transferring purchasing power to the future

interest

a decline in price level means lower interest rates that can increase levels of certain types of spending

interest rate effect

relationship between price level and amount of real GDP is ____/____; when price level rises, the quantity of real GDP ____ and vice versa

inverse; negative; decreases

amount of money demanded as an asset varies ____ w/ the rate of interest (which is opportunity cost of holding money as an asset)

inversely

interest rates and bond prices are ____ related

inversely

restrictive monetary policy will cause the money supply curve to shift ____, thereby ____ the interest rate, decreasing investment and aggregate demand

left; increasing

decline in investment spending at each price level will shift the aggregate demand curve to the ____ and increase to the ____

left; right

if aggregate demand decreases, the economy's equilibrium will move ____

leftward

2 significant characteristics of fractional reserve banking system 1) can create money through ____ 2) vulnerable to "____" or"____"

lending, panics, runs

use of borrowed money to magnify profits and losses

leverage

ease with which an asset can be converted quickly into the most widely accepted and easily spent form of money, cash, with little or no loss of purchasing power; key advantage money has over all other assets

liquidity

are assets to Fed but liabilities to commercial banks b/c increase reserves but most be repaid

loans

usable for buying and selling goods and services

medium of exchange

The interest-rate effect suggests that: A. a decrease in the supply of money will increase interest rates and reduce interest-sensitive consumption and investment spending. B. an increase in the price level will increase the demand for money, reduce interest rates, and decrease consumption and investment spending. C. an increase in the price level will increase the demand for money, increase interest rates, and decrease consumption and investment spending. D. an increase in the price level will decrease the demand for money, reduce interest rates, and increase consumption and investment spending.

C.

An economist who favored expanded government would recommend: A. tax cuts during recession and reductions in government spending during inflation. B. tax increases during recession and tax cuts during inflation. C. tax cuts during recession and tax increases during inflation. D. increases in government spending during recession and tax increases during inflation.

D.

Expansionary fiscal policy is so named because it: A. involves an expansion of the nation's money supply. B. necessarily expands the size of government. C. is aimed at achieving greater price stability. D. is designed to expand real GDP.

D.

Suppose that the economy is in the midst of a recession. Which of the following policies would most likely end the recession and stimulate output growth? A. A congressional proposal to incur a federal surplus to be used for the retirement of public debt. B. Reductions in agricultural subsidies and veterans' benefits. C. Postponement of a highway construction program. D. Reductions in federal tax rates on personal and corporate income.

D.

The aggregate demand curve: A. is upsloping because a higher price level is necessary to make production profitable as production costs rise. B. is downsloping because production costs decline as real output increases. C. shows the amount of expenditures required to induce the production of each possible level of real output. D. shows the amount of real output that will be purchased at each possible price level.

D.

The real-balances effect indicates that: A. an increase in the price level will increase the demand for money, increase interest rates, and reduce consumption and investment spending. B. a lower price level will decrease the real value of many financial assets and therefore reduce spending. C. a higher price level will increase the real value of many financial assets and therefore increase spending. D. a higher price level will decrease the real value of many financial assets and therefore reduce spending.

D.

If government wants to use fiscal policy to counter the resulting inflation without changing tax rates, would it increase government spending or decrease it?

Decrease it

the monetary authority who controls the money supply for our country

Federal Reserve System

the US "monetary authorities"; central authority of the US money and banking system; purposely established as an independent agency of gov't that on average keeps interest rates lower; members of the Board of Governors of the:

Federal Reserve System (Fed)

-currency (coins and paper) in the hands of the public -all checkable deposits (all deposits in commercial banks and "thrift" or savings institutions on which checks of any size can be drawn)

M1

includes savings deposits, including money market deposit accounts; small denominated time deposits; money market mutual funds held by individuals; composed of M1 and 3 categories of near-monies

M2

rule of thumb for tracking actual monetary policy; Feds has 2% target inflation rate; target varies as inflation and real GDP vary, central banks are willing to tolerate a small positive rate of inflation if doing so will help the economy to produce at potential output

Taylor Rule

financial instruments issued by the federal government to borrow money to finance expenditures that exceed tax revenues

U.S. government securities

key measure in banking that helps to predict the money supply that will be available to drive economic growth

money multiplier

assets demanded (Da): -____ as a store of value -varies inversely with the ____ ____

money; interest rate

commercial banking system can lend (create money) by a ____ of its excess reserves

multiple

how to calculate new output at each price level?

multiply original values by 1.1

certain highly liquid financial assets that do not function directly or fully as a medium of exchange but can readily be converted into currency or checkable deposits

near-monies

a change in the ____ ____ - working through the transactions demand for money- will shift the ____ ____ ____ curve

nominal GDP, total money demand

transactions demanded (Dt): -determined by ____ ____ -independent of the ____ ____

nominal GDP; interest rate

buying and selling of gov't securities (or bonds) that increase or decrease commercial bank reserves available to affect the amount of money available in the economy; commercial banks and general public; most important tool used by the Feds; gives them great flexibility in controlling the money supply and impact is swift

open market operations

buying gov't bonds (US securities) from or selling gov't bonds to commercial banks and the general public

open-market operations

4 main tools of monetary control Fed uses to alter reserves of commercial banks?

open-market operations, the reserve ratio, the discount rate, interest on reserves

time elapsed between the change in policy and its impact on the economy

operational lag

____ affect purchasing power of money

prices

real output per unit of input; increases reduce costs and decreases increase costs

productivity

prices flexible in supply long run because ____ ____ will always adjust to give firms exactly the right profit incentive to produce exactly the full-employment ____ ____

profit levels; output level

average tax rates rise w/ GDP

progressive tax system

average tax rate remains constant as GDP rises

proportional tax system

US national debt; essentially the accumulation of all past federal deficits and surpluses; emerged mainly from war financing, recessions, and fiscal policy

public debt

the amount of goods and services a unit of money will buy

purchasing power of money

banks that blend private ownership and public control

quasi-public banks

how to calculate productivity?

real GDP / input quantity

when price level falls, the purchasing power of existing financial balance rises, which can increase spending

real balances effect

expansionary fiscal policy: -used during a ____ -____ government spending -____ taxes -creates a ____ -____ aggregate demand and ____ real GDP

recession; increase; decrease; deficit; increase; increase

expansionary monetary policy: -economy faces a ____ -____ target for Federal funds rate -Fed buys ____ -____ money supply -____ pressure on other interest rates

recession; lower; securities; expanded; downward

elapsed time between the beginning of a recession or inflation and awareness of this occurence

recognition lag

3 lags/delays that hinder fiscal policy, monetary policy only first 2

recognition, operational, administrative

when the Federal Reserve Banks sell gov't bonds, commercial banks' reserves ____

reduce

raising the reserve ratio forces banks to ____ the amount of check able deposits they create through ____

reduce, lending

average tax rate falls as GDP rises

regressive tax system

money multiplier equals 1 / ____

required reserve ratio

money multiplier = 1 / (____)

required reserve ratio (R)

an amount of funds equal to a specified percentage of the bank's own deposit liabilities

required reserves

Feds manipulate the ____ ____ in order to influence the ability of commercials banks to lend

reserve ratio

the portion of depositors' balances that banks must have on hand as cash, a requirement determined by the country's central bank, affects the money supply in a country at any given time

reserve ratio

the ratio of the required reserves the commercial bank must keep the bank's own outstanding check able-deposit liabilities

reserve ratio

for periods of rising inflation, "tight money policy", policy will increase the interest rate to reduce borrowing and spending, which will curtail the expansion of aggregate demand and hold down price-level increases, immediate step will be to announce a higher target for the federal funds rate

restrictive monetary policy

a rise in US net exports shifts the aggregate demand curve to the ____ and vice versa

right

a sufficient increase in government spending or reduction in taxes will shift an economy's aggregate demand curve to the ____

right

an increase in government purchases will shift the aggregate demand curve to the ____ and vice versa

right

expansionary monetary policy shifts money supply curve to ____, causing aggregate demand to ____ and shift aggregate demand curve to ____ so real output rises to the full employment level

right; increase; right

consist largely of Treasury bills, Treasury notes, and Treasury bonds issued by the US gov't to finance past budget deficits, part of public debt, mainly bought and sold to influence the size of commercial bank reserves and ability of those banks to create money by lending

securities

2 main assets of the Federal Reserve Banks?

securities and loans

buying government ____ and ____ creates new money

securities; lending

monetary policy advantages over fiscal policy: -____ and flexibility -____ from political pressure -more ____

speed; isolation; subtle

enables people to transfer purchasing power from the present to the future

store of value

interest rates determine by money ____ and money ____

supply; demand

the sum of the transactions demand for money plus the asset demand for money

total demand for money (Dm)

the demand for money as a medium of exchange the level of nominal GDP is the main determinant

transactions demand for money

society uses monetary units as a yardstick for measuring the relative worth of a wide variety of goods, services, and resources

unit of account

how to calculate per-unit production cost?

(price of input unit x input quantity) / real GDP

nation's "central bank" and bankers' bank; blend private and public control

12 Federal Reserve Banks

A $70 price tag on a sweater in a department store window is an example of money functioning as a: A. unit of account. B. standard of deferred payments. C. store of value. D. medium of exchange.

A.

An economist who favors smaller government would recommend: A. tax cuts during recession and reductions in government spending during inflation. B. tax increases during recession and tax cuts during inflation. C. tax cuts during recession and tax increases during inflation. D. increases in government spending during recession and tax increases during inflation.

A.

An expansionary fiscal policy is shown as a: A. rightward shift in the economy's aggregate demand curve. B. movement along an existing aggregate demand curve. C. leftward shift in the economy's aggregate supply curve. D. leftward shift in the economy's aggregate demand curve.

A.

If you write a check on a bank to purchase a used Honda Civic, you are using money primarily as: A. a medium of exchange. B. a store of value. C. a unit of account. D. an economic investment.

A.

In the United States, the money supply (M1) includes: A. coins, paper currency, and checkable deposits. B. currency, checkable deposits, and Series E bonds. C. coins, paper currency, checkable deposits, and credit balances with brokers. D. paper currency, coins, gold certificates, and time deposits.

A.

The economy's long-run AS curve assumes that wages and other resource prices: A. eventually rise and fall to match upward or downward changes in the price level. B. are flexible upward but inflexible downward. C. rise and fall more rapidly than the price level. D. are relatively inflexible both upward and downward.

A.

The immediate-short-run aggregate supply curve represents circumstances where: A. both input and output prices are fixed. B. both input and output prices are flexible. C. input prices are fixed, but output prices are flexible. D. input prices are flexible, but output prices are fixed.

A.

Which one of the following would not shift the aggregate demand curve? A. A change in the price level. B. Depreciation of the international value of the dollar. C. A decline in the interest rate at each possible price level. D. An increase in personal income tax rates.

A.

Assume that a bank initially has no excess reserves. If it receives $5,000 in cash from a depositor and the bank finds that it can safely lend out $4,500, the reserve requirement must be: A. zero. B. 10 percent. C. 20 percent. D. 25 percent.

B.

Suppose that the data below shows an economy's relationship between real output and the inputs needed to produce that output: Input Quantity Real GDP 150.0 $400 112.5 $300 75.0 $200 Instructions: Round your answers to 2 decimal places. a. What is the level of productivity in this economy? __?__ b. What is the per-unit cost of production if the price of each input unit is $2? __?__ c. Assume that the input price increases from $2 to $3 with no accompanying change in productivity. What is the new per-unit cost of production? __?__ In what direction would the $1 increase in input price push the economy's aggregate supply curve? __?__ What effect would this shift of aggregate supply have on the price level and the level of real output? __?__ d. Suppose that the increase in input price does not occur but, instead, that productivity increases by 100 percent. Instructions: Round your answer to 3 decimal places. What would be the new per-unit cost of production? __?__ In what direction would this change in per-unit production cost push the economy's aggregate supply curve? __?__ What effect would this shift of aggregate supply have on the price level and the level of real output? __?__

a.) 2.67 b.) $0.75 c.) $1.12; to the left; price level increase and real output decrease d.) $0.375; to the right; price level decrease and real output increase

Assume that the following data characterize the hypothetical economy of Trance: money supply = $200 billion; quantity of money demanded for transactions = $150 billion; quantity of money demanded as an asset = $10 billion at 12 percent interest, increasing by $10 billion for each 2-percentage-point fall in the interest rate. a. What is the equilibrium interest rate in Trance? ____ percent. b. At the equilibrium interest rate, what are the quantity of money supplied, the total quantity of money demanded, the amount of money demanded for transactions, and the amount of money demanded as an asset in Trance? Quantity of money supplied = ____ billion. Quantity of money demanded = ____ billion. Amount of money demanded for transactions =____ billion. Amount of money demanded as an asset = ____ billion.

a.) 4 b.) 200; 200; 150; 50

Suppose that a country has no public debt in year 1 but experiences a budget deficit of $40 billion in year 2, a budget deficit of $20 billion in year 3, a budget surplus of $10 billion in year 4, and a budget deficit of $2 billion in year 5. a. What is the absolute size of its public debt in year 5? $____ billion b. If its real GDP in year 5 is $104 billion, what is this country's public debt as a percentage of real GDP in year 5? ____ percent.

a.) 52 b.) 50

(A) Price Level Real GDP 110 275 100 250 95 225 90 200 (B) Price Level Real GDP 100 200 100 225 100 250 100 275 (C) Price Level Real GDP 110 225 100 225 95 225 90 225 a. Which set of data illustrates aggregate supply in the immediate short-run in North Vaudeville? __?__ Which set of data illustrates aggregate supply in the short run in North Vaudeville? __?__ Which set of data illustrates aggregate supply in the long run in North Vaudeville? __?__ b. Assuming no change in hours of work, if real output per hour of work increases by 10 percent, what will be the new levels of real GDP in the right column of A? __?__ Instructions: Round your answer to 1 decimal place. With a price level of 110, new output = __?__ Instructions: Enter your answer as a whole number. With a price level of 100, new output = __?__ Instructions: Round your answer to 1 decimal place. With a price level of 95, new output = __?__ Instructions: Enter your answer as a whole number. With a price level of 90, new output = __?__ Does the new data reflect an increase in aggregate supply or does it indicate a decrease in aggregate supply? __?__

a.) B.; A.; C. b.) 302.5; 275; 247.5; 220; increase