Principles of Macroeconomics: 3

Suppose the government spending multiplier is 2. The federal government cuts spending by $40 billion. What is the change in GDP if the price level is not held constant?

decrease of less than $80 billion

Last week, six Swedish kronor could purchase one U.S. dollar. This week, it takes eight Swedish kronor to purchase one U.S. dollar. This change in the value of the dollar will ________ exports from the United States to Sweden and ________ U.S. aggregate demand.

decrease; decrease

Refer to Figure 16-5. In the dynamic model of AD- AS in the figure above, if the economy is at point A in year 1 and is expected to go to point B in year 2, Congress and the president would most likely pursue

expansionary fiscal policy

In absolute value, the tax multiplier is greater than the government purchases multiplier.

false

The purchase of Treasury securities by the Federal Reserve will, in general,

increase the quantity of reserves held by banks

If a person withdraws $500 from his/her savings account and puts it in his/her checking account, then M1 will ________ and M2 will ________.

increase; not change

A decrease in the reserve requirement ________ bank reserves and ________ the money supply.

increases; increases

Refer to Figure 15-11. In the dynamic model of AD- AS in the figure above, the economy is at point A in year 1 and is expected to go to point B in year 2, and the Federal Reserve pursues policy. This will result in

inflation higher than what would occur if no policy had been pursued

Which of the following would most likely induce the Federal Reserve to conduct expansionary monetary policy? A significant decrease in

investment spending

Suppose the required reserve ratio is 20 percent. If banks are conservative and choose not to loan all of their excess reserves, the real-world deposit multiplier is

less than 5

Buying a house during a recession may be a good idea if your job seems secure because the Federal Reserve often lowers interest rates during a recession.

true

Imagine that Kristy deposits $10,000 of currency into her checking account deposit at Bank A and that the required reserve ratio is 20%. Refer to Scenario 14-2. As a result of Kristy's deposit, Bank A's required reserves increase by

$2,000

Suppose the equilibrium real federal funds rate is 2 percent, the target rate of inflation is 2 percent, the current inflation rate is 4 percent, and real GDP is 2 percent above potential real GDP. If the weights for the inflation gap and the output gap are both 1/2, then according to the Taylor rule the federal funds target rate equals

8%

Refer to Figure 15-7. Suppose the Fed lowers its target for the federal funds rate. Using the static AD- AS model in the figure above, this situation would be depicted as a movement from

A to B

Spending on the war in Afghanistan is essentially categorized as government purchases. How do decreases in spending on the war in Afghanistan affect the aggregate demand curve?

They will shift the aggregate demand curve to the left

According to the quantity theory of money, if the money supply grows at 6%, real GDP grows at 2%, and the velocity of money is constant, then the inflation rate will be

4%

Refer to Figure 13-3. Which of the points in the above graph are possible short-run equilibria but not long-run equilibria? Assume that Y 1 represents potential GDP.

B and D

Suppose that households became mistrustful of the banking system and decide to decrease their checking account balances and increase their holdings of currency. Using the money demand and money supply model and assuming everything else is held constant, the equilibrium interest rate should

increase

Refer to Figure 16-2. In the graph above, if the economy is at point A, an appropriate fiscal policy by Congress and the president would be to

increase government transfer payments

In the long run, most economists agree that a permanent increase in government spending leads to

a decrease in private spending by the same amount that government spending increased

extra info

a. an increase in the price level- Movement along the curve c. a technological advance: Rightward shift in SRAS d. a decrease in interest rates- Does not affect the SRAS: Affect the AD. b. an increase in inflation expectations. As people increase inflation to be higher, they will demand a higher wage, hence cost of production will increase, henc SRAS will shift to the left.

An increase in imports increases aggregate demand.

false

If the required reserve ratio is 10 percent, the bank at this point can make no more loans. Assets - Reserves: $1,000 Assets - Loans: $4,000 Liabilities - Deposits: $5,000

false

When potential GDP increases, short-run aggregate supply also increases, but long-run aggregate supply does not change.

false

Which of the following would be classified as fiscal policy?

The Federal Reserve cuts taxes to stimulate the economy

Explain why the tax multiplier is different from the government purchases multiplier, in both sign and relative magnitude.

The difference why the tax multiplier from the government purchases multiplier is because when the government purchases increase, people will have an increased income. Why... well the government purchases bonds form an open market, which will increase the money supply. A dollar change in government purchases does the opposite impact of a dollar change in taxes. An increase in government purchases increases income, spending, and GDP in the economy. But, an increase in taxes also lowers income, spending and GDP in the economy. The result is that the government purchases multiplier is positive, and the tax multiplier is negative. A dollar change in government purchases will have a larger effect on GDP as compared to a dollar change in the tax multiplier. A change in government purchases effects overall spending. With a change in taxes affects income first and then spending. So the first round of GDP change in the multiplier process will be equal to the smaller change in spending.

Suppose you deposit $4,000 in currency into your checking account at Bank of America. Assume that Bank of America has no excess reserves at the time you make your deposit and that the required reserve ratio is 10 percent. a. Use a T-account to show the initial effect of this transaction on Bank of America's balance sheet. b. Suppose that Bank of America makes the maximum loan they can from the funds you deposited. Use a T-account to show the initial effect on Bank of America's balance sheet from granting the loan. Also include in this T-account the transaction from question (a.). c. Now suppose that whoever took out the loan in question (b) writes a check for this amount and that the person receiving the check deposits it in Bank of Boston. Show the effect of these transactions on the balance sheet of Bank of America and Bank of Boston, after the check has been cleared. On the T-account for Bank of America, include the transactions from questions (a) and (b). d. What is the maximum increase in checking account deposits that can result from your $4,000 deposit? What is the maximum increase in the money supply? Explain.

A) Bank of America Assets - Reserves: $4,000 Bank of America Liabilities - Deposits: $4,000 B) Bank of America has to hold $400 of required reserves, leaving $3,600 of excess reserves which they loan. Bank of America increases the checking account of the borrower by $3,600 Bank of America Assets - Reserves: $4,000 Bank of America Assets - Loans: $3,600 Bank of America Liabilities - Deposits: $4,000 Bank of America Liabilities - Deposits: $3,600 C) At Bank of America when the $3,600 check clears, reserves fall by $3,600 and the borrower's checking account will be empty. At the Bank of Boston, the deposit of the $3,600 check increases checking account deposits and reserves by $3,600. Bank of America Assets - Reserves: $400 Bank of America Assets - Loans: $3,600 Bank of America Liabilities - Deposits: $4,000 Bank of Boston Assets - Reserves: $3,600 Bank of Boston Liabilities - Deposits: $3,600 D) The max increase in checking account deposits is $40,000 .... so $4,000 times the simple deposit of 10. With the original deposit of $4,000 came from the currency. The money supply will increase to $36,000 - $4,000 ($40,000 - $4,000).

Which of the following is not an assumption made by the dynamic model of aggregate demand and aggregate supply?

Aggregate demand and potential real GDP decrease continuously

Refer to Figure 13-3. Suppose the economy is at point A. If investment spending increases in the economy, where will the eventual long-run equilibrium be?

C

Explain how the economy moves back to full employment from recession through automatic adjustment. Be sure to detail what happens to short-run aggregate supply, unemployment, equilibrium GDP and the price level.

If and when the economy enters a recession, sales fall and unemployment rises through the automatic adjustment. From the unemployment, workers are willing to take lower wages. The demand will then make firms okay to accept lower prices for their goods. Also, the decline in price level in the economy's recession also causes workers willing to take lower wages and the firms to accept lower prices. This will cause the shifts of the short-run aggregate supply curve to the right and moves the economy back toward potential GDP. The unemployment then falls back to the neutral/ normal level and the price level drops.

Refer to Table 15-4. Suppose the following table illustrates the values of real and potential GDP and the price level if the Fed does not vote to change their current policy to be more contractionary or expansionary. If the Fed wants to keep real GDP at its potential level in 2017, should the Fed use a contractionary or expansionary policy? How should it conduct open market operations to achieve its goal? Year - Potential Real GDP - Real GDP - Price Level 2016 - $18.1 trillion - $18.1 trillion - 150 2017 - $18.4 trillion - $18.3 trillion - 153

If the Fed doesn't vote to change their current policy to be contractionary or expansionary, then the real GDP will fall below potential GDP in 2017. To keep the economy at potential GDP in 2017, the Fed should use the expansionary monetary policy, which would allow the fed to direct the trading desk to buy U.S. treasury bills. If this happens, the reserves in the bank system will increase and then the banks can increase the number of loans, which will raise the money supply and lower interest rates.

Which of the following would cause the short-run aggregate supply curve to shift to the left?

an increase in inflation expectations