Unit 5 - Macroeconomics

If nominal GDP is $600 billion and, on the average, each dollar is spent three times per year, then the amount of money demanded for transactions purposes will be

$200 billion.

A few years ago, you bought a bond with no expiration and a fixed annual interest payment of $1,000 at a price of $10,000. If the interest rate in the economy is now 12.5 percent a year and you want to sell the bond, the maximum price that you can get for it is

$8,000

In this case, if AD decreases, what will happen to equilibrium output and the price level? Equilibrium output will and the price level will

Fall Fall

If AD decreases in this situation, what will happen to equilibrium output and the price level? Equilibrium output will and the price level will

Fall Not Change

Which of the following is a difference between "quantitative easing" and ordinary open-market operations?

Open-market operations are focused exclusively on U.S. government bonds; quantitative easing also includes the buying and selling of debt issued by government agencies and government-sponsored entities.

Which of the following is correct?

The asset demand for money is downsloping because the opportunity cost of holding money increases as the interest rate rises.

Total money demand is the

horizontal sum of the transactions demand for money and the asset demand for money

According to the Taylor rule

if inflation rises by 1 percentage point above its target, then the Fed should raise the real federal funds rate by one-half a percentage point.

An expansionary monetary policy may be frustrated if the

investment-demand curve shifts to the left.

Monetarists say that the relationship between the amount of money that households and businesses want to hold and the level of national output and income

is relatively stable.

The basic determinant of the transactions demand for money is the

level of nominal GDP.

Rational expectations theory implies that the

long-run aggregate supply curve is vertical.

In which of the following situations is it certain that the quantity of money demanded by the public will decrease?

nominal GDP decreases and the interest rate increases

If velocity unexpectedly falls because of, say, a drop in investment spending by businesses, adherence to a monetary rule will

not provide sufficient liquidity to provide for economic growth.

The velocity of money is the

number of times per year the average dollar is spent on final goods and services.

The Fed's response to the zero lower bound problem was

quantitative easing.

The mainstream view is that macro instability is caused by

significant changes in investment spending.

In recent years, the Federal Reserve has

taken an activist, pragmatic approach to monetary policy, paying close attention to interest rates.

The liquidity trap refers to the situation where

the Fed adds excess reserves to the banking system, but it has minimal positive effect on lending, investment, or aggregate demand.

When economists say that monetary policy can exhibit cyclical asymmetry, this means

expansionary and restrictive monetary policy do not have the same potential for economic expansion and contraction

The possible asymmetry of monetary policy is the central idea of the

pushing-on-a-string analogy.

Most monetarists would say that

the MV = PQ equation provides a better understanding of the macroeconomy than does the Ca + Ig + Xn + G = GDP equation.

Suppose there is an increase in the total demand for money. In this case,

the equilibrium interest rate will rise

In response to the zero lower bound problem,

the Fed pursued quantitative easing.

Which of the following is not an aggregate-demand-side explanation of business cycles?

the real-business-cycle theory

If nominal GDP is $4,000 billion and the amount of money demanded for transactions purposes is $800 billion, it can generally be concluded that

on average, each dollar will be spent five times a year.

To determine the velocity of money, you would need to know

nominal GDP and the money supply.

Prior to the mortgage debt crisis, the most frequently employed restrictive monetary policy tool was

selling bonds in the open market

Hourly Wage Rate Output Per Hour Of Work $10 6 9 6 8 4 7 2 6 1 Refer to the table. At the $8 wage, labor cost per unit of output is

$2.00

If the dollars held for transactions purposes are, on the average, spent four times a year for final goods and services, then the quantity of money people will wish to hold for transactions purposes is equal to

25 percent of nominal GDP.

If a certain household earns and spends $24,000 per year and, on the average, holds a money balance of $6,000, then the velocity of money for this household is

4

Finally, if both input and output prices are fully flexible, what does the aggregate supply curve look like?

AS(1)

Next, imagine that input prices are fixed, but output prices are flexible. What does the aggregate supply curve look like?

AS(2)

The mainstream view of macroeconomic instability emphasizes sticky prices. Use the figure below to answer the following questions. What does the aggregate supply curve look like if both input and output prices are fixed?

AS(3)

Which of the following best explains why there may exist a negative lower bound for interest rates, beyond which lowering interest rates is counterproductive?

Depositors will be willing to accept small negative interest rates in exchange for the convenience of being able to make electronic transactions.

Which of the following best describes the effect of the zero interest rate policy implemented in December 2008?

Its effectiveness was limited by the zero lower bound problem.

Rational expectations theory is based on the assumption that

both product and resource markets are very competitive.

Changes in the federal funds rate and the prime interest rate closely track one another because

both rates are related to the relative scarcity or availability of reserves.

A higher wage could result in a lower labor cost per unit of output than a lower wage if the higher wage

brings forth greater work effort.

Before the financial crisis, if the Fed wanted to lower the federal funds rate, it would

buy government securities in the open market

One of the strengths of monetary policy relative to fiscal policy is that monetary policy

can be implemented more quickly.

In new classical economics, a "price-level surprise"

causes a temporary change in real output.

Mainstream macroeconomics would suggest that fiscal policy

changes aggregate demand and GDP through the multiplier process.

Refer to the figure and assume the economy initially is in equilibrium at point a. In the new classical theory, an unanticipated decrease in aggregate demand from AD2 to AD3 would move the economy

from a to c to h.

The federal funds rate is

lower than the prime interest rate because federal funds are loaned overnight.

In an effort to stabilize the banking sector and keep banks lending, from October 2008 to September 2009, the Fed

lowered the federal funds target rate.

The policy position that the supply of money should be increased at a constant rate each year is most closely associated with the views of

monetarism.

Which of the following groups of economists believe that cost-push inflation is impossible in the long run without excessive monetary growth?

monetarists and rational expectations economists

Cyclical asymmetry is important to policymakers because

monetary policy is more effective in fighting inflation than recession

The velocity of money is equal to

none of these.

The view that anticipated changes in the money supply will have no effect on the economy's output would most likely be a proposition of

rational expectations theory.

Refer to the diagram. A decline of aggregate supply from ASLR1 to ASLR2, followed by a decline of aggregate demand from AD1 to AD2, would best describe the

real-business-cycle view of recession

The increase in excess reserves that occurred as a result of the mortgage debt crisis

rendered open-market operations ineffective

The federal funds rate is

the interest rate that banks charge one another on overnight loans, whereas the prime interest rate is the interest rate that banks charge on loans to their most creditworthy customers.

If the quantity of money demanded exceeds the quantity supplied,

the interest rate will rise

The 2007-2009 recession began with reductions in investment and consumption spending, precipitated by a financial crisis. This explanation for the recession is consistent with

the mainstream view of macroeconomic instability.

Which of the following varies directly with the interest rate?

the opportunity cost of holding money

A consumer holds money to meet spending needs. This would be an example of the

transactions demand for money.

According to rational expectations theory, observed instability in the private economy would most likely be due to

unanticipated aggregate demand and aggregate supply shocks in the short run.

The rationale for a monetary rule can be explained by using the equation of exchange if

velocity is assumed to be constant so that changes in the money supply equal changes in real output and leave the price level (P) unchanged

A decrease in the interest rate will cause a(n)

increase in the amount of money held as an asset.

Answer the question on the basis of the following information for a hypothetical economy. All values are in nominal terms. M = $100 V = 2 Ca = $160 Xn = $10 G = $10 In equilibrium, Ig is

$20

raig and Kris were walking directly toward each other in a congested store aisle. Craig moved to his left to avoid Kris, and at the same time Kris moved to his right to avoid Craig. They bumped into each other. This idea relates to macroeconomic instability because the economy

Coordination Failure - does not achieve a mutually beneficial equilibrium because there is a lack of coordination of the actions of people and businesses.

When bond prices go up, interest rates go

Down

An efficiency wage is

NOT a "wage" that contains a profit-sharing component as well as traditional hourly pay.

On a diagram where the interest rate and the quantity of money demanded are shown on the vertical and horizontal axes, respectively, the transactions demand for money can be represented by

NOT a line parallel to the horizontal axis Best guess - a vertical line

Prior to the financial crisis of 2007-2009, the Fed would typically initiate an expansionary monetary policy by

NOT setting a lower reserve ratio.

Why wouldn't the Fed want to drive nominal interest rates below zero in response to a financial crisis and recession?

Negative nominal interest rates would cause people to withdraw their money from banks, reducing what banks could lend out to consumers and businesses.

In this case, if AD decreases, what will happen to equilibrium output and the price level? Equilibrium output will and the price level will

Not Change Fall

What does it mean when economists say that the Fed has attempted to "normalize" monetary policy after the Great Recession?

The Fed has tried to use monetary policy to bring interest rates back to the historically normal range of 3 percent or higher.

Other things equal, which of the following would increase the federal funds rate?

a decline in excess reserves in the banking system

Commercial bank reserves, most of which are held by the Federal Reserve Banks, are

a liability of the Federal Reserve Banks and an asset for commercial banks.

The problem of cyclical asymmetry refers to the idea that

a restrictive monetary policy can force a contraction of the money supply, but an expansionary monetary policy may not achieve an increase in the money supply.

The Federal Reserve Banks sell government securities to the public. As a result, the checkable deposits

and reserves of commercial banks both decrease.

A wealthy executive is holding money, waiting for a good time to invest in the stock market. This action would be an example of the

asset demand for money.

The equilibrium interest rate is determined

at the intersection of the total demand for money curve and the supply of money curve

According to monetarists,

changes in the money supply are the primary cause of changes in the price level.

An expansionary monetary policy may be less effective than a restrictive monetary policy because

commercial banks may not be able to find good loan customers.

New classical economists

hold that, left alone, the economy gravitates to its full-employment level of output.

Suppose laid-off workers and other qualified unemployed workers offer to work for less than the wages being paid existing employed workers, but employers do not hire these workers for fear that existing workers will refuse to cooperate with them. This situation best describes the

insider-outsider theory.

The basic determinant of the asset demand for money is the

interest rate

The difference between a so-called real business cycle and a more traditional "spending" business cycle is that in the real-business-cycle theory, macroeconomic instability arises

on the aggregate supply side of the economy.

The benchmark interest rate that banks use as a reference point for a variety of consumer and business loans is the

prime interest rate.