Wingender Macro Final
non price determinants of the aggregate supply (5)
-changes in the size of the labor force/capital stock -technological advances -future price expectations -changes in natural resource prices -business taxes/subsidies
what three facts make the aggregate demand and aggregate supply model dynamic?
-potential real GDP increases continually, shifting the long run aggregate supply curve to the right -during most years, aggregate demand shifts to the right -except during periods when workers and firms expect high rates of inflation, aggregate supply curve shifts to the right
which of the following functions of money would be violated if inflation where high? -unit of account -certificate of gold -store of value -medium of exchange
-store of value
How many federal banks are there?
12
in expansionary fiscal policy, T _______
Decreases
T/F : expansionary fiscal policy involves increasing government purchases and increasing taxes
F
government cutting taxes to stimulate economy would be an example of _______ policy
Fiscal
fiscal policy involves
G and T
if aggregate demand just increased, which of the following may have caused the increase? : an increase in ______
G or T
government purchases will ______ aggregate demand
Increase
in contractionary fiscal policy, T _______
Increases
monetary policy involves two things
M and I
quantity equation (definition and equation)
M x V = P x Y relates money supply to the price level M- money supply, V- velocity of money, P-price level, Y-real output
T/F: an appropriate fiscal policy response when aggregate demand is growing at a slower rate than aggregate supply is to cut taxes
T
a decrease in disposable income will shift the AD curve to the left (T/F)
T
required reserve ratio
The minimum fraction of deposits banks are required by law to keep as reserves
What happens to the equilibrium when we encounter: recession, expansion, or supply shocks?
We make 2 assumptions: 1. there is no inflation and none is expected 2. there is no long term growth
Interest rates in the economy have fallen: aggregate demand will ____, equilibrium price will _____, and the equilibrium level of GDP will ___
__rise, rise, rise
M2
a broader definiton of money supply: M1 + non-checking savings accounts, CD's, + money market mutual supply
Fed as a lender of last resort
a central bank (Fed) can stop a bank panic by making loans to banks that cannot borrow funds elsewhere
stagflation
a combination of inflation and stagnation, usually resulting from supply shock
why is the aggregate demand curve downward sloping?
a decline in the price level increases the quantity of real GDP demanded (consumption, investment, and net exports increase)
security
a financial asset (such as a stock/bond) that can be bought or sold in a financial market
Phillips curve
a graph showing the short run relationship between unemployment rate and inflation rate
bank panic
a situation in which many banks experience runs at the same time
if firms become more optimistic about the future profitability of investment spending, ______ will shift to the right.
aggregate demand curve
supply shock
an unexpected event that causes the short-run aggregate supply curve to shift
the increase in government spending on unemployment insurance payments to workers who lose their jobs during a recession and the decrease in government spending on unemployment insurance payments to workers during an expansion is an example of
automatic stabilizers
tax cuts on business income increase aggregate demand by increasing
business investment spending
The change in checking accounts deposits
change in reserves x 1/RR
fiscal policy
changes in federal taxes and purchases that are intended to achieve macroeconomic policy goals
what are the three categories that cause the aggregate demand curve to shift?
changes in government policies, changes in the expectations of households and firms, changes in foreign variables
discretionary fiscal policy
changes in government spending and taxes that are the option of the federal government
who controls fiscal policy?
congress and the president
what are the four non-price determinants of aggregate demand?
consumption (C) consumer spending investment (I), government purchases (G), and net exports (NX)
securitization
creating a secondary market in which loans that have been bundled together can be bought and sold in financial markets (just as corporate or government bonds are)
When banks lose reserves, loans _______ and the money supply _______
decrease, decreases
contractory monetary policy on the part of the Fed results in an _______ in the money supply, a ________ in interest rates, and a _______ in GDP
decrease, increase, decrease
in contractionary fiscal policy, G _______
decreases
usually the biggest liabilities banks have
deposits
reserves
deposits the bank has retained rather than loaned out or invested
government debt
every time the federal government runs a budget deficit, the treasury must borrow funds from investors by selling Treasury securities
countercyclical policy - during a recession, use _________ fiscal policy
expansionary
increasing government purchases and cutting taxes are examples of (contractionary/expansionary) policy.
expansionary
if the economy is falling below potential real GDP, which of the following would be an appropriate fiscal policy to bring back long-run aggregate supply? an INCREASE in
government purchases
automatic stabilizers
government spending and taxes that automatically increase or decrease along with the business cycle
an objective of fiscal policy
high rates of economic growth
a decrease in the price level in the aggregate demand curve leads to a ________ level of real GDP demanded
higher
why is the long run aggregate supply curve vertical?
in the long run, real GDP is always at its potential level and is unaffected by price level
deflation will _______ the quantity of GDP demanded
increase
When banks gain reserves, loans _______ and the money supply _______
increase, increases
in expansionary fiscal policy, G ______
increases
largest source of fed gov revenue include
individual income taxes, followed by social insurance taxes
contractionary fiscal policy
involves decreasing G or increasing T and shifts AD to the left. The goal of this is to reduce increases in AD that seem likely to lead to inflation
expansionary fiscal policy
involves increasing G or decreasing T and shifts AD to the right. The goal of this is to increase AD relative to what it would have been without the policy
Contractionary monetary policy
is when a central bank uses its monetary policy tools to fight inflation.
tax increases necessary to fund future Social Security and Medicare benefit payments would be....
large, slowing economic growth
transfer payments
largest and fastest growing category of federal government expenditures
in contractionary fiscal policy, AD shifts to the _______
left
raising interest rates causes the aggregate demand curve to shift to the _______.
left
if workers and firms both expect that prices will be 2.5% higher next year, the short-run aggregate supply curve will shift to the _____ and wages will ____
left, increase
usually the the biggest assets banks have
loans
discount loans
loans the Federal Reserve makes to banks
open market operations
mainly consist of buying and selling treasury securities
what is money?
medium of exchange, unit of account, store of value
when the government takes action in the economic world, it is through _____ policy.
monetary, fiscal
M1
narrow definition of money supply: the sum of currency in circulation, checking account deposits in banks, and holdings of traveler's checks
the main tool the Fed uses to conduct monetary policy
open market operations
monetary policy - the three tools the Fed uses to implement monetary policy
open market operations, discount policy, reserve requirements
the short run aggregate supply curve has a ________ slope because as prices of _________ rise, prices of _________ rise more slowly
positive, final goods and services, inputs
the level of aggregate supply in the long run is not affected by changes in _______ ________
price level
potential GDP refers to the level of
real GDP in the long run
excess reserves
reserves greater than the required amounts
required reserves
reserves that a bank is legally required to hold, based on its checking account deposits
three major assets on a banks balance sheet
reserves, loans, and holdings of securities
if households are optimistic about the future, aggregate demand curve will shift to the ____. right
right
if net exports fall, aggregate demand curve will shift to the _______.
right
in expansionary fiscal policy, AD shifts to the _______
right
lowering interest rates causes the aggregate demand curve to shift to the _______.
right
which way would a long period of technological innovation (like cotton gin, industrial revolution) shift the short-run aggregate supply curve?
right
a technological advance would cause a short-run aggregate supply curve shift to the _______
right _______
what does the aggregate demand and aggregate supply model explain?
short-run fluctuations in real GDP and price level
when the aggregate demand curve and the short-run aggregate supply curve intersect, the economy is in a...
short-run macroeconomic equilibrium
Aggregate demand
shows the amount of real output that buyers collectively desire to purchase at each possible price level. Inverse relationship between price level and amount of GDP demanded (AD)
aggregate demand curve
shows the relationship between the price level and the quantity of real GDP demanded
1/Reserve Ratio
simple deposit multiplier
government transfer payments include
social security and medicare
Federal Open Market Committee
the 12 member group that determines the purchase and sale policies of the Federal Reserve Banks in the market for U.S. government securities . meets in D.C. eight times per year to discuss monetary policy
federal reserve system
the US central bank, consisting of Board of Governors of the Federal Reserve and the 12 Federal Banks, which controls the activity of the nation's banks and thrifts and thus the money supply commonly referred to as the Fed
monetary policy
the actions the federal reserve takes to manage money supply and interest rates to achieve macroeconomic policy goals
what happens to the economy on the aggregate demand and supply model if any other variable than the price level changes?
the aggregate demand curve will shift
velocity of money
the average number of times each dollar in the money supply is spent during the year
what happens to the economy on the aggregate demand and supply model if the price level changes (and all other determinants stay the same)?
the economy will move up or down a stationary aggregate demand curve
Discount rate
the interest rates the Federal Reserve charges on discount loans
the use of fiscal policy to stabilize the economy is limited because
the legislative process is slow
simple deposit multiplier
the ratio of the amount of deposits created by banks to the amount of new reserves
bank reserves include
vault cash and deposits with the federal reserve
fractional reserve banking system
when a bank keeps less than 100 percent of deposits as reserves
bank run
when many depositors decide to withdraw simultaneously from a bank
why does the short run aggregate supply curve slope upward?
workers and firms fail to predict accurately the future price level (contracts make wages/prices "sticky", businesses often adjust wages slowly, menu costs sometimes make prices "sticky")