ECN 390 Final

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If the nominal interest rate is 6 percent and the inflation rate is 3 percent, the real interest rate is

3 percent

Which of the following statements regarding taxes is correct

A permanent change in taxes has a greater effect on aggregate demand than a temporary change in taxes

Which of the following statements about economic fluctuations is true

A variety of spending, income, and output measures can be used to measure economic fluctuations because most macroeconomic quantities tend to fluctuate together.

Which of the following statements about a bank's balance sheet is true?

Assets minus liabilities equals owner's equity or capital.

Which of the following statements about inflation is not true

Inflation reduces people's real purchasing power because it raises the cost of the things people buy

Which of the following statements about stabilization policy is true?

Many economists prefer automatic stabilizers because they affect the economy with a shorter lag than activist stabilization policy.

Velocity is

the annual rate of turnover of the money supply

The discount rate is

the interest rate the Fed charges on loans to banks.

If the Fed engages in an open-market purchase, and at the same time, it raises reserve requirements

we cannot be certain what will happen to the money supply

Suppose the Fed purchases a $1,000 government bond from you. If you deposit the entire $1,000 in your bank, what is the total potential change in the money supply as a result of the Fed's action if reserve requirements are 20 percent?

$5,000

Suppose Joe changes his $1,000 demand deposit from Bank A to Bank B. If the reserve requirement is 10 percent, what is the potential change in demand deposits as a result of Joe's action?

0

An inflation tax is

a tax on people who hold money

Suppose the nominal interest rate is 7 percent while the money supply is growing at a rate of 5 percent per year. Assuming real output remains fixed, if the government increases the growth rate of the money supply from 5 percent to 9 percent, the Fisher effect suggests that, in the long run, the nominal interest rate should become

11 percent

If the real interest rate is 4 percent, the inflation rate is 6 percent, and the tax rate is 20 percent, what is the after-tax real interest rate?

2 %

If the marginal propensity to consume (MPC) is 0.75, the value of the multiplier is

4

If the reserve ratio is 25 percent, the value of the money multiplier is

4

Suppose the economy is initially in long-run equilibrium. Then suppose there is a drought that destroys much of the wheat crop. If policymakers allow the economy to adjust to long-run equilibrium on its own, according to the model of aggregate demand and aggregate supply, what happens to prices and output in the long run?

Output and the price level are unchanged from their initial values.

Suppose the economy is initially in long-run equilibrium. Then suppose there is a reduction in military spending. According to the model of aggregate demand and aggregate supply, what happens to prices and output in the short run?

Prices fall; output falls.

Suppose the economy is initially in long-run equilibrium. Then suppose there is a reduction in military spending. According to the model of aggregate demand and aggregate supply, what happens to prices and output in the long run?

Prices fall; output is unchanged from its initial value.

Suppose the economy is initially in long-run equilibrium. Then suppose there is a drought that destroys much of the wheat crop. According to the model of aggregate demand and aggregate supply, what happens to prices and output in the short run?

Prices rise; output falls

Which of the following is not a function of money

Protection against inflation

Which of the following best describes how an increase in the money supply shifts aggregate demand

The money supply shifts right, the interest rate falls, investment increases, and aggregate demand shifts right.

If money is neutral

a change in the money supply only affects nominal variables such as prices and dollar wages

Which of the following events shifts the short-run aggregate-supply curve to the right?

a drop in oil prices

The quantity theory of money concludes that an increase in the money supply causes

a proportional increase in prices.

The initial impact of an increase in government spending is to shift

aggregate demand to the right

Which of the following would not cause a shift in the long-run aggregate-supply curve?

an increase in price expectations

Which of the following costs of inflation does not occur when inflation is constant and predictable?

arbitrary redistributions of wealth

Which of the following policy combinations would consistently work to increase the money supply?

buy government bonds, decrease reserve requirements, decrease the discount rate

The M1 money supply is composed of

currency, demand deposits, traveler's checks, and other checkable accounts.

Suppose a wave of investor and consumer optimism has increased spending so that the current level of output exceeds the long-run natural rate. If policymakers choose to engage in activist stabilization policy, they should

decrease government spending, which shifts aggregate demand to the left

The initial effect of an increase in the money supply is to

decrease the interest rate

When money demand is expressed in a graph with the interest rate on the vertical axis and the quantity of money on the horizontal axis, an increase in the interest rate

decreases the quantity demanded of money

Required reserves of banks are a fixed percentage of their

deposits

Countries that employ an inflation tax do so because

government expenditures are high and the government has inadequate tax collections and difficulty borrowing

In the long run, inflation is caused by

governments that print too much money.

Commodity money

has intrinsic value

When prices rise at an extraordinarily high rate, it is called

hyperinflation

Suppose a wave of investor and consumer pessimism causes a reduction in spending. If the Federal Reserve chooses to engage in activist stabilization policy, it should

increase the money supply and decrease interest rates

The long-run effect of an increase in the money supply is to

increase the price level

Which of the following statements is true regarding the long-run aggregate-supply curve? The long-run aggregate-supply curve

is vertical because an equal change in all prices and wages leaves output unaffected

If the money supply grows 5 percent, and real output grows 2 percent, prices should rise by

less than 5 percent

According to the wealth effect, aggregate demand slopes downward (negatively) because

lower prices increase the value of money holdings and consumer spending increases.

According to the interest-rate effect, aggregate demand slopes downward (negatively) because

lower prices reduce money holdings, increase lending, interest rates fall, and investment spending increases

Suppose that, because of inflation, a business in Russia must calculate, print, and mail a new price list to its customers each month. This is an example of

menu costs

Suppose the price level falls but suppliers only notice that the price of their particular product has fallen. Thinking there has been a fall in the relative price of their product, they cut back on production. This is a demonstration of the

misperceptions theory of the short-run aggregate-supply curve

The quantity equation states that

money x velocity = price level x real output

The Fed's tools of monetary control are

open-market operations, lending to banks, reserve requirements, and paying interest on reserves.

An example of fiat money is

paper dollars

Suppose the economy is operating in a recession such as point B in Exhibit 4. If policymakers allow the economy to adjust to the long-run natural level on its own,

people will reduce their price expectations and the short-run aggregate supply will shift right.

Check My Work According to the model of aggregate supply and aggregate demand, in the long run, an increase in the money supply should cause

prices to rise and output to remain unchanged.

An increase in the marginal propensity to consume (MPC)

raises the value of the multiplier

Which of the following policy actions by the Fed is likely to increase the money supply

reducing reserve requirements

Policymakers are said to "accommodate" an adverse supply shock if they

respond to the adverse supply shock by increasing aggregate demand, which further raises prices.

Stagflation occurs when the economy experiences

rising prices and falling output

In the model of aggregate demand and aggregate supply, the initial impact of an increase in consumer optimism is to

shift aggregate demand to the right

In the market for real output, the initial effect of an increase in the money supply is to

shift aggregate demand to the right.

Suppose the economy is operating in a recession such as point B in Exhibit 4. If policymakers wished to move output to its long-run natural level, they should attempt to

shift aggregate demand to the right.

When the supply and demand for money are expressed in a graph with the interest rate on the vertical axis and the quantity of money on the horizontal axis, an increase in the price level

shifts money demand to the right and increases the interest rate.

Suppose that, because of inflation, people in Brazil economize on currency and go to the bank each day to withdraw their daily currency needs. This is an example of

shoeleather costs

Suppose the price level falls. Because of fixed nominal wage contracts, firms become less profitable and they cut back on production. This is a demonstration of the

sticky-wage theory of the short-run aggregate-supply curve.

To insulate the Federal Reserve from political pressure,

the Board of Governors are appointed to fourteen-year terms

Suppose the government increases its purchases by $16 billion. If the multiplier effect exceeds the crowding-out effect, then

the aggregate-demand curve shifts to the right by more than $16 billion

Which of the following is not a reason why the aggregate-demand curve slopes downward?

the classical dichotomy/monetary neutrality effects

When an increase in government purchases raises incomes, shifts money demand to the right, raises the interest rate, and lowers investment, we have seen a demonstration of

the crowding-out effect.

For the United States, the most important source of the downward slope of the aggregate-demand curve is

the interest-rate effect

When an increase in government purchases causes firms to purchase additional plant and equipment, we have seen a demonstration of

the investment accelerator

In the long run, the demand for money is most dependent upon

the level of prices

If banks increase their holdings of excess reserves

the money multiplier and the money supply decrease.

decrease in the reserve requirement causes

the money multiplier to rise

When the Fed sells bonds

the money supply decreases.

Suppose all banks maintain a 100 percent reserve ratio. If an individual deposits $1,000 of currency in a bank

the money supply is unaffected

When an increase in government purchases increases the income of some people, and those people spend some of that increase in income on additional consumer goods, we have seen a demonstration of

the multiplier effect

An example of a real variable is

the ratio of the value of wages to the price of soda

Keynes's liquidity preference theory of the interest rate suggests that the interest rate is determined by

the supply and demand for money

If the price level doubles,

the value of money has been cut by half.

Which of the following is an automatic stabilizer?

unemployment benefits

The Board of Governors of the Federal Reserve System consists of

up to seven members appointed by the president

If actual inflation turns out to be greater than people had expected, then

wealth was redistributed to borrowers from lenders.

The natural level of output is the amount of real GDP produced

when the economy is at the natural rate of unemployment


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