ECO 202 Exam 2 Review
Which of the following is not a correct statement about M2?
M2 is the best definition of money as a medium of exchange
Suppose you withdraw $1000 from a money market mutual fund and deposit the funds in your bank checking account. How will this action affect M1 and M2?
M2 will not be affected, but M1 will increase
Which can be changed more quickly: monetary or fiscal policy?
Monetary policy can be changed ore quickly than fiscal policy. Monetary policy can be changed at any of the FOMC meetings and the smaller number of individuals involved makes it easier to change policy
In the long run, government tax policy can affect private investment which impacts the production function and factors of production. In other words, aggregate supply may be impacted by different types of taxes the government can use.
a tax rebate given one year will cause people to have more money and therefore they will spend more which will cause an increase in aggregate supply
Changes in taxes and spending that happen without actions by the government are called
automatic stabilizers
Reserve requirements are changed infrequently because
banks set long-term policy decisions, loan decisions, and deposit decisions based on the reserve requirement
Why does the failure of workers and firms to accurately predict the price level result in an upward-sloping aggregate supply curve?
because firms are often slow to adjust wages, because menu costs make some prices "sticky", and because contracts between workers and firms make some wages and prices "sticky"
Which of the following is a monetary policy tool used by the Federal Reserve Bank?
buying $500 million worth of government securities, such as Treasury bills, decreasing the rate at which banks can borrow money from the Federal Reserve, and increasing the reserve requirement from 10% to 12.5%
When the economy is experiencing an expansion automatic stabilizers will cause
transfer payments to decrease and tax revenues to increase
If the Fed believes the inflation rate is about to increase, it should
use a contractionary monetary policy to increase the interest rate and shift AD to the left
If the Fed believes the economy is about to fall into recession, it should
use an expansionary monetary policy to lower the interest rate and shift AD to the right
When is it considered "good policy" for the government to run a deficit?
when borrowing is used for long-lived capital goods
An initial increase in a bank's reserves will increase checkable deposits
by an amount greater than the increase in reserves
How can government policies shift the aggregate demand curve to the right?
by increasing government purchases
How does the dynamic model of aggregate supply and aggregate demand explain inflation?
by showing that if total spending in the economy grows faster than total production, prices will rise
Which of the following is not a policy tool the Federal Reserve uses to manage the money supply?
changing income tax rates
What changes should they make if they decide a contractionary fiscal policy is necessary?
congress and the president should enact policies that decrease government spending and increase taxes
The Fed's strategy of increasing the money supply and lowering interest rates in order to increase real GDP is called
expansionary monetary policy
The multiplier effect is only a consideration for increases in government purchases
false
The interest rate that banks charge each other for overnight loans is called the
federal funds rate
The U.S. dollar can best be described as
fiat money
A depreciation in the domestic currency will
increase exports and decrease imports, thereby increasing net exports
What actions can Congress and the president take to move the economy back to potential GDP?
increase government spending or decrease taxes
What do economists mean by the demand for money?
it's the amount of money- currency and checking account deposits- that individuals hold
If the economy moves into recession, monetarists argue that the Fed should
keep the money supply growing at a constant rate
As a result of crowding out in the short run, the effect on real GDP of an increase in government spending is often
less than the increase in government spending
Which of the following is NOT a monetary policy goal of the Federal Reserve bank (the Fed)?
low prices
The amount of U.S. currency outstanding averages to about $2800 per person in the U.S.. This large amounts of currency per person can be partially explained because
many U.S. dollars are held outside of the country by foreigners
What is the advantage of holding money?
money can be used to buy goods, services, or financial
Which of the following is included in M2 but not M1?
money market deposit accounts in banks
What is the disadvantage of holding money?
money, in the form of currency or checking account deposits, earns either no interest or a very low rate of interest
Which of the following refers to the minimum fraction of deposits banks that are required by law to keep as reserves?
the required reserve ratio
When the Federal Reserve sells Treasury securities in the open market,
the buyers of these securities pay for them with checks and banks reserves fall
The position of the long-run aggregate supply (LRAS) curve is determined by
the number of workers, the amount of capital, and the available technology
One of the goals of the Federal Reserve is price stability. For the fed to achieve this goal,
the rate of inflation should be low, such as 1% to 3%, and should be fairly consistent
When the Federal Reserve purchases Treasury securities in the open market?
the sellers of such securities deposit the funds in their banks and bank reserves increase
The quantity theory of money is better able
to explain the inflation rate in the long run
When Congress established the Federal Reserve in 1913, its main responsibility was
to make discount loans to banks suffering from large withdraws by depositors
The wealth effect refers to the fact that
when the price level falls, the real value of household wealth rises, and so will consumption
Suppose that velocity is 4 and the money supply is $600 million. According to the quantity theory of money, nominal output equals
$1.8 billion
Suppose the reserve requirement is 5%. What is the effect on total checkable deposits in the economy if bank reserves increase by $60 billion
$1200 billion increase
In a fractional reserve banking system, what is the difference between a "bank run" and a "bank panic"
A bank run involves one bank; a bank panic involves many banks
Which of the following statements is correct?
A majority of economists support the Fed's choice of the interest rate as its monetary policy target, but some economists believe the Fed should concentrate on the money supply instead, the effect of a change in the federal funds rate on long-term interest rates is usually smaller than its short-term interest rates, changes in the federal funds rate usually will result in changes in both short-term and long-term interest rates on financial assets
According to the dynamic AD-AS model, what is the most common cause of inflation?
AD increases by more than LRAS, and total spending increases faster than total production
Assume the tax multiplier is estimated to be 1.7 and the aggregate supply curve has its usual upward slope. Suppose the government lowers taxes by $57 million.
Aggregate demand will increase by $96.9 million
Almora, a developing open economy, is experiencing an economic boom since it discovered oil reserves off its coast two years ago. Bill Hudson, an economist with the Finance Ministry of Almora, said in an interview that the oil boom has improved the average standard of living in the economy. Robin Peters is an industry analyst who does not agree with Hudson's view. In one of his recent articles in the country's leading business daily, Robin claimed that the high rate of inflation following the boom has actually weakened the expansionary impact on the economy. Which of the following, if true, will support Robin's argument?
Almora's agriculture and manufacturing sectors have become less competitive in the world market
The United Kingdom produces computers and sells them to Canada. At the same time Canada produces cars and sells them to the United Kingdom. Suppose there is an appreciation in the pound. This will cause:
An increase in imports into the United Kingdom and a decrease in exports to Canada, which will cause a decrease in aggregate demand and real GDP
Compute the M1 money supply
Currency and coin held by the public + checking account balances + travelers checks
Do you agree or disagree with the following statement? "I recently read that more than half of the money issued by the government is actually held by people in foreign countries. If that's true, then the United States is less than half as wealthy as the government statistics indicate."
Disagree. Money is currency plus checking deposits. Wealth is the value of assets minus debts.
Which of the following best explains how the economy will adjust from the short-run equilibrium point to the new long-run equilibrium point?
Due to the higher price level, workers will demand higher wages, and firms will raise prices and cause SRAS to shift to the left to point C
During 2005, the FOMC was considered that the inflation rate would begin to accelerate due to the continued boom in the housing market, so the Fed started decreasing the target for the federal funds rate
False
Evaluate the following statement: Banks use deposits to make consumer loans to households and commercial loans to businesses. Banks will loan out every penny of their deposits in order to make a profit.
False, Banks must hold a fraction of their deposits as vault cash or with the Federal Reserve
Which of the following is not a correct comparison between an expansionary fiscal policy in the basic aggregate demand and aggregate supply model and in the dynamic aggregate demand and aggregate supply model?
In the dynamic model, expansionary policy would be used when demand doesn't grow sufficiently; in the basic model, expansionary policy would be used when demand falls. The dynamic model assumes that potential GDP is constantly growing while the basic model assumes that it's static If the economy is below full employment, expansionary fiscal policy will cause an increase in the price level in both models
Which of the following statements is true?
In the long run, changes in the price level do not affect the level of real GDP
According to an article in the New York Times, an official at the Bank of Japan had the following explanation of why monetary policy LOADING... was not pulling the country out of recession: "Despite recent major increases in the money supply, he said, the money stays in banks."
In the quote, when the official says "the money stays in banks," he is referring to an increase in the reserves in banks But the real problem was that banks were not lending the reserves The reason for this may have been a lack of borrowers
Which of the following best describes the difference between crowding out in the short run and in the long run?
In the short run, an increase in government purchases may not fully crowd out private expenditures due to stimulative effect of an increase in government purchases on aggregate demand. In the long run, most economists believe that a permanent increase in government purchases will result in complete crowding out of private expenditures.
In 2017, in proposing a $1 trillion increase in government spending on infrastructure, President Trump argued that the spending would increase total employment in the United States
In the short run, increases in federal spending will increase real GDP and employment if -the economy is producing at less than its potential output and has some cyclical unemployment The federal government would not want to increase its spending, even if the result were to increase real GDP and employment in the short run, if -it would lead to a greater federal deficit and an increase in the national debt President Trump was assuming that in 2017, the economy was -able to create more jobs and expand without increasing the inflation rate
Which of the following is true with respect to Irving Fisher's quantity equation. M x V = P x Y?
P= the GDP deflator V= Average number of times a dollar is spent on goods and services V= P x Y/M M= M1 definition of the money supply
Why would the Fed intentionally use contractionary monetary policy to reduce real GDP?
The Fed intends to reduce inflation, which occurs if real GDP is greater than potential GDP
What can we expect from the Federal Reserve Bank if it seeks to move the economy in the direction of long-run macroeconomic equilibrium?
The Fed will pursue a contractionary monetary policy
Neutron Inc., is one of the leading electric car manufacturers in Northbay, a developing economy. Neutron's sales increased by more than 20 percent this year compared to the previous year, which started a debate within the company about whether the firm should increase prices. Among those in favor of a price hike is Eric Johnson, the operations head at Neutron. Eric is of the opinion that given the high demand for Neutron's cars, the firm should increase price to improve profits. Mike Wilson, the CEO of the firm, however, feels that a price increase would adversely affect the demand for Neutron's products because he thinks consumers in this industry are more price conscious than brand loyal. Which of the following, if true, will support Eric's view?
The economy of Northbay is expected to grow at a remarkable pace of 9 percent in the upcoming year
Paul Schumer and Jim Miller, two analysts at a research institute, discuss the rising costs of higher education in their country. Paul feels that escalating tuition fees in colleges and universities are indicative of a bubble in the higher education market. According to Jim, however, the rising costs are the result of better quality education being provided by the institutions in recent years. Which of the following, if true, will strengthen Jim's claim?
The gap between the earnings of college graduates and nongraduates is increasing
The Federal Reserve has multiple economic goals for monetary policy to achieve, However, it can be difficult to manage all of the goals at once. Which of the following is not true regarding the multiple goals of the Fed?
The goal of financial market stability means that the Fed tries to ensure that asset prices, such as stock prices, increase at a very high rate so investors can make more money
Why might increasing taxes as a fiscal policy be more difficult policy than the use of monetary policy to slow down and economy experiencing inflation?
The legislative process experiences longer delays than monetary policy
Explain whether you agree with this argument: If the Fed actually ever carried out a contractionary monetary policy, the price level would fall. Because the price level has not fallen in the United States over an entire year since the 1930s, we can conclude that the Fed has not carried out a contractionary policy since the 1930s.
The statement is false. A contractionary policy could result in a lower rate of inflation rather than a fall in the price level
"The Fed has an easy job. Say it wants to increase real GDP by $200 billion. All it has to do it increase the money supply by that amount."
The statement is incorrect because an increase in the money supply does not affect real GDP directly
Velocity is defines as
V= ( P x Y)/ M
Which of the following in not true when the economy is in macroeconomic equilibrium?
When the economy is at long-run equilibrium, firms will have excess capacity
Does government spending ever reduce private spending?
Yes, due to crowding out.
Suppose you decide to withdraw $100 in cash from your checking account. Which one of the following choices accurately shows the effect of this transaction on your bank's balance sheet?
Your bank's balance sheet shows a decrease in reserves by $100 and a decrease in deposits by $100
Which of the following is usually the cause of stagflation?
a supply shock as a result of an unexpected increase in the price of a natural resource
Which of the following factors does not cause the aggregate demand curve to shift
a change in the price level
The international-trade effect refers to the fact that an increase in the price level will result in
a decrease in exports and an increase in imports
When the Federal Reserve sells bonds as a part of a contractionary monetary policy, there is:
a decrease in the money supply and an increase in the interest rate
Which of the following is not one of the monetary policy goals of the Federal Reserve ("the Fed")?
a high foreign exchange rate of the U.S. dollar relative to other currencies
The aggregate demand curve slopes downward for all of the following reasons except
a lower price level makes imports from other countries less expensive, and U.S. citizens buy more imports
Which of the following causes the short-run aggregate supply curve to shift to the right?
a positive technological change
If the economy adjusts through the automatic mechanism, then a decline in aggregate demand causes
a recession in the short run and a decline in the price level in the long run
Which of the following is NOT a function of money?
acceptability
The use of money
allows for greater specialization, reduces the transaction costs of exchange, and eliminates the double coincidence of wants
Suppose that at the same time Congress and the president pursue an expansionary fiscal policy, the Federal Reserve pursues an expansionary monetary policy. How might an expansionary monetary policy extent of crowding out in the short run?
an expansionary monetary policy would decrease interest rates and thus reduce the extent of crowding out
Which of the following causes the short-run aggregate supply curve to shift to the left?
an increase in the expected price of an important natural resource
The SRAS curve will shift to the left if there is
an increase in the expected price of an important natural resource, an increase in the adjustment of workers' and firms' prior underestimation of the price level, an increase in expected future prices
The SRAS curve will shift to the rights if there is
an increase in the labor force or capital accumulation, an increase in productivity, a technological change
The aggregate demand curve is downward sloping because
an increase in the price level reduces real money holdings, which reduces the amount of expenditures
When actual GDP is below potential GDP the budget deficit increases because of
an increase in transfer payments and a decrease in tax revenues
Suppose the government increases expenditures by $70 billion and the marginal propensity to consumer is 0.50. By how will equilibrium GDP change?
change= $140 billion (1/1-MPC) 1/1-0.5= 2 x 70
What is fiscal policy?
changes in government spending and taxes to achieve macroeconomic policy objectives
Which of the following is not one of the main sets of factors that can cause the supply and demand curves in the foreign exchange market to shift?
changes in the U.S. supply of oil and changes in the foreign supply of oil
How does an increase in the price level affect the quantity of real GDP supplied in the long run?
changes in the price level do not affect the level of GDP in the long run
If Congress and the president decide an expansionary fiscal policy is necessary, what changes should they make in government spending or taxes?
congress and the president should enact policies that increase government spending and decrease taxes
What is meant by crowding out?
crowding out is a decline in private expenditures as a result of increases in government purchases
Increased government debt can lead to higher interest rates and, as result, crowding out of privates investment spending. In terms of borrowing (debt-spending), what will offset the effect of crowing out in the long run so that government debt poses less of a problem to the economy?
debt-spending on education, research and development, high and ports
Example of expansionary fiscal policy
decrease in taxes
From an initial long-run macroeconomic equilibrium, if the Federal Reserve anticipated the next year aggregate demand would grow significantly slower than long-run aggregate supply, then the Federal Reserve would most likely
decrease interest rates
Which of the following is the largest liability of a typical bank?
deposits
The (FOMC) Federal Open Market Committee
determines the target funds rate and the direction of open market operation policies, includes the Board of Governors and the presidents of the 12 Federal Reserve regional banks (through not all are voting members), and makes decisions that are voted on by all 7 members of the Board of Governors but only 5 of the 12 regional bank presidents
If the government cuts taxes in order to increase aggregate demand, the action is called
discretionary fiscal policy
When a central bank intervenes into the foreign exchange market to set a country's exchange rate over long periods of time, it's called
fixed exchange rate
Aggregate demand (AD) is comprised of expenditure components that include:
government spending, consumption, investment, and net exports
The interest rate effect refers to the fact that a higher price level results in
higher interest rates and lower investment
In addition to the Federal Reserve Bank, what other economic actors influence the money supply?
households, firms, and banks
Credit cards are
included in neither the M1 definition of the money supply nor in the M2 definition
An article in the Economist magazine notes that: "the economy's potential to supply goods and services (is) determines by such things as labour force and capital stock, as well as inflation expectations." This list of determinants of potential GDP is
incorrect since changes in the expected price level affect short run aggregate supply but not the long run aggregate supply
Causes a shift in the aggregate demand curve
increased consumer optimism, lower interest rates, decrease in the U.S. exchange rate relative to other currencies, and lower taxes
Which of the following events would cause the demand curve in the foreign exchange market to shift?
increased demand for U.S. goods and services, increase in U.S. interest rates, changes in expectations of the future value of U.S. currencies
Expansionary fiscal policy is less effective in an open economy because
increases in government spending can increase interest rates, which increases the value of the dollar and crowds out net exports
Expansionary monetary policy is more effective in an open economy because
interest rate decreases also reduce the value of the dollar, which increases net exports and further increases aggregate demand
The Federal Reserve cannot affect the price level directly; therefore, the Fed typically uses the following as its policy target
interest rates
The federal funds rate
is the rate that banks charge each other for short-term loans of excess reserves
Which of the following is true with respect to hyperinflation?
it can be hundreds- even thousands- of percentage points per year, in the presence of hyperinflation, firms and households avoid holding money, its cause by central banks increasing the money supply at a rate much greater than the growth rate of real GDP
The Federal Reserve Bank of New York is always voting member of the FOMC because
it carries out the policy directive of the FOMC
M1 includes more than just currency because
other assests can also be used to make transactions to buy goods and services
Why does the short-run aggregate supply curve (SRAS) slope upward?
prices of final goods rise more quickly than the prices of inputs, firms and workers fail to predict changes in the price level, and contracts keep wages "sticky"
A baseball fan with a Mike Trout baseball card wants to trade it for a Giancarlo Stanton baseball card, but everyone the fan knows who has a Stanton card doesn't want a Trout card
principle of a double coincidence of wants
Why does the short-run aggregate supply curve slope upward?
profits rise when the prices of the goods and services firms sell rise more rapidly than the prices they pay for inputs
Which of the following policy tools is the Federal Reserve least likely to use in order to actively change the money supply?
reserve requirements
Congress broadened the Fed's responsibility since
the 1930s as a result of the Great Depression
Which of the following factors will cause the long-run aggregate supply curve to shift to the right?
the accumulation of more machinery and equipment, and increase in the number of workers in the economy, and technological change
Monetary policy is defined as
the actions the Federal Reserve takes to manage the money supply and interest rates
A double coincidence of wants refers to
the fact that for a barter trade to take place between two people, each person must want what the other one has
Who is responsible for fiscal policy?
the federal government
Which of the following factors brought on the recession of 2007-2009?
the financial crisis, a rapid increase in the price of oil, and the end of the housing bubble
If the short-run aggregate supply curve (SRAS) were a horizontal line, what would be the impact on the size of the government purchases and tax multipliers
the impact of the multiplier would be larger if the SRAS curve is horizontal
If the price level decreases
the money demand curve shifts to the left
If real GDP increases
the money demand curve shifts to the right
What are the Fed's main monetary policy targets?
the money supply and interest rates
Which of these variables are the main monetary policy targets of the Fed?
the money supply and the interest rate
According to the quantity theory of money, inflation results from which of the following?
the money supply grows faster than real GDP