ECON 2203 FINAL

Marta lends money at a fixed interest rate and then inflation turns out to be higher than she had expected it to be. The real interest rate she earns is

lower then she had expected, and the real value of the loan is lower than she had expected.

If the reserve ratio is 12.5 percent, then $2,000 of additional reserves can create up to

$16,000 of new money.

According to the quantity equation (also known as the equation of exchange), the price level would change less than proportionately with a rise in the money supply if there were also

either a rise in output or a fall in velocity. MV=PY so if M increases then P will increase by the same proportion unless either V is falls or Y is larger.

During a recession the economy experiences

falling employment and income.

If the MPC = 0.75, then the government purchases multiplier is about

4

If the sacrifice ratio is 3, then reducing the inflation rate from 5 percent to 3 percent would require sacrificing

6 percent of annual output.

Which of the following is an example of crowding out?

An increase in government spending increases interest rates, causing investment to fall.

Last year, Jane spent all of her income to purchase 200 units of corn at $5 per unit. This year, she spent all of her income to purchase 180 units of corn at $6 per unit.

Jane's nominal income increased this year, but her real income decreased. Jane's real income has fallen because she used to be able to buy 200 units of corn and now only 180 units of corn. Previously she had $5 x 200 = $1,000 to spend and now has $6 x 180 = $1,080 so her nominal income actually increased.

If M = 2,000, P = 2.25, and Y= 6,000, what is velocity?

MV = PY or V = PY/M = 2.25 x 6,000 / 2,000 = 6.75

Again consider the economy is in long-run equilibrium and then stock prices rise more than expected and stay high for some time. In the long run, the change in price expectations created by the stock market boom shifts

Since prices rose above what was expected due to the shift in the AD, price expectations then rise and hence the SRAS shifts left to put the economy back in equilibrium.

If the central bank unexpectedly increases the money supply, then in the short run unemployment will move

below its natural rate. The short-run Phillips curve shifts right as the economy moves back to its natural rate of unemployment

In 2009 Congress passed legislation providing states with funds to build roads and bridges. It also instituted tax cuts. Which of these shifts aggregate demand right?

both the increased funding for states and the tax cuts

Consider the economy is in long-run equilibrium. Then stock prices rise more than expected and stay high for some time. In the short run what happens to the price level and real GDP?

both the price level and real GDP rise.

When the Federal Reserve conducts open-market operations to increase the money supply, it

buys government bonds from the public.

Proponents of rational expectations argued that the sacrifice ratio

could be low because people might adjust their expectations quickly if they found anti-inflation policy credible.

Which list ranks assets from most to least liquid?

currency, stocks, fine art

When the price level falls, the number of dollars needed to buy a representative basket of goods

decreases, so the value of money rises.

If the Fed increases the money supply, then 1/P

falls, so the value of money falls

Fiat money

has no intrinsic value.

Keynes believed that economies experiencing high unemployment should adopt policies to

increase aggregate demand

If monetary neutrality holds, then an increase in the money supply

increases nominal but not real variables. Most economists think that monetary neutrality is a good description of the long run.

When the interest rate increases, the opportunity cost of holding money

increases, so the quantity of money demanded decreases. You Answered

As the reserve ratio decreases, the money multiplier

increases. As banks have to hold less reserves, they can lend more so the multiplier process is greater. The simple multiplier = 1/r, and as r decreases this will rise.

Higher inflation makes relative prices

more variable, making it less likely that resources will be allocated to their best use

According to Friedman and Phelps, policymakers face a tradeoff between inflation and unemployment

only in the short run.

The nominal interest rate is 6 percent and the inflation rate is 3 percent. What is the real interest rate?

r - i - inflation = 6% - 3% = 3%

Economic variables whose values are measured in goods are called

real variables.

In 2021 the U.S. has seen ______ inflation and if it continues you would expect the Federal Reserve to _____ interest rates.

relatively high; raise

Other things the same, when the price level rises, interest rates

rise, so firms decrease investment.

Which of the following is included in M2 but not in M1?

savings deposits

Suppose that the MPC is 0.7, and there are no crowding-out effects. If government expenditures increase by $30 billion, then aggregate demand

shifts rightward by $100 billion.

You saved $500 in currency in your piggy bank to purchase a new laptop. The $500 you kept in your piggy bank illustrates money's function as a _______. The laptop's price is posted as $500. The $500 price illustrates money's function as a _____. You use the $500 to purchase the laptop. This transaction illustrates money's function as a ______.

store of value, unit of account, medium of exchange

The long-run aggregate supply curve shifts right if

technology improves - bc LRAS is shifted by things that impact the real productive capability of the economy (resources, knowledge, technology)

The short-run relationship between inflation and unemployment is often called

the Phillips curve.

The interest rate the Fed charges on loans it makes to banks is called

the discount rate.

Using the liquidity-preference model, when the Federal Reserve decreases the money supply,

the equilibrium interest rate increases.

Which of the following effects helps to explain the slope of the aggregate-demand curve?

the interest-rate effect, the wealth effect, the exchange-rate effect

Critics of stabilization policy argue that

the lag problem ends up being a cause of economic fluctuations.

Which of the following is not an automatic stabilizer?

the minimum wage

If aggregate demand shifts left, then in the short run

the price and real GDP both fall.

Again consider the economy is in long-run equilibrium and then stock prices rise more than expected and stay high for some time. After the economy adjusts to a new long run equilibrium how is the new long-run equilibrium different from the original one?

the price level is higher and real GDP is the same.

The sticky-wage theory of the short-run aggregate supply curve says that the quantity of output firms supply will increase if

the price level is higher than expected making production more profitable

Real and nominal variables are highly intertwined, and changes in the money supply change real GDP. Most economists would agree that this statement accurately describes

the short run, but not the long run.

A change in expected inflation shifts

the short-run Phillips curve, but not the long run Phillips curve.

An increase in the expected price level shifts the

the short-run but not the long-run aggregate supply curve left.

A basis for the slope of the short-run Phillips curve is that when UNEMPLOYMENT is LOW there are

upward pressures on prices and wages.