Econ 222 Lindsay Practice Final and practice quizzes
"Fiscal Policy" is the federal government's plan for
spending and taxes, designed to influence the level of aggregate demand.
The most volatile component of aggregate demand is
spending on items that increase the stock of capital
The long-run aggregate supply curve shifts right if
technology improves.
A country with a relatively low level of real GDP per person is considering adopting two policies to promote economic growth. The first is to decrease barriers to trade. The second is to restrict foreign portfolio investment. Which of these policies do most economists say promote growth?
the first but not the second
Which of the following is not a determinant of the long-run level of real GDP?
the inflation rate
One good argument for some inflation is
the probability of the zero bound problem (or effective lower bound problem) is reduced
The interest rate (nominal) on the 10 year T-note has been trending down since 1980 in a large part because of
the rate of inflation has been decreasing so this would be explained by the Fisher effect
One of the strongest arguments against active stabilization is
the recognition that there are lags that make timely intervention very difficult
If the wage rate was "sticky", what would you expect to happen if the demand for labor decreased?
unemployment
If the Federal Reserve wants to decrease the monetary base (M0), it can
use open market operations to sell bonds
Which of the following shifts aggregate demand upward and to the right?
The Fed increases the money supply M1
Suppose the banking system currently has $300 billion in reserves; the reserve requirement is 10 percent; and excess reserves amount to $5 billion. What is the level of checking deposits?
$2,950 billion
A steel company sells some steel to a bicycle company for $150. The bicycle company uses the steel to produce a bicycle, which it sells for $250. Taken together, these two transactions contribute
$250 to nominal GDP.
If the stock market crashes, then
AD decreases, which the Fed could offest by decreasing the Federal Funds Rate
All of the following would shift the aggregate demand curve to the right and upward, except (ceteris paribus)
Both "C" and "E" ; C) an increase in imports , E) An increase in Taxes
Real interest rates
Both "a" and "b" ; a) can be positive or negative, b) can be influenced by the federal reserve
If the economy is on the outside of the Production Possibilities Frontier with an inflation rate of 3%, which might be a response of the Federal Open Market Committee (FOMC)
C) Increase the Federal Funds Rate (FFR)
A fiscal policy to increase aggregate demand by spending might
D) both A and C ; A) cause crowding out , C) decrease Investment (I)
Which of the following is included in the aggregate demand for goods and services?
F) Both A and C ; A) consumption expenditures , C) net exports
Suppose expenditures decrease and aggregate demand decreases. Businesses cut back on production and lay off employees. According to Keynesian theory
F) Both B and D ; B) The economy could still be in equilibrium inside of the PPF , D) The economy could be in equilibrium if Y = C + I + G + NX
If people stopped buying new homes, and builders cut back on the number of homes built, this would
F) Both B and E ; B) Make investment (I) fall and shift aggregate demand left. , E) reduce real GDP
Suppose the economy is below its potential GDP. Which of the following scenarios is possible?
Inflation is 10 % and unemployment is 10%
If the FOMC orders a purchase of government securities from member banks, where does it usually get the money to pay for the securities?
It creates money to pay for the securities by adding the purchase amount to banks' reserves.
If the price of an item increases, what happens to the demand for that item?
It does not change.
How has M0 (the monetary base) changed since 2019?
It has increased
What causes recessions?
It isn't clear
Normally the Fed through the FOMC will focus on ____ as a tool to stabilize the economy
Short term interest rates
While a TV reporter might state that "Today the Fed lowered the federal funds rate from 5.5% to 5.25%", a more precise account of the Fed's action would be as follows
Today the Fed told its bond traders to conduct open-market operations in such a way that the equilibrium federal funds rate would decrease to 5.25 %
Keynes thought investment spending could be changed by ___________
a change in bond prices
During a recession, according to Keynes,
aggregate demand and production falls while unemployment rises.
Which of the following by itself is consistent with what happened to the price level and real GDP during the 1930's depression?
aggregate demand shifted left
A recession is a period during which
aggregate demand, production falls while unemployment rises
In studying for this final exam I have:
all of the above
According to the aggregate demand and aggregate supply model, in the long run an increase in the money supply leads to
an increase in inflation but does not change real GDP.
An increase in the yield on the 10-year German Bonds (Bunds) would likely lead to (ceteris paribus)
an increase in the yield on the US 10-year T-notes
Tax cuts
and increases in government expenditures shift aggregate demand right.
If the economy is initially at long-run equilibrium and aggregate demand declines, then in the SHORT run Inflation
and output are lower than in the original long-run equilibrium.
The short run aggregate demand and aggregate supply curve intersect
at a point which may or may not be equal to potential GDP.
The concept of "lender of last resort" is that when
banks need to borrow money , the Fed will step in and loan money by increasing the reserves the banks have with the Fed.
Suppose interest rates drop and bond prices increase. Why might other forms of holding wealth also increase, such as stocks or bitcoin?
because bonds and stocks and bitcoin are substitutes for holding wealth.
A central bank can change the nominal interest rate (i) with open market operations. Economists think that it is the real interest rate (r) that has the ability to stimulate or contract the economy. How then can the central bank stimulate or contract the economy by changing the nominal interest rate?
because in the short run, the rate of inflation is constant
The relationship between consumer spending and disposable income is
called the consumption function. It has a slope less than 1
When taxes decrease
consumption increases as shown by a shift of the aggregate demand curve to the right.
When the aggregate demand curve and the SHORT RUN aggregate supply curve are in equilibrium, GDP will be
could be any of these possibilities
Other things the same, if the long-run aggregate supply curve shifts right, inflation
decrease and output increases
Suppose the required reserve ratio for checking accounts is 10%, and banks do not hold excess reserves, and people hold only checking deposits and no currency. If the Fed sells $10 million worth of bonds to the public or member banks, bank reserves would
decrease by $10 million and the money supply M1 would eventually decrease by $100 million
According to the Keynesian model of Aggregate supply and demand, a fiscal policy that increases taxes or decreases government spending will in the short run cause a(n)
decrease in real GDP and a decrease in inflation
A fiscal policy that increases taxes will in the short run cause a(n)
decrease in real GDP and a decrease in the rate of inflation
Technological change can shift the aggregate supply curves outward. If, at the same time, the government decreases spending, the most likely outcome of these two factors is a(n)
decrease in the inflation rate
An increase in the supply of 10-year T-notes would, ceteris paribus,
decrease the demand of 5-year T-notes.
"Crowding out" may
decrease the effectiveness of government spending in stimulating the economy
After the Covid pandemic in 2020 the velocity of money decreased. This means that the rate at which money changed hands
decreased. Other things the same, a decrease in velocity decreases the price level.
If the aggregate supply curve is flat,
expansionary fiscal or monetary policy will buy large gains in real output at low cost in terms of inflation.
Usually the Federal Reserve has conducted policy by setting a target for the
federal funds rate.
If the government uses stabilization policies to reduce inflation, the economy may have to suffer
higher rates of unemployment
Contractionary fiscal policy may have some undesirable consequences. Among these is
higher unemployment.
The monetary base
includes bank reserves
The money supply as measured by M2
includes everything in M1 and more.
Keynes believed that economies experiencing high unemployment should adopt policies to
increase aggregate demand.
Suppose the economy was at potential GDP and Interest rates increased causing investment to fall. This made GDP drop by 50 billion dollars. Using the simple model of income determination inspired by Keynes, what could be an action by the government to raise GDP back to Full employment if it was believed that the Keynesian multiplier was 10?
increase government spending by 5 billion dollars
If the inflation rate is greater than the expected inflation rate producers will
increase production, so the short-run aggregate supply curve shifts right.
Monetary neutrality implies that an increase in the quantity of money will
increase the price level.
An increase in investment spending will
increase the stock of physical capital.
If the aggregate demand curve moves to the right more rapidly than the aggregate supply curve, then
inflation will tend to increase.
If the Fed conducts open-market sales, which of the following quantities increase(s)?
interest rates, but not investment or the money supply
If the economy is initially at long-run equilibrium and aggregate demand declines, then in the long run the inflation rate
is lower and output is the same as the original long-run equilibrium.
Most economists agree that the economy will adjust from an output gap where GDP is less than potential GDP back to potential GDP. The adjustment process
is very slow because The rate of inflation and expected inflation change slowly
what is the slope of the consumption function?
it is less than one but greater than zero
The Federal Reserve will tend to tighten monetary policy when
it thinks inflation is too high today, or will become too high in the future.
Suppose you have one million dollars in your savings account and the price level rises, This means
lots of others are in the same boat so consumption in the economy will fall
The effect of an increase in the level of inflation on the aggregate-demand curve is represented by a
movement along the aggregate-demand curve.
Country A and country B are the same except country A currently has more capital. Assuming diminishing returns, if both countries increase their capital by 100 units and other factors that determine output are unchanged, then
output in country A increases by less than in country B.
The main purpose of expansionary monetary policy is to
reduce interest rates
An increase in U.S. net exports would shift U.S. aggregate demand
rightward. In an attempt to stabilize the economy, the government could raise taxes.
Suppose the economy is in long-run equilibrium. According to the misperceptions theory of Lucus, if the government increases its expenditures, eventually the increase in aggregate demand causes inflation expectations to
rise. This rise in inflation expectations shifts the short-run aggregate supply curve up.
