econ

Money that some authority, generally a government, has ordered to be accepted as a medium of exchange is called _______ money.

fiat

changing the level of government spending is an example of

fiscal policy

deficit spending

government spending, in excess of revenue, of funds raised by borrowing rather than from taxation.

A business will want to borrow to undertake an investment project when the rate of return on that project is:

greater than the interest rate

autonomous consumption

level of consumption that doesn't depend on income

Federal funds are

loans between banks

commodity money

money that can be exchanged for a commodity at a fixed rate

fiat money

no value except as the medium of exchange

Expansionary fiscal policy causes the aggregate demand curve to shift to the _______ and is used to close a(n) _______ gap

right; recessionary

Bank reserves are

the fraction of deposits kept in the form of very liquid assets

the price in the loanable funds market is

the interest rate

Keynesian economic theory

theory of total spending in the economy and its effects on output and inflation

If the marginal propensity to consume is .75, and the federal government increases spending by $100 billion, the income expenditure model would predict that real GDP will increase by

$400 billion

in the short run a decrease in investments is illustrated by a

decrease in aggregate demand

suppose that political instability in the Middle East temporarily interrupts the supply of oil to the United States. Which of the following is likely to happen

the short-run aggregate supply curv shifts left, output decreases, and prices increase

what happens to aggregate supply when people expect inflation

when people expect inflation they buy more before the rate goes up

in the short run, wages and resource prices _____ as price levels increase

NOT

Suppose that the reserve ratio is 10% when the Fed buys $100,000 of U.S. Treasury bills from the banking system. If the banking system does NOT want to hold any excess reserves, _______ will be added to the money supply.

$1,000,000

Tax Multiplier

-MPC/MPS

Shifters of Aggregate Demand

-consumer spending -investment spending -government spending -net exports

three functions of money

-medium of exchange -a unit of account -store of value

shifters of aggregate supply

-resources price -actions of the gov -productivity

Suppose that the money supply increases by $150 million after the Federal Reserve has engaged in an open market purchase of $50 million. Then the reserve ratio is:

.33

Spending Multiplier

1/MPS

If the MPC is 0.9, then the government spending multiplier is

10

discretionary fiscal policy

Changes in taxes or spending that are the result of deliberate changes in government policy.

In the U.S., the institution that is charged with determining the size of the monetary base and with regulating the banking system is the

Federal Reserve

If the government decides to spend an extra $5 billion

GDP will increase by more than $5 billion.

Non-Discretionary Fiscal Policy

Permanent spending or taxation laws enacted to work counter cyclically to stabilize the economy

classical economic theory

The market as a self-adjusting mechanism

Suppose that there are no excess reserves in the banking system and the current amount of demand deposits are equal to $100,000. Now the monetary authorities lower the required reserve ratio from 10% to 5%. Which of the following will likely follow?

The money creating potential of the banking system will rise.

Suppose the Federal Reserve were to engage in open-market operations by buying $100 million of U.S. Treasury bills. Which of the following would be the end result of such an action?

The money supply would increase by more than $100 million.

Which of the following would be the initial effect of an individual making a $10,000 cash deposit in a bank?

The money supply would not be affected by the deposit

in the long run, wages and resource prices _____ as price levels increase

WILL

a decrease in aggregate demand will generate_________in real GDP and______in the price level in the short run

a decrease; a decrease

The money multiplier and the required reserve ratio are

are inversely related

crowding out

argues that rising pubic sector spending drives down or even eliminates private sector spending

The discount rate is the interest rate the Fed charges on loans to

banks

positive supply shock

cause its prices to go downward

suppose the economy is experiencing a recessionary gap. to move equilibrium aggregate output closer to the level of potential output, the best fiscal policy option is to

decrease taxes

If the Federal Reserve wanted to increase the money supply, it could:

decrease the required reserve ratio, decrease the discount rate, buy bonds on the open market.

Given a recessionary gap, the Fed will use monetary policy to _______ interest rates and _______ aggregate demand.

decrease; increase

Contractionary monetary policy

decreases aggregate demand.

Expansionary fiscal policy includes

decreasing taxes

time lags in fiscal policy

delay between an economic action and a consequence

Marginal Propensity to Consume (MPC)

how much people consume rather than save when there is a change in income

disposable income

income remaining after deduction of taxes, available to be spent or saved

the current level of real GDP lies below potential GDP. An appropriate fiscal policy would be to ______, which will shift the ________ curve to the ________

increase government purchases; AD; right

To _______ the money supply, the Fed could ________.

increase; lower the reserve requirements

Expansionary monetary policy:

increases the money supply, decreases interest rates, and increases consumption and investment.

the financial sector

is a category of the economy made up of firms that provide financial services to commercial and retail customers

what is the asset demand for money

is money kept as a store of value for later use

what is the transaction demand for money

is positively affected by the amount of real income, expenditure, and negatively affected by the interest rate alternative assets

One of the shortcomings of fiscal policy is that

it has time lags and sometimes it may end up destabilizing the economy as a result of these lags.

expansionary fiscal policy

laws that reduce unemployment and increase GDP (close recessionary gap)

Contactionary Fiscal Policy

laws to reduce inflation, decrease GDP

a recessionary gap can be closed by _____ wages that shift the _____

lower; SRAS curve rightward

If banks were required to keep 100% of deposits in reserves, they could

make no loans

To decrease the money supply, the central bank could:

make open-market sales

The tool of monetary policy that involves the Fed's buying and selling of government bonds is:

open-market operations

Assets

property owned by a person or company, regarded as having value

when a economy is producing output below potential it has an

recessionary Gap

The major tools of monetary policy available to the Federal Reserve System include:

reserve requirements, open-market operations, and the discount rate.

Money is anything that

serves as a medium of exchange for goods and services

stagflation

slow economic growth, high unemployment, rising growth, inflation

When the economy is in a recession

tax receipts decrease but unemployment insurance payments increase

fiscal policy attempts to affect the level of overall spending in the economy by changes in

taxes and spending

Liquidity

the availability of liquid assets to a market or company.

liability

the state of being responsible for something, especially by law.

To change the money supply, the Fed most frequently uses

open-market operations.

multiplier effect

An initial change in spending will set off a spending chain that is magnified in the economy.

Assume that marginal propensity to consume is 0.8, and potential output is $800 billion. If current real GDP is $700 billion, which of the following policies would bring the economy to potential output

Increase government spending by $20 billion

If the economy is at potential output, and consumption spending suddenly decreases due to a fall in consumer confidence, the appropriate fiscal policy is

an increase in government spending.

negative supply shock

causes aggregate supply to decrease; costs rise and output falls; unemployment increases but price levels increase

The tools of conducting monetary policy include

changes in the reserve requirement.

If the Fed wants to decrease interest rates, it can:

increase the money supply by buying Treasury bills.

Suppose the Fed buys bonds. We can expect this transaction to

increase the money supply, increase bond prices, and decrease interest rates.

If the Federal Reserve wants to increase the money supply, it will:

lower the reserve requirement.