Econ Final Exam Study Guide

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in the above figure, at the price level of 140 and real GDP of

$15 trillion, firms will not be able to sell all their output

In the above figure, the aggregate demand curve is AD2, so the short-run equilibrium level of real GDP is

$18.5 trillion

Suppose the velocity of circulation increases by 2 percent and potential GDP grows by 2 percent. The trend inflation rate will equal zero if the quantity of money grows by

0 percent

In the above figure, suppose that the economy is at point D. Which of the following occurs as a result of an open market purchase of government securities by the Fed?

A decrease, in the real interest rate an increase in exports, an increase in investment

An initial increase in aggregate demand that is NOT followed by an increase in the quantity of money results in a long-run equilibrium with

A higher price level but the same real GDP

Assuming that GDP currently equals potential GDP, a cost-push could result from which of the following?

A large crop failure that boosts the prices of raw food materials

Moving along the short-run phillips curve indicates

A tradeoff between inflation and unemployment so that higher inflation is related to lower unemployment

Demand-pull inflation starts with

An increase in aggregate demand

If real GDP is less than potential GDPm which of the following fiscal policies would increase real GDP?

An increase in government expenditure and/or a decrease taxes

Suppose the economy is at a short-run equilibrium with real GDP greater than potential GDP. Which of the following fiscal policies would decrease real GDP and the price level?

An increase in taxes

Which of the following is not a potential start of a demand-pull inflation?

An increase in taxes

When the output gap is positive, it represents ____ gap, and when it is negative, it represents ___ gap

An inflationary; a recessionary

Checks _____ money and checking deposits _____ money.

Are not; are

In the above figure, if the economy initially is at point A and government expenditure increases, in the short run the economy will move to point

B

Bank reserves include

The cash in the bank's vault; the bank's deposits at the Federal Reserve

Barter is

The exchange of goods and services directly for other goods and services

An individual holds $10,000 in a checking account and the price level rises significantly. Hence

The individual's real wealth and consumption expenditure decrease

Which of the following best describes the chain of events in the money creation process?

The monetary base increases. Banks acquire unplanned reserves which they loan out, increasing deposits and also the quantity of money. The new deposits then create additional unplanned reserves.

In response to the financial crisis of 2007 and the ensuing recession, the Fed announced three rounds of "quantitative easing," where the Fed purchased billions of dollars of securities. What impact would quantitative easing have on the monetary base?

The monetary base would increase

A change in _____ creates a movement along the aggregate demand curve but does not shift the aggregate demand curve

The price level

The quantity theory of money asserts that inflation is the result of growth in

The quantity of money

The quantity theory of money predicts how changes in

The quantity of money affect the price level

The monetary base

currency and reserves of depository institutions

The use of fiscal policy is limited because

time lags associated with fiscal policy may cause the policy to take effect too late to solve the problem it was supposed to address

Fiscal policy includes

Decisions related to government expenditure on goods and services, the value of transfer payments, and tax revenue

To end a deflation, the government must

Decrease government expenditures

A decrease in government expenditure on goods and services

Decreases aggregate demand

In the aggregate supply-aggregate demand model, raising the federal funds rate initially

Decreases aggregate demand

Increases in the quantity of money can start a ________ inflation and an increase in government expenditure can start a ________ inflation

Demand-pull; demand-pull

The stimulus package passed by congress in 2009 to combat the recession is an example of

Discretionary fiscal policy

The short-run phillips curve and the long-run phillips curve intersect at the ___ and ____

Expected inflation rate; the natural unemployment rate

The equation of exchange states that the price level is equal to

The velocity of circulation multiplied by the quantity of money divided by real GDP

Which of the following are limitations of fiscal policy?

There is a lag between recognizing that fiscal policy might be needed and when it actually takes effect; monetary policy might counter fiscal policy

When the AD and SAS curves intersect at a level of real GDP which exceeds potential GDP and there is no government policy undertaken, which of the following will occur?

The SAS curve shifts leftward because the money wage rate rises

Social security benefits and expenditures on Medicare and Medicaid are classified as

Transfer payments

The largest item of government outlays is

Transfer payments

The Federal Reserve's monetary policy goals include

Price level stability

All of the following are part of fiscal policy except

Controlling the money supply

In the above figure, suppose point C is the original equilibrium. If the Fed increases the federal funds rate and engages in quantitative tightening, the new equilibrium is given by point

A

The figure above illustrates the effect of

A decrease in real GDP.

In the short run, which of the following actions lower the interest rate

A decrease in the demand for money

In the United States today, money consists of

Currency and deposits at banks and other depository institutions

The largest source of government revenues is

Personal income taxes

Federal Reserve open market operations directly influence

Banks

The federal funds rate is the interest rate

Banks charge each other on overnight loans

If an economy has no money, then all transactions must be conducted through the use of

Barter

In the short run, when the Fed decreases the quantity of money

Bond prices fall and the interest rate rises

In the short run, when the Fed increase the quantity of money

Bond prices rise and the interest rate fails

When tax revenues exceed outlays, the government has a ________, and when outlays exceed tax revenues, the government has a ________.

Budget surplus; budget deficit

The factor that leads to business cycle events within real business cycle theory is represented by

Changes in the growth rate in productivity

When the economy is hit by spending fluctuations, the government can try to minimize the effects by

Changing government expenditures on goods, changing taxes, changing government expenditures on services

If the government has a balanced budget, the total amount of government debt is

Constant

Demand-pull inflation persists because of

Continuing increases in the quantity of money

If the Fed responds to repeated decreases in the short-run aggregate supply with repeated increases in the quantity of money, the economy will be faced with

Continuous inflation

Which of the following is the central bank of the United States?

Federal Reserve System

In the above, which figure shows the start of a cost-push inflation?

Figure C

Prior to the great depression, the purpose of the federal budget was to

Finance the activities of the government

Suppose a country has been running a persistent government budget deficit. If the deficit is reduced, but remains positive

Government debt will increase

The U.S. government's budget

Has mostly been in deficit during the past 30 years

Long-term interest rates are ________ than short-term interest rates because long-term loans are ________ than short-term loans.

Higher;riskier

Which of the following can start an inflation?

Increase in aggregate demand and a decrease in aggregate supply

The government budget deficit tends to decrease during the expansion phase of a business cycle because of tax revenues ________ and government transfer payments ________.

Increase;decrease

An open market purchase of securities by the FED?

Increases banks' reserves and decreases banks' securities

A decrease in short-run aggregate supply ________ the equilibrium price level and ________ the equilibrium quantity of real GD

Increases;decreases

If the government runs a surplus, the total amount of government debt is

Increasing

In the short run, the Federal Reserve faces a tradeoff between

Inflation and unemployment

A recessionary gap that the level of real GDP at the short-run macroeconomic equilibrium

Is less than full-employment GDP

An inflationary gap means that the level of real GDP at the short-run macroeconomic equilibrium

Is more than full-employment GDP

If real GDP decreases, the demand for money curve will shift

Leftward and the interest rate will rise

An increase in the money wage rate shifts the SAS curve ________ and an increase in the money prices of raw materials shifts the SAS curve ________.

Leftward;leftward

When the Federal Reserve fights inflation, the supply of loanable funds curve shifts ________ and the aggregate demand curve shifts ________.

Leftward;leftward

Long-term interest rates fluctuate _____ short-term interest rates

Less than

In the above figure, curve A is the ________ curve, curve B is the ________ curve, and curve C is the ________ curve.

Long-run aggregate supply; short-run aggregate supply; aggregate demand

The FED buys U.S. government securities from banks in order to

Lower the federal funds rate

Which of the following describes the chain of events the fed uses to fight recession?

Lower the federal funds rate target, buy government securities, increase reserves and loans, increase aggregate demand

In the short run, an increase in the federal funds rate ________ the real interest rate and ________ investment.

Lowers; increases

Commercial banks are able to create money by

Making loans

The functions of money are

Medium of exchange, unit of account, and store of value

The main sources of cost-push inflation are increases in

Money wage rates and the cost of raw materials

In the above figure, if the economy is initially at point B and taxes are raised while potential GDP does not change, then the economy will

Move to point A

In the long run, when the Fed increases the quantity of money

No real variable changes

Which aggregate supply-aggregate demand diagram above shows the effect on real GDP and the price level of monetary policy when it is used to fight a recession?

Only figure A

In the above figure, the economy experiences an increase in aggregate demand so that the aggregate demand curve shifts from AD0 to AD2. If the Fed wants to offset this change, it would

Raise the federal funds rate and engage in quantitative tightening

If the fed is concerned with inflation it will ___ the federal funds rate in order to ____ aggregate demand

Raise; decrease

Suppose the economy is in a recession and the fed lowers the federal funds rate. Then

Real GDP and the price level will both increase

The quantity of money

Real GDP equals potential GDP

The Federal Reserve System

Regulates the nation's financial institutions; conducts the nation's monetary policy

Changing which of the following is a Federal Reserve monetary policy tool?

Required reserve ratios

A discretionary fiscal policy is a fiscal policy that

Requires action by the congress

One characteristic of automatic fiscal policy is that it

Requires no legislative action by congress to be made effective

An increase in government expenditure shifts the AD curve ________ and an increase in taxes shifts the AD curve ________.

Rightward; leftward

Stagflation is the combination of a _____ and _____.

Rising price level; a decreasing real GDP

If the fed wants to decrease the quantity of money, it can

Sell U.S. government securities

A change in the full-employment quantity of labor ________ the short-run aggregate supply curve and ________ the long-run aggregate supply curve.

Shifts; shifts

A change in the capital stock ________ the short-run aggregate supply curve and ________ the long-run aggregate supply curve

Shifts;shifts

A technological advance ________ the long-run aggregate supply curve and ________ the short-run aggregate supply curve

Shifts;shifts

The short-run phillips curve

Slopes downward

Changes in which of the following is included as part of fiscal policy?

Tax rates

Monetary policy is controlled by

The Federal Reserve

Which of the following government bodies does not participate directly in formulating U.S. fiscal policy?

The Federal Reserve Board

An open market operation involves

The Federal Reserve's purchase or sale of securities

A change in the money wage rate shifts

The SAS curve but not the LAS curv

Phillips curve show the relationship between the

Unemployment rate and the inflation rate

An open market sale of securities by the FED

decreases banks' reserves and increases banks' securities


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