Econ Final Review - Ch13-17

In the long run, wages can adjust: Wages go down -> profits go to normal -> output and employment go up/down -> Y goes up/down and unemployment goes up/down

down up up down

The 3 functions of money: 1. Medium of _________ (no barter) 2. Storage of ________ (banks) 3. Unit of ________ (facilitate comparisons and track debts)

exchange value account

Wage-price Spiral: Employers forced to pay higher/lower wages even if workers aren't more productive -> causes ______ -> back to step 1

higher inflation

When there are a lot of excess reserves in system, the FFR will be high/low

low

In the short run, as profits go down, out____ and empl____ also go down, causing Y to go up/down and unemployment to go up/down

output and employment down up

In the short run: Not all ______ have adjusted ______ are sticky _______ prices are sticky P goes up/down, but wages are the same

prices wages input prices down

Near-moneys are: A. highly liquid financial assets. B. any financial assets. C. paper money. D. fiat money.

A. highly liquid financial assets.

M2 formula

M1 + Savings + CD's

Overnight loan: Loan used overnight to satisfy _______ requirement Borrow from other ______ Int rate is the ________ ________ rate FFR going down encourages/discourages lending

reserve banks federal funds encourages

If the reserve ratio goes up, the money supply goes up/down

up

Spending for Medicare and Medicaid accounts for approximately _____% of federal spending.

20%

In the basic equation of national income accounting, GDP = C + I + G + X - IM, the government directly controls _____ and influences _____ through fiscal policy. A. G; C and I B. T; G and C C. I; G and T D. C; X and M

A. G; C and I

Which of the following is NOT an argument AGAINST the use of expansionary fiscal policy? A. Government borrowing may reduce the marginal propensity to consume. B. Government borrowing may crowd out private investment spending. C. Government spending may crowd out private spending. D. Government budget deficits may lead to reduced private spending.

A. Government borrowing may reduce the marginal propensity to consume.

If the short-run Phillips curve has shifted upward, the _____ curve has shifted to the _____. A. SRAS; left B. SRAS; right C. AD; right D. AD; left

A. SRAS; left

Contractionary monetary policy causes _____ in the price level in the short run and _____ in the price level in the long run. A. a decrease; a decrease B. a decrease; no change C. no change; a decrease D. no change; no change

A. a decrease; a decrease

Commodity-backed money is: A. a medium of exchange with no intrinsic value. B. gold and silver coins used for exchange. C. a medium of exchange with alternative economic uses. D. equivalent to commodity money.

A. a medium of exchange with no intrinsic value.

Normally the discount rate is _____ the federal funds rate. A. above B. equal to C. after the discount, less expensive than D. below

A. above

When the output gap is negative, the actual unemployment rate is: A. above the natural rate. B. equal to the natural rate. C. below the natural rate. D. The actual and natural unemployment rates are not related to the output gap.

A. above the natural rate. (because unemployment would be higher than 5%)

A share of stock is considered: A. an asset for the owner of the stock. B. a liability for the owner of the stock. C. part of the money supply. D. part of M2.

A. an asset for the owner of the stock.

When the Fed uses quantitative easing, it is: A. buying longer-term government debt. B. selling longer-term government debt. C. buying three-month Treasury bills. D. selling three-month Treasury bills.

A. buying longer-term government debt.

Which of the following is part of M1? A. checkable bank deposits B. short-term certificates of deposit C. shares of corporate stock D. currency in a bank's vault

A. checkable bank deposits

The federal budget tends to move toward _____ as the economy ____. A. deficit; contracts B. a balanced budget; contracts C. surplus; contracts D. deficit; expands

A. deficit; contracts

If the actual output lies below potential output, then an appropriate fiscal policy would be to _____, which will shift the _____ curve to the _____. A. increase government purchases; AD; right B. increase government purchases; AD; left C. increase tax rates; AD; right D. increase transfer payments; AS; right

A. increase government purchases; AD; right

To change the money supply, the Federal Reserve most frequently uses: A. open-market operations. B. changes in the inflation rate. C. changes in the required reserve ratios. D. changes in the discount rate

A. open-market operations.

Workers in country A have wage contracts for cost-of-living adjustments (COLAs), which adjust wages to offset the effect of inflation, and workers in country B do NOT. When the central banks of countries A and B increase the money supply: A. prices in country A increase faster than prices in country B. B. prices in country B increase faster than prices in country A. C. prices in countries A and B will change at the same rate. D. COLAs have no effect on the speed of price changes.

A. prices in country A increase faster than prices in country B.

If a high inflation rate leads people to _____ their money holdings, this may lead to a further increase in the money supply and _____ inflation. A. reduce; higher B. increase; lower C. reduce; lower D. increase; higher

A. reduce; higher

When the unemployment rate increases, the budget: A. tends to move into deficit. B. is unaffected. C. remains neutral. D. tends to move into a surplus.

A. tends to move into deficit.

Government debt is monetized when: A. the Fed conducts open-market purchases. B. commercial banks buy newly issued Treasury bills. C. the Fed sells Treasury bills in the bond market. D. the Fed transfers part of its financial reserves to the Treasury, which in turn buys Treasury bills back.

A. the Fed conducts open-market purchases.

In the long run, when the actual inflation rate gets embedded in people's expectation: A. there is no longer a trade-off between inflation and unemployment. B. it is possible to achieve lower unemployment in the long run by accepting higher inflation. C. actual inflation at any unemployment rate is always higher than expected inflation. D. the trade-off between inflation and unemployment becomes even stronger.

A. there is no longer a trade-off between inflation and unemployment.

The idea that a 1% increase in the output gap will decrease the unemployment rate by 0.5% is known as _____ law. A. Greenspan's B. Okun's C. Keynes's D. Phillips's

B. Okun's

An automatic stabilizer that works when the economy contracts is: A. a discretionary decrease in government purchases. B. a rise in government transfers as more people receive unemployment insurance benefits. C. a rise in tax receipts. D. a fall in government purchases.

B. a rise in government transfers as more people receive unemployment insurance benefits.

Which of the following is near-money? A. a credit card B. a savings account C. a traveler's check D. a debit card

B. a savings account

The short-run Phillips curve shows: A. consequences of the misperceptions theory. B. an inverse relationship between unemployment and inflation. C. a direct relationship between unemployment and inflation. D. the optimal level of employment.

B. an inverse relationship between unemployment and inflation.

Money is: A. paper money and coins but not checks. B. anything that can easily be used to buy goods and services. C. None of the answers is correct. D. currency and stocks.

B. anything that can easily be used to buy goods and services.

The Federal Reserve never buys U.S. Treasury bills directly from the federal government because it could: A. reduce the power of the Fed. B. be a route to disastrous inflation. C. lead to a recession. D. make the budget deficit worse.

B. be a route to disastrous inflation.

Interest rates were low in the United States in 2003 because of: A. capital outflows from the United States to China. B. capital inflows and monetary policy. C. a decrease in the money supply. D. increases in tax rates.

B. capital inflows and monetary policy.

Which of the following is NOT a tool of fiscal policy? A. government transfers B. changes in the money supply C. changing tax rates D. government purchases of goods and services

B. changes in the money supply

Monetary policy affects GDP and the price level by: A. changing exports. B. changing aggregate demand. C. changing the aggregate amount of labor supplied. D. changing aggregate supply.

B. changing aggregate demand.

Monetary policy affects aggregate demand through changes in: A. tax receipts. B. consumer and investment spending. C. government spending. D. export demand.

B. consumer and investment spending.

An increase in the supply of money will lead to a(n) _____ in the equilibrium interest rate and a(n) _____ in real GDP. A. increase; increase B. decrease; increase C. increase; decrease D. decrease; decrease

B. decrease; increase

Other things equal, rising interest rates lead to a _____ in investment spending and a _____ in _____ spending. A. fall; rise; consumer B. fall; fall; consumer C. fall; rise; investment D. rise; rise; consumer

B. fall; fall; consumer

If legislation required the budget to be balanced at all times, _____ as an automatic stabilizer of the business cycle. A. it would reduce the effectiveness of monetary policy B. fiscal policy could not operate C. it would increase the effectiveness of discretionary fiscal policy D. monetary policy could not operate

B. fiscal policy could not operate

Government borrowing will not crowd out private investment spending if unemployment is _____ and the fiscal expansion causes a(n) _____ in incomes and a(n) _____ in saving at each interest rate. A. high; increase; decrease B. high; increase; increase C. low; increase; decrease D. low; decrease; decrease

B. high; increase; increase

If the economy is at potential output and the Fed increases the money supply, in the LONG run the price level will likely: A. fluctuate randomly. B. increase. C. remain the same. D. decrease.

B. increase.

Expansionary monetary policy _____ the money supply, _____ interest rates, and _____ consumption and investment spending. A. increases; increases; increases B. increases; decreases; increases C. decreases; decreases; decreases D. decreases; increases; decreases

B. increases; decreases; increases

Assume that marginal propensity to consume is 0.8 and potential output is $800 billion. If the actual real GDP is $700 billion, _____ government spending by _____ would bring the economy to potential output. A. decreasing; $100 billion B. increasing; $20 billion C. increasing; $25 billion D. increasing; $100 billion

B. increasing; $20 billion 1 - MPC 1 - 0.8 = 0.2 1/0.2 = 5 Only 20 * 5 = 100 100 + 700 = 800 billion

The stability pact signed in 1999 by the European nations that adopted the euro required each country to: A. keep its cyclically balanced budget below 3% of its GDP. B. keep its actual budget deficit below 3% of its GDP. C. supply a certain amount of euros each year. D. balance its budget annually.

B. keep its actual budget deficit below 3% of its GDP.

The federal government's largest source of revenue is: A. social insurance taxes. B. personal income and corporate profit taxes. C. property taxes. D. sales taxes.

B. personal income and corporate profit taxes.

Liquidity traps are most likely to occur when the: A. economy is expanding rapidly. B. public expects deflation. C. economy is going through a recovery. D. public expects inflation.

B. public expects deflation.

The monetary base is the sum of: A. checkable bank deposits and currency in circulation. B. reserves held by the banks and currency in circulation. C. checkable bank deposits and bank reserves. D. savings deposits and currency in circulation.

B. reserves held by the banks and currency in circulation.

Banks are illiquid because: A. their deposits are less liquid than their loans. B. their loans are less liquid than their deposits. C. their assets are greater than their liabilities. D. their liabilities are greater than their assets.

B. their loans are less liquid than their deposits.

As people get used to inflation: A. the long-run aggregate demand adjusts more slowly. B. wages adjust faster, and the short-run aggregate supply shifts quickly to the left. C. wages adjust faster, and the short-run aggregate supply shifts quickly to the right. D. the short-run aggregate demand curve adjusts more rapidly.

B. wages adjust faster, and the short-run aggregate supply shifts quickly to the left.

The theory of Ricardian equivalence argues that expansionary fiscal policy: A. is effective, but contractionary fiscal policy is not. B. will have no effect on the economy because consumers, anticipating higher taxes to pay for government spending, will decrease spending today to save for the higher taxes. C. is more effective than expansionary monetary policy. D. is not effective because it causes higher interest rates and crowds out investment spending.

B. will have no effect on the economy because consumers, anticipating higher taxes to pay for government spending, will decrease spending today to save for the higher taxes

"Tuition at State University this year is $8,000." Which function of money does this statement best illustrate? A. store of value B. medium of exchange C. unit of account D. means of deferred payment

C. unit of account

AD shifting left is caused by what GDP components going down? What is the biggest component? Which is the most volatile?

C, I, G, or NX going down biggest = C volatile = I

Which of the following monetary policies would be destabilizing? I. an expansionary policy during an expansion II. an expansionary policy during a recession III. a contractionary policy during an expansion A. I, II, and III B. II only C. I only D. III only

C. I only

If you transfer $1,000 from your savings account to your checking account: A. M1 decreases by $1,000, and M2 increases by $1,000. B. M1 and M2 don't change. C. M1 increases by $1,000, but M2 doesn't change. D. M1 increases by $1,000, and M2 decreases by $1,000.

C. M1 increases by $1,000, but M2 doesn't change.

The main objective of contractionary monetary policy is to: A. close a recessionary gap. B. raise the level of potential output. C. decrease aggregate demand. D. increase investment.

C. decrease aggregate demand.

A decrease in the supply of money will lead to a(n) _____ in equilibrium real GDP and a(n) _____ in equilibrium interest rates. A. increase; decrease B. decrease; decrease C. decrease; increase D. increase; increase

C. decrease; increase

A change in taxes or a change in government transfers affects consumption through its effect on: A. government spending. B. the marginal propensity to save. C. disposable income. D. autonomous consumption.

C. disposable income.

The 2009 U.S. stimulus was a(n) _____ fiscal policy that _____ aggregate demand. A. contractionary; increased B. expansionary; decreased C. expansionary; increased D. contractionary; decreased

C. expansionary; increased

Social insurance programs are: A. private insurance policies that cover gaps in government-provided health care. B. private insurance policies to protect families from hardships caused by government actions. C. government programs intended to protect families against economic hardships. D. programs to help unemployed people have a social life.

C. government programs intended to protect families against economic hardships.

If the economy is in a liquidity trap, monetary policy is _____ and fiscal policy is _____. A. effective; effective B. ineffective; ineffective C. ineffective; effective D. effective; ineffective

C. ineffective; effective

Most of the Fed's income comes from: A. interest on its loans to commercial banks. B. fees that it charges commercial banks for clearing checks and electronic funds transfers. C. interest on the U.S. Treasury bills that it owns. D. payments from the U.S. government in return for the Fed serving as its fiscal agent.

C. interest on the U.S. Treasury bills that it owns.

The short-run Phillips curve: A. is vertical because there is no trade-off between inflation and unemployment rates in the short run. B. is upward sloping because inflation and unemployment rates have a positive relationship in the short run. C. is downward sloping because there is a trade-off between inflation and unemployment rates in the short run. D. is horizontal because there is no trade-off between inflation and unemployment rates in the short run.

C. is downward sloping because there is a trade-off between inflation and unemployment rates in the short run.

The government has almost eliminated the possibility of bank runs by instituting protective measures. All of the following are such measures EXCEPT: A. deposit insurance. B. reserve requirements. C. loan guarantees. D. capital requirements.

C. loan guarantees.

Among the assets of a bank are: A. customers' borrowings. B. deposits and loans. C. loans. D. customers' deposits.

C. loans.

When actual output is above potential output over time: A. the aggregate demand curve will shift to the right. B. the short-run aggregate supply curve will shift to the right. C. nominal wages will increase, and the short-run supply curve will shift to the left. D. nominal wages will increase, and the short-run supply curve will shift to the right.

C. nominal wages will increase, and the short-run supply curve will shift to the left.

When the economy expands, income tax receipts will: A. fall, but sales tax revenues will rise. B. stay the same unless the government changes the tax rates. C. rise, and sales tax revenues will rise. D. rise, but sales tax revenues will remain the same.

C. rise, and sales tax revenues will rise.

An increase in the expected rate of inflation: A. moves the economy along the short-run Phillips curve to higher rates on unemployment. B. moves the economy along the short-run Phillips curve to higher rates of inflation. C. shifts the short-run Phillips curve up. D. shifts the short-run Phillips curve down.

C. shifts the short-run Phillips curve up.

When the Federal Reserve decreases bank's reserves through an open-market operation: A. deposits increase, currency in circulation increases, and the monetary base remains the same. B. loans increase, the federal funds rate rises, and the discount rate rises. C. the monetary base decreases, loans decrease, and the money supply decreases. D. the monetary base decreases, the money multiplier decreases, and the money supply increases.

C. the monetary base decreases, loans decrease, and the money supply decreases.

M1 money formula

Cash in circulation (currency: not in bank vault) + checking accounts

Why are wages sticky: Cont____ Uni____ Laws & _____ wages _______ wages

Contracts Unions Minimum Efficiency

If there has been an upward movement (not shift) along the fixed short-run Phillips curve, the _____ curve has shifted to the _____. A. SRAS; right B. SRAS; left C. AD; left D. AD; right

D. AD; right

Which of the following accurately describes disinflation? A. It must be accompanied by a decline in the price level. B. The inflation rate rises at a higher rate. C. It is a gradual reduction in the price level over time. D. It is reduction of the inflation that has become embedded in expectations.

D. It is reduction of the inflation that has become embedded in expectations.

The primary difference between M1 and M2 is that: A. the dollar amount of M1 is much larger than the dollar amount of M2. B. M2 includes checkable deposits, but M1 does not. C. M1 includes checkable deposits, but M2 does not. D. M2 includes savings deposits and time deposits, but M1 does not.

D. M2 includes savings deposits and time deposits, but M1 does not.

Do economists believe that the budget should be balanced each fiscal year? A. Yes, since the balanced budget multiplier is larger, so it makes the economy grow faster. B. Yes, as the law states that both the federal and state budgets should always be balanced. C. Yes, a budget should be balanced annually; otherwise persistent budget deficits can cause havoc in the economy. D. No, a budget should be balanced only on average; it can be in a deficit during a recession and offset by surpluses when the economy is doing well.

D. No, a budget should be balanced only on average; it can be in a deficit during a recession and offset by surpluses when the economy is doing well.

The Federal Reserve's main assets are: A. currency in circulation and bank reserves. B. corporate stocks and bonds. C. the facilities of the 12 district banks. D. U.S. Treasury bills.

D. U.S. Treasury bills.

In the long run, changes in the money supply _____ the aggregate price level and _____ aggregate output. A. affect; affect B. do not affect; do not affect C. do not affect; affect D. affect; do not affect

D. affect; do not affect

An increase in the money supply causes _____ in output in the short run and _____ in output in the long run. A. no change; an increase B. no change; no change C. an increase; an increase D. an increase; no change

D. an increase; no change

Among the liabilities of banks are: A. reserves. B. loans and reserves. C. loans. D. customers' deposits.

D. customers' deposits.

Suppose an economy has $200,000 of demand deposits and $40,000 of excess reserves, with a 10% required reserve ratio. If the monetary authorities raise the required reserve ratio to 20%: A. there will be no more excess reserves in the system. B. excess reserves will fall by 10%. C. excess reserves will rise by 10%. D. excess reserves will decrease by $20,000.

D. excess reserves will decrease by $20,000.

Monetary policy that lowers the interest rate is called _____ because it _____. A. contractionary; aims to head off inflation B. contractionary; reduces saving and increases consumption C. expansionary; increases short-run aggregate supply D. expansionary; increases aggregate demand

D. expansionary; increases aggregate demand

Consumer spending will likely rise if: A. government transfers fall. B. the government raises tax rates. C. the government raises tax rates or government transfers fall. D. government transfers rise.

D. government transfers rise.

If the government spends an extra $5 billion on goods and services, GDP will: A. go up by $5 billion. B. remain unchanged. C. increase by less than $5 billion. D. increase by more than $5 billion.

D. increase by more than $5 billion.

Time lags associated with policy decision making and implementation suggest that: A. increases in spending to fight a recessionary gap may occur too early. B. most information is old before the public is aware of it. C. increases in spending to fight a recessionary gap can be timed correctly. D. increases in spending to fight a recessionary gap may occur too late.

D. increases in spending to fight a recessionary gap may occur too late.

When the central bank announces the desired inflation rate and sets policy to reach that rate, it is using: A. monetary neutrality policy. B. fiscal policy. C. the Taylor rule. D. inflation targeting.

D. inflation targeting.

In the long run, any given percentage increase in the money supply: A. increases real GDP. B. decreases real GDP. C. leads to an equal percentage decrease in the unemployment rate. D. leads to an equal percentage increase in the overall price level.

D. leads to an equal percentage increase in the overall price level.

In the long run, the interest rate is determined in the _____ market. A. commodity B. stock C. money D. loanable funds

D. loanable funds

Inflation does NOT reduce purchasing power if: A. it remains under 10% per year. B. prices of essential products, such as food and gasoline, don't increase too much. C. the Federal Reserve increases the money supply enough to offset it. D. nominal wages rise at the same rate as prices.

D. nominal wages rise at the same rate as prices.

The major tools of monetary policy available to the Federal Reserve System include: A. reserve requirements, margin regulations, and moral suasion. B. the discount rate, margin regulations, and moral suasion. C. open-market operations, margin regulations, and moral suasion. D. reserve requirements, open-market operations, and the discount rate.

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

The banking crisis of 1907 that preceded the Great Depression and the recent one in 2008 were both caused by: A. low labor productivity in the United States combined with a huge trade deficit. B. lack of investment spending and high unemployment. C. short-run business cycle fluctuations. D. risky speculation in real estate and in the stock market.

D. risky speculation in real estate and in the stock market.

All of the following are sources of federal tax revenue EXCEPT: A. social insurance taxes. B. the personal income tax. C. the corporate profits tax. D. sales taxes.

D. sales taxes.

If the Federal Reserve sets the federal funds rate on the basis of inflation and the output gap, then the Federal Reserve is following: A. the quantity theory. B. inflation targeting. C. money illusion. D. the Taylor rule.

D. the Taylor rule.

The zero lower bound for interest rates is: A. a law that prohibits credit unions from paying interest on checkable deposits. B. only a theory that never actually occurs in the real world. C. a theory that says that interest rates should have no bounds or limits. D. the fact that interest rates can't go below zero.

D. the fact that interest rates can't go below zero.

Politicians have an incentive to push the unemployment rate below the natural rate of unemployment right before their reelection because: A. the expansionary monetary policy is used to finance the political campaigns. B. the Phillips curve is horizontal in the long run. C. the opportunistic seignorage gains are very large. D. the political benefits are immediate and the economic costs are delayed.

D. the political benefits are immediate and the economic costs are delayed.

The long-run Phillips curve is: A. the same as the short-run Phillips curve. B. negatively sloped, showing an inverse relationship between unemployment and inflation. C. unrelated to the NAIRU. D. vertical at the nonaccelerating inflation rate of unemployment (NAIRU).

D. vertical at the nonaccelerating inflation rate of unemployment (NAIRU).

The cyclically adjusted budget balance is an estimate of: A. the tax increase needed to compensate for larger government transfers so that the budget remains balanced. B. the expansionary fiscal policy needed to close a recessionary gap. C. the contractionary fiscal policy needed to close an inflationary gap. D. what the budget balance would be if real GDP were exactly equal to potential output.

D. what the budget balance would be if real GDP were exactly equal to potential output.

Total Reserve =

Required + Excess

T/F: U.S Bonds are highly liquid

T