ECON MACRO CH 13 & 14

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Distinguish among​ money, income, and wealth.

A​ person's money is the currency held and the checking account​ balance, income is the earning and wealth is equal to value of assets minus all debts.

Suppose you decide to withdraw​ $100 in currency from your checking account. What is the effect on M1? Ignore any actions the bank may take as a result of your having withdrawn the​ $100.

M1 remains unchanged

The M2 definition of the money supply includes

M1, savings accounts, small time deposits, and money markets

Which of the following is not a correct statement about​ M2?

M2 is the best definition of money as a medium of exchange.

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

Money market deposit accounts in banks

Which one of the following is not one of the policy tools the Fed uses to control the money​ supply?

Moral suasion

Suppose that you deposit​ $2,000 in your bank and the required reserve ratio is 10 percent. The maximum loan your bank can made as a direct result of your deposit is

$1,800

Imagine that Kristy deposits​ $10,000 of currency into her checking account deposit at Bank A and that the required reserve ratio is​ 20%. Refer to the scenario above. As a result of​ Kristy's deposit, Bank​ A's reserves immediately increase by

$10,000

Suppose a bank has​ $100 million in checking account deposits with no excess reserves and the required reserve ratio is 10 percent. If the Federal Reserve reduces the required reserve ratio to 8​ percent, then the bank can make a maximum loan of

$2 million

Imagine that Kristy deposits​ $10,000 of currency into her checking account deposit at Bank A and that the required reserve ratio is​ 20%. Refer to the scenario above. As a result of​ Kristy's deposit, Bank​ A's required reserves increase by

$2,000

Suppose the reserve requirement is 15​%. What is the effect on total checkable deposits in the economy if bank reserves increase by ​$50 ​billion?

$333 billion increase

Spending on the war in Afghanistan is essentially categorized as government purchases. How do increases in spending on the war in Afghanistan affect the aggregate demand​ curve?

they will shift the aggregate demand curve to the right

Banks can continue to make loans until their

actual reserves equal their required reserves.

The​ ________ shows the relationship between the price level and quantity of real GDP demanded.

aggregate demand curve

The​ long-run aggregate supply curve is vertical because in the long​ run,

changes in the price level do not affect potential​ GDP, as potential GDP depends on the size of the labor​ force, capital​ stock, and technology.

Stagflation is a

combination of inflation and recession

Silver is an example of a

commodity money

To increase the money​ supply, the Federal Reserve could

conduct an open market purchase of Treasury securities

The most important role of the Federal Reserve in​ today's U.S. economy is

controlling the money supply to pursue economic objectives.

Which of the following is not counted in​ M1?

credit card balances

The​ long-run aggregate supply curve will shift to the right if the economy

experiences technological change

The U.S. dollar can best be described as

fiat money

Banks can make additional loans when required reserves are

less than total reserves

The seven members of the Board of Governors of the Federal Reserve are appointed by

The President

Which aggregate supply curve has a positive slope?

the short run only

Imagine that Kristy deposits​ $10,000 of currency into her checking account deposit at Bank A and that the required reserve ratio is​ 20%. Refer to the scenario above. As a result of​ Kristy's deposit, checking account deposits in the banking system as a whole​ (including the original​ deposit) could eventually increase up to a maximum of

$50,000

Imagine that Kristy deposits​ $10,000 of currency into her checking account deposit at Bank A and that the required reserve ratio is​ 20%. Refer to the scenario above. As a result of​ Kristy's deposit, Bank A can make a maximum loan of

$8,000

If the reserve requirement ratio ​(RR​) is​ 0.20, the simple deposit multiplier is

5

Interest rates in the economy have fallen. How will this affect aggregate demand and equilibrium in the short​ run?

Aggregate demand will​ rise, the equilibrium price level will​ rise, and the equilibrium level of GDP will rise.

Which of the following best describes how banks create​ money?

Banks create checking account deposits when making loans from excess reserves.

How does a decrease in the price level affect the quantity of real GDP supplied in the long​ run?

Changes in the price level do not affect the level of GDP in the long run.

Which of the following is not a policy tool the Federal Reserve uses to manage the money​ supply?

Changing Income tax rates

Banks use deposits to make consumer loans to households and commercial loans to businesses. Banks will loan out every penny of their deposits in order to make a profit.

False. Banks must hold a fraction of their deposits as vault cash or with the Federal Reserve.

Which of the following best explains the difference between commodity money and fiat​ money?

Fiat money has no value except as​ money, whereas commodity money has value independent of its use as money.

The most liquid measure of money supply is

M1

The Federal Reserve uses two definitions of the money​ supply, M1 and​ M2, because

M1 is a narrow definition focusing more on​ liquidity, whereas M2 is a broader definition of the money supply.

The formula for the simple deposit multiplier is

Simple Deposit Multiplier = 1/RR

Which tool is the most important?

The Fed conducts monetary policy principally through open market operations.

The student explained the graph as​ follows: ​"An increase in aggregate supply causes a shift from SRAS1 to SRAS2. Because this shift in the aggregate supply curve results in a lower price​ level, consumption,​ investment, and net exports will increase. This change causes the aggregate demand curve to shift to the right from ADl to AD2. We know that real GDP will​ increase, but we​ can't be sure whether the price level will rise or fall because that depends on whether the aggregate supply curve or the aggregate demand curve has shifted farther to the right. I assume that aggregate supply shifts out farther than aggregate​ demand, so I show the final price​ level, P3​, as being lower than the initial price​ level, P1​." Which of the following is a correct statement about the​ student's analysis?

The student is incorrect because the aggregate demand curve does not shift because of the price level change.

The recession of 2007−2009 made many consumers pessimistic about their future incomes. How does this increased pessimism affect the aggregate demand​ curve?

This will shift the aggregate demand curve to the left.

Open market operations refer to the purchase or sale of​ ________ to control the money supply.

U.S. Treasury securities by the Federal Reserve

Which of the following best describes the​ "wealth effect"?

When the price level falls, the real value of household wealth rises

How do the banks​ "create money"?

When there is an increase in checking account​ deposits, banks gain reserves and make new​ loans, and the money supply expands.

Which of the following would cause a decrease in aggregate​ demand?

a decrease in government spending

If the economy adjusts through the automatic​ mechanism, then a decline in aggregate demand causes

a recession in the short run and a decline in the price level in the long run.

A change in any other factor causes ________ the SRAS curve. In the figure, this is shown by moving from point ______

a shift ; B to C

An increase in the expected future price level causes

a shift from B to A

An increase in the expected price of an important natural resource is indicated by

a sift from B to A

A supply shock is

a sudden increase in the price of an important natural​ resource, resulting in a leftward shift of the SRAS curve.

Which of the following is usually the cause of​ stagflation?

a supply shock as a result of an unexpected increase in the price of a natural resource

Stagflation occurs when

a supply shock shifts the SRAS to the left, increasing the price level and decreasing actual GDP

Consider each of the following events and then figure out how each of these events will affect the aggregate demand curve.

a. An increase in the price level will cause a movement up along the aggregate demand curve. b. An increase in government purchases will cause a rightward shift of the aggregate demand curve. c. An increase in state income taxes will cause a leftward shift of the aggregate demand curve. d. An increase in interest rates will cause a leftward shift of the aggregate demand curve. e. A faster income growth in other countries will cause a rightward shift of the U.S. aggregate demand curve.

Explain whether each of the following will cause a shift of the AD curve or a movement along the AD curve.

a. Firms become more optimistic and increase their spending on machinery and equipment. Because this is a change in investment​, it will cause a shift to the right in the aggregate demand curve. b. The federal government increases taxes in an attempt to reduce a budget deficit. Because this is a change in consumption​, it will cause a shift to the left in the aggregate demand curve. c. The U.S. economy experiences 4 percent inflation. Because this is a change in the price level​, it will cause a movement along the aggregate demand curve.

Which of the following will shift the aggregate demand curve to the​ right, ceteris paribus​?

an increase in net exports

If the economy is initially at​ full-employment equilibrium, then an increase in aggregate demand causes​ _____________ in real GDP in the short run and​ ___________ in the price level in the long run.

an increase; an increase

Which of the following is considered a negative supply​ shock?

an unexpected decrease in the refining capacity for oil

In​ economics, money is defined as

any asset people generally accept in exchange for goods and services

Higher personal income taxes

decrease aggregate demand

The sale of Treasury securities by the Federal Reserve​ will, in​ general,

decrease the quantity of reserves held by banks

The required reserves of a bank equal its​ ________ the required reserve ratio.

deposits multiped by

Compared to the U.S. aggregate demand​ curve, the reason that the demand curve for an individual​ product, such as​ bananas, slopes downward is

different, because consumers can substitute between individual products.

Changes in the price level

do not affect the level of aggregate supply in the long run.

Congress passed legislation to create the Federal Reserve System in 1913 in order to

end the instability created by bank panics by acting as a lender of last resort.

Aggregate demand​ (AD) is comprised of expenditure components that​ include:

government​ spending, consumption,​ investment, and net exports.

When the price level in the United States falls relative to the price level of other​ countries, ________ will​ fall, ________ will​ rise, and​ ________ will rise.

imports; exports; net exports

Deflation will

increase the quantity of real GDP demanded

A decrease in the discount rate​ ________ bank reserves and​ ________ the money supply if banks respond appropriately to the change in the rate.

increases; increases

A decrease in the reserve requirement​ ________ bank reserves and​ ________ the money supply.

increases; increases

Money is an imperfect standard of deferred payment because ______ causes the value of money to decrease over time.

inflation

Stagflation occurs when

inflation rises and GDP falls.

The​ "interest rate​ effect" can be described as an increase in the price level that raises the interest rate and chokes off

investment and consumption spending

Which of the following about fiat money is​ false? Fiat money

is backed by gold

the long run aggregate supply curve

is vertical

If​ full-employment GDP is equal to​ $4.2 trillion, what does the​ long-run aggregate supply curve look​ like?

it is a vertical line at $4.2 trillion of GDP

You earn​ $500 a​ month, currently have​ $200 in​ currency, $100 in your checking​ account, $2,000 in your savings​ accounts, $3,000 worth of illiquid assets and​ $1,000 of debt. Using the M1 measure of​ money, you have

money​ = $300, annual income​ = $6,000, and wealth​ = $4,300.

An increase in the price level will

move the economy up along a stationary aggregate demand curve

In the diagram to the​ right, moving from point A to point B is called a

movement along the AD curve

A change in the price level causes a ___________ the short-run aggregate supply (SRAS) curve. In the figure, this is shown by moving from point ______

movement along; A to B

If a person withdraws​ $500 from​ his/her checking account and holds it as​ currency, then M1 will​ ________ and M2 will​ ________.

not change; not change

Of the four primary tools the Federal Reserve uses to conduct monetary​ policy, the tool used most often is

open market operations

Full-employment GDP is also known as

potential GDP

A baseball fan with a Mike Trout baseball card wants to trade it for a Giancarlo Stanton baseball​ card, but everyone the fan knows who has a Stanton card​ doesn't want a Trout card. Economists characterize this problem as a failure of the

principle of a double coincidence of wants

When the price of oil rises​ unexpectedly, the equilibrium price level​ ________ and the unemployment rate​ ________ in the short run

rises; rises

An improvement in technology is shown as a

shift from A to B

An increase in the labor force or capital stock is illustrated as a

shift from A to B

Moving from point A to point C is referred to as a

shift in the AD curve

In​ 2005, Hurricane Katrina destroyed oil and natural gas refining capacity in the Gulf of Mexico which subsequently drove up natural​ gas, gasoline, and heating oil prices. Three years​ later, once the refining capacity was​ restored, these prices came back down. The restoration of refining capacity should

shift the​ short-run aggregate supply curve to the right.

An increase in the working population will cause the long-run aggregate supply curve to

shift to the right

Which of the following functions of money would be violated if inflation were​ high?

store of value

​Long-run macroeconomic equilibrium occurs when

the aggregate demand and​ short-run aggregate supply curves intersect at a point on the​ long-run aggregate supply curve.

Where the aggregate demand curve and the​ short-run aggregate supply curve​ intersect,

the economy is in short-run macroeconomic equilibrium

In response to the destructive bank panics of the Great​ Depression, future bank panics are designed to be prevented by

the establishment of the Federal Deposit Insurance Corporation.

The position of the​ long-run aggregate supply​ (LRAS) curve is determined by

the number of​ workers, the amount of​ capital, and the available technology.

What relationship is shown by the aggregate demand​ curve? The aggregate demand curve shows the relationship between

the price level and the quantity of real GDP demanded by​ households, firms, and the government

What relationship is shown by the aggregate supply​ curve? The short run aggregate supply curve shows the relationship in the short run between

the price level and the quantity of real GDP supplied by firms.

The central bank of a country controls the money​ supply, which equals the currency held by

the public plus their checking account balances

The major shortcoming of a barter economy is

the requirement of a double coincidence of wants

Increases in firms' expectations of their future profitability and investment spending will make the aggregate demand curve shift

to the right

When money is acting as a store of​ value, it allows an individual to

transfer dollars, and therefore purchasing power, into the future

In the long run,

unemployment is at its natural rate

Bank reserves include

vault cash and deposits with the Federal Reserve.

Give the three reasons the aggregate demand curve slopes downward. The U.S. aggregate demand curve slopes downward due to all of the following reasons except the

​government-spending effect, where a change in the price level affects government purchases.


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