econ midterm 2

examples of negative shocks (5)

- bad weather - higher price of oil - productivity slump/technology slump - higher taxes or regulations - disruption of production by war, earthquake, pandemic

assets that serve as means of payment in the US

- currency - total reserves held by banks - checkable deposits - savings deposits, money market mutual funds, and small-time deposits

shortcomings of unemployment rate as a measure (3)

- doesn't include discouraged workers - doesn't account for underemployment - lagged measure

what is the effect when AD falls due to a fall in the money supply?

- economy shifts to a new short-run equilibrium - inflation rate is reduced - real growth rate is reduced (recession)

positives shocks to AD (7)

- faster money growth rate - confidence - increased wealth - lower taxes - greater growth of govt. spending - increased export growth - decreased import growth

examples of positive shocks (5)

- good weather - lower price of oil - productivity boom/tech boom - lower taxes/regulations - smooth production without disruption

why doesn't the government always inflate its debt away? (2)

- if lenders expect inflation, they will increase nominal rates - buyers of bonds are also voters who would be upset if real returns were shrunk

how can the Fed shift the AD curve back up and to the right?

- increase rate of growth of the money supply - reduce interest rates and encourage more borrowing

when is the multiplier for fiscal policy bigger? (5)

- lots of unemployed resources - govt can target spending on unemployed - tax cuts go to people who want to spend immediately - govt can tax savings - govt borrowing doesn't crowd out

roles Fed plays as government's bank (2)

- maintains US treasury account - manages govt borrowing through US treasury bonds, bills, and notes

effects of unexpected disinflation

- real rate greater than equilibrium rate - benefits lenders, harms borrowers

effects of unexpected inflation

- real rate less than equilibrium rate - harms lenders, benefits borrowers

roles Fed plays as the bankers' bank (3)

- regulates bank and lends them money - manages the nation's payment system - protects financial consumers with disclosure regulations

effect of positive shock in spending (in short run and long run of AD curve)

- short run: increase in spending will be split between inflation and real growth - long run: real growth = solow rate, not affected by inflation, so increase in spending only increases inflation rate

negative shocks to AD (7)

- slower money growth rate - fear - reduced wealth - higher taxes - lower growth of govt. spending - decreased export growth - increased import growth

three purposes of money

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

factors that can reduce structural employment (1)

1. active labor market policies

price indexes (3)

1. consumer price index (CPI) 2. GDP deflator 3. producer price index

when is fiscal policy a good idea?

1. economy needs short-run boost 2. problem is deficiency in AD 3. many resources are unemployed and the fiscal stimulus can be targeted to those people 4. when govt. spending is efficient and productive

why is monetary policy difficult?

1. fed reserve must operate in real time when a lot of data is unknown 2. control of money supply is incomplete and subject to lags

three tax systems

1. flat (everyone pays the same) 2. regressive (make less = pay more) 3. progressive (make more = may more)

sources that account for more than 90% of revenue (3)

1. individual income tax 2. social security and medicare taxes 3. corporate income tax

factors that increase structural unemployment (2)

1. large, long-lasting shocks that require the economy to restructure. 2. labor regulations.

three most important definitions of the money supply

1. monetary base (currency and total reserves at the Fed) 2. M1 (currency plus checkable deposits) 3. M2 (M1 plus savings deposits, money market mutual funds, and small time deposits)

fed's two major tools to control the money supply

1. open market operations 2. paying interest on reserves held by banks at the Fed

four problems associated with inflation

1. price confusion and money illusion 2. inflation redistributes wealth 3. inflation interacts with other taxes 4. inflation is painful to stop

fiscal policy lags (5)

1. recognition lag 2. legislative lag 3. implementation lag 4. effectiveness lag 5. evaluation and adjustment lag

what is 2/3 of the fed budget spent on? (4)

1. social security 2. defense 3. medicare 4. medicaid

Using the Fisher Effect, what is the nominal interest rate if expected inflation is 10%, and real interest rate is 2%?

12%

Using the Fish Effect, what is expected inflation if the nominal interest rate is 6%, and the real interest rate is 2%?

4%

what does AD equal?

C + I + G + (X - M)

MV = PY (variable names)

M = money supply P = price level V = velocity of money (constant) Y = real GDP (constant)

inflation rate

[P2 - P1] / P1 - P2 = index value in year 2 - p1 = index value in year 1

commodity money

a good used for transactions where the good also has consumption value

real price

a price that has been corrected for inflation; used to compare the prices of goods over time

aggregate demand shocks

a rapid and unexpected shift in the AD curve

A country has 100 million people out of which 50 million are either looking for a job or have a full time job. What is the labor force participation rate? a) 50% b) 75% c) 23% d) 24%

a) 50%

Given a RR of 14%, what is the money multiplier? a) Approximately 7.00 b) Approximately 13.05 c) Approximately 20.50 d) Approximately 15.5

a) Approximately 7.00

Increases in the velocity of money lead to a) Increases in AD b) Decreases in AD c) Increases in LRAS d) Decreases in LRAs

a) Increases in AD

Let's suppose that 10 million people do not have a job. What's the unemployment rate? a) Not possible to determine it. These 10 million could be discouraged workers b) 20% c) 34% d) 10%

a) Not possible to determine it. These 10 million could be discouraged workers

What are the two types of unemployment that compose the natural rate of unemployment? a) Structural and Frictional b) Cyclical and Frictional c) Frictional and Structural d) None of the above

a) structural and frictional

If the growth rate of money supply is 2%, velocity of money is constant (or stable), and growth rate of GDP is 3% . Inflation rate will be a. -1% b. 2% c. 1.5% d. 0.5%

a. -1%

If Hugo's National Bank has a total of $ 400,000 checking deposits and $ 368,000 of total loans. What is the money multiplier? a. 12.5 b. 8 c. 10 d. 5

a. 12.5

If the money supply is $375 million, the velocity of money is 5, and Real GDP is $12.5 million. What is the average price level? a. 150 b. 15 c. 1500 d. 150000

a. 150

Which asset is the most liquid? a. A checkable deposit in a bank b. A savings account c. The LRAS Curve d. The AD Curve and the AS Curve

a. A checkable deposit in a bank

What happens when the FED overstimulates the economy (increasing Aggregate Demand too much)? a. A rise in the inflation rate b. A decline in the inflation rate c. An increase in unemployment rate in the short-run d. None of the above

a. A rise in the inflation rate

Suppose tax payers are given rebates on previous tax payments. What would happen if they spend all those rebates today? a. Aggregate Demand shifts to the right b. Aggregate Demand shifts to the left c. Nothing since money is neutral d. Long Run Aggregate supply shifts to the right

a. Aggregate Demand shifts to the right

When we have a negative inflation rate, we have a process known as a. Deflation b. Hiperinflation c. Moderate inflation d. None of the above

a. Deflation

What is the difference between insolvency and illiquidity? a. Insolvency refers when overall liabilities are greater than assets while illiquidity refers when short- term liabilities are greater than short-term assets b. Illiquidity refers when overall liabilities are greater than assets while insolvency refers when short-term liabilities are greater than short-term assets c. Insolvency and illiquidity are the same thing d. None of the above

a. Insolvency refers when overall liabilities are greater than assets while illiquidity refers when short- term liabilities are greater than short-term assets

Which of the following will be counted as part of the labor force? a. Michelle, who is collecting unemployment benefits b. Mishell, who is on active military duty in Iraq c. Keynes, who retired at the beginning of the year d. Andrew, who is currently studying at Clemson University

a. Michelle, who is collecting unemployment benefits

What are the advantages of a rules-based monetary policy (as advocated by Milton Friedman)? a. Rules-based policies can restrict excessive discretionary measures by authorities, hence leading to a more credible monetary policy b. Rules-based policies allow policymakers to do whatever they desire, hence leading to a more credible policy c. Rules-based policies have no advantages d. Rules-based policies give a lot of flexibility to the FED

a. Rules-based policies can restrict excessive discretionary measures by authorities, hence leading to a more credible monetary policy

Which of these are examples of positive real shocks? a. Technological booms b. Higher jumps in oil prices as in the 70's c. Wars d. None of the above

a. Technological booms

The Federal Reserve can influence the economy by shifting: a. The AD curve b. The SRAS curve c. the LRAS d. None of the above

a. The AD curve

Which of these describe an aggregate demand shift (AD) (something that will cause aggregate demand to shift)? a. The fall in the growth rate of money supply b. An increase in farm productivity c. a real positive shock d. None of the above

a. The fall in the growth rate of money supply

"Inflation is always and everywhere a monetary phenomenon" . What did Milton Friedman mean with this statement? a. The main cause of inflation is an increase in money supply. That's why the term "monetary phenomenon". This happens, in general, when governments monetize their debt by printing money. Thus, leading to inflation b. The main cause of inflation is a decrease in money supply. That's why the term "monetary phenomenon" .This happens, in general, when governments monetize their debt by decreasing money supply. Thus, leading to deflation c. Inflation happens mainly due to natural causes such as earthquakes and bad harvests seasons d. Inflation has no relation with money supply and Milton Friedman was wrong

a. The main cause of inflation is an increase in money supply. That's why the term "monetary phenomenon". This happens, in general, when governments monetize their debt by printing money. Thus, leading to inflation

Evaluate the following statement: "In the long run, money is neutral, so the growth rate of the money supply does not effect real growth. In the long run, output is independent of prices" a. True b. False c. Uncertain d. half true, half false

a. True

True or False: The FED can shift the aggregate demand curve (AD) by purchasing government bonds. Thus, increasing money supply a. True b. False c. Partially true, partially false d. Impossible to determine

a. True

True or False: A negative real shock poses challenges to monetary policy because, in the short-run, there is a trade-off between inflation and unemployment rates. a. True, but the trade-off does not hold in the long-run b. False, increasing money supply does not lead to inflation c. False, increasing money supply in the short-run increases unemployment d. None of the abov

a. True, but the trade-off does not hold in the long-run

We covered in class that one of the reasons behind the decline in economic activity in the United States during the Great Depression was due to : a. a contraction in money supply, leading to a decline in the price level and economic activity b. an increase in money supply, leading to inflation c. money supply did not affect economic activity nor prices during the Great Depression d. money supply did not affect economic activity during the Great Depression but the increase in money supply led to massive deflation

a. a contraction in money supply, leading to a decline in the price level and economic activity

The Lender of Last Resort relies on which role of the FED? a. allows the FED to help financial intermediaries during financial crisis b. Buying and selling bonds to manipulate money supply c. Buying only long-term bonds d. Lowering interest rates on reserves

a. allows the FED to help financial intermediaries during financial crisis

the employment at-will doctrine says that employment can be terminated: a. at any time for any reason b. with two weeks' notice c. at any time by employees, but employers must give notice

a. at any time for any reason

the monetary base (MB) includes: a. currency and reserves held by the banks at the Federal Reserve b. currency and checkable deposits c. currency and savings deposits

a. currency and reserves held at the Federal Reserve

a slower growth in the money supply will: a. decrease AD b. increase AD c. not affect AD

a. decrease AD

a decrease in the average level of prices is called: a. deflation b. disinflation c. money illusion

a. deflation

the time it takes for fiscal policy to work is called a(n): a. effectiveness lag b. implementation lag c. legislative lag

a. effectiveness lag

A shift outward (to the right) in the Aggregate Demand (AD) curve will tend to: a. increase inflation and increase growth in the short-run b. increase inflation and increase growth in the long-run c. decrease inflation and increase growth in the short-run d. decrease inflation and decrease growth permanently

a. increase inflation and increase growth in the short-run

which monetary policy can the Fed use to increase AD? a. increase the rate of growth of the money supply b. increase the interest rates c. discourage consumer borrowing

a. increase the rate of growth of the money supply

a progressive tax means that people with higher incomes: a. pay a higher tax rate b. pay a lower tax rate c. pay a lower rate, but a higher dollar amount

a. pay a higher tax rate

a negative real shock poses difficulties for monetary policy because: a. policymakers can reduce inflation or unemployment but not both b. increasing the money supply is politically unpopular c. increasing the money supply is illegal

a. policymakers can reduce inflation or unemployment but not both

One of the costs of inflation include a. price confusion and money illusion b. economic development c. an increase in physical capital d. None of the above

a. price confusion and money illusion

According to the quantity theory of money, a change in the money supply affects: a. real GDP in the short run but not in the long run. b. real GDP in the long run but not in the short run. c. nominal GDP in the short run but not in the long run. d. nominal GDP in the long run but not in the short run.

a. real GDP in the short run but not in the long run.

During the Great Depression, the US Aggregate Demand Curve a. shifted to the left (decreased) b. shifted to the right (increased) c. Did not move d. Impossible to determine

a. shifted to the left (decreased)

frictional unemployment is... a. short-term unemployment due to the normal difficulties of matching employers with employees b. persistent and long-term unemployment caused by shocks that make it difficult for workers to find jobs c. unemployment due to short-term fluctuations in the business cycle d. None of the above

a. short-term unemployment due to the normal difficulties of matching employers with employees

the largest amount of federal government spending goes to: a. social security b. defense c. medicare

a. social security

an economy's potential growth rate is called: a. solow growth rate b. aggregate supply c. aggregate demand

a. solow growth rate

What are menu costs? a. the costs of changing prices b. the costs of adjusting menu's at restaurants only c. a price paid only by those who work in services d. None of the above

a. the costs of changing prices

For monetary policy to be credible, the FED has a. to stick with its policy b. has to randomly pick any policy for each year c. to do whatever lowers unemployment at any cost d. None of the above

a. to stick with its policy

higher business taxes will shift the long-run aggregate supply curve: a. to the left b. to the right c. higher taxes will not shift the LRAS curve

a. to the left

The average number of times a dollar is spent on final goods and services during the year a. Velocity of money b. Money Supply c. Consumption Rate d. Quantity theory of money

a. velocity of money

solvency

ability to fulfill long-term obligations

liquidity

ability to fulfill short-term obligations

multiplier effect

additional increase in spending caused by the initial increase in government spending (AD shifts right)

unemployed workers

adults who do not have a job, but who are looking for a job

national debt held by the public

all federal debt held by individuals, corporations, and governments other than the US federal govt

liquid asset

an asset that can be used for payments or, quickly and without loss of value, be converted into an asset that can be used for payments

illiquid asset

an asset that is worth a lot in the future, but it can only be sold today at a much lower price

solow growth rate

an economy's potential growth rate, the rate of economic growth that would occur given flexible prices and the exist real factors of production

inflation

an increase in the average level of prices

insolvent institution

an institution that has liabilities that are greater than its assets

deficit

annual difference between federal spending and revenues

money

any good that is widely used and accepted in transactions involving the transfer of goods and services from one person to another

union

association of workers that bargains collectively with employers over wages, benefits, and working conditions - strong unions have effect similar to minimum wages

Hugo's national bank has a total of $700,000 in deposits and $600,000 in loans. What is the amount Hugo's national bank has on required reserves? a) 50,000 b) 100,000 c) 150,000 d) 300,000

b) 100,000

if the tax rate is 10% on income up to $30,000 and 15% on income up to 60,000, what is the average tax rate for someone earning $55,000? a. 12% b. 12.27% c. 12.5%

b. 12.27%

if 2 million people are unemployed and 8 million people are employed, the unemployment rate is: a. 2% b. 20% c. 25%

b. 20%

if the price index is 200 in year 1 and 210 in year 2, the rate of inflation is: a. 4.76% b. 5% c. 20%

b. 5%

If the average price level rises from 120 in year 1 to 130 in year 2, the inflation rate will be: a. 7.69% b. 8.33% c. 9.23% d. None of the above

b. 8.33%

The technology boom of the 1980s and 1990s with telecommunications and internet contributed for a positive real shock. In the AD/AS framework, how do we model this positive real shock? a. A shift to the left for Long-Run Aggregate Supply (LRAS) b. A shift to the right for Long- Run Aggregate Supply (LRAS) c. No changes in Long Run Aggregate Supply (LRAS) d. Impossible to determine

b. A shift to the right for Long- Run Aggregate Supply (LRAS)

A nation's scientists invent many new Internet search tools, raising current productivity and making investors optimistic about future inventions as well. How do we represent this in our AS/AD framework? a. A shift to the left for Long-Run Aggregate Supply (LRAS) b. A shift to the right for Long-Run Aggregate Supply (LRAS) c. LRAS does not move d. Uncertain

b. A shift to the right for Long-Run Aggregate Supply (LRAS)

What policy can the FED use to increase Aggregate Demand (AD)? a. increase the reserve ratio b. Buy treasury bonds through open market operations c. Sell treasury bonds through open market operations d. Increase the FED funds rate

b. Buy treasury bonds through open market operations

Over the last few years, the number of people in the labor force has declined. This is in part due to: I- More people becoming unemployed and looking for a job II- Aging population that is leaving the labor force III- Lower fertility rates, causing in the long-run, that less people join the labor force a. I only b. II and III only c. I and II only d. I,II and III

b. II and III only

What is included in M2? a. Only Money Market Mutual Funds b. M1 + Savings deposits + Money Market Mutual funds c. Only Savings Account d. None of the above

b. M1 + Savings deposits + Money Market Mutual funds

The main conclusion from the 2008-2009 financial crisis is that a. There is nothing the FED could have done b. The FED could have restricted some subprime mortgages loans before the bubble burst c. The FED could have increased the FED funds rate d. The FED could have decreased the reserve ratio

b. The FED could have restricted some subprime mortgages loans before the bubble burst

Open Market Operations are: a. The buying or selling of bonds exclusively in the stock market b. The buying and selling of mainly government bonds by the FED c. The buying and selling in hedge funds d. Decision to lower the money multiplier

b. The buying and selling of mainly government bonds by the FED

What is the best definition for "money illusion"? a. When high money supply growth leads to high levels of Real GDP per capita b. When people mistakes changes in nominal prices for changes in real prices c. Deflationary paranoia among citizens d. None of the above

b. When people mistakes changes in nominal prices for changes in real prices

one cause of structural unemployment is: a. a recession b. a large, economy-wide shock c. the time it takes to find a suitable job

b. a large, economy-wide shock

In the AS/AD model , a positive real shock causes: a) a lower inflation rate and a lower real growth rate. b) a lower inflation rate and a higher real growth rate. c) a higher inflation rate and a lower real growth rate. d) a higher inflation rate and a higher real growth rate.

b. a lower inflation rate and a higher real growth rate

an increase in government spending that causes a decrease in private spending is called: a. multiplier effect b. crowding out c. fiscal policy

b. crowding out

Which type is likely to be higher when Real GDP is lower? a. structural unemployment b. cyclical unemployment c. frictional unemployment d. None of the above

b. cyclical unemployment

a decrease in the rate of inflation is called: a. deflation b. disinflation c. recession

b. disinflation

When a bank has short-term liabilities that are greater than its short-term assets, but overall its assets are greater than its liabilities, the bank is considered: a. liquid and solvent b. illiquid but solvent. c. liquid but insolvent. d. illiquid and insolvent.

b. illiquid but solvent.

labor force participation is affected by: a. the unemployment rate b. lifecycles effects and demographics c. the business cycle

b. lifecycle effects and demographics

the fed influences short-term rates through: a. quantitative easing b. open market operations c. the reserve ratio

b. open market operations

cyclical unemployment is correlated with: a. innovation b. the business cycle c. economic shocks

b. the business cycle

a systematic risk is the risk that: a. an illiquid but solvent institution will fail b. the failure of one financial institution will bring down other such institutions c. an insolvent but liquid institution will fail

b. the failure of one financial institution will bring down other such institutions

An increase in G (Government Spending) shifts the Aggregate Demand (AD) curve: a. to the left b. to the right c. It does not shift the AD curve d. It only shifts LRAS

b. to the right

the number of times a dollar is spent on final goods and services in a year is called: a. quantity theory of money b. velocity of money c. currency turnover rate

b. velocity of money

medicare and the federal insurance contributions act (FICA) taxes are paid by: a. workers b. workers and employers c. workers and self-employed individuals

b. workers and employers

how well of an indicator (for how well the labor market is working) is the unemployment rate?

best indicator, but it is incomplete, because it does not include discouraged or underemployed workers

underemployment rate

bureau of labor statistics measure that includes part-time workers who would rather have a full-time position and people who would like to work but have given up looking for a job

Given a required reserve of 100,000 and a total deposit of 700,000 , what is the reserve ratio? a) Approximately 10% b) Approximately 20% c) Approximately 14% d) Approximately 45%

c) Approximately 14%

A decrease in money supply growth will cause the economy's Aggregate Demand (AD) curve to: a) become steeper. b) become flatter. c) shift leftward. d) shift rightward.

c) shift leftward.

if the reserve ratio is 5%, the money multiplier is equal to: a. 2 b. 10 c. 20

c. 20

What does Long- Run Aggregate Supply (LRAS) represent? a. Total value of commodities b. Total supply of intermediary goods and services in an economy c. Capacity to produce output in the long-run d. None of the above

c. Capacity to produce output in the long-run

If the FED decreases substantially the growth rate of money supply when there is high inflation, we will have a. Less unemployment b. More inflation c. Disinflation d. an economic boom

c. Disinflation

When negative real shocks hit, what typically happens to the long-run aggregate supply curve (LRAS): Does it shift left, shift right, or stays in the same place? a. It shifts left b. It shifts right c. It does not shift d. Impossible to determine

c. It does not shift

What are the advantages of a discretion-based monetary policy? a. It does not apply when the velocity of money fluctuates b. It promotes instability in monetary policy c. It gives more flexibility for policymakers when there are AD fluctuations d. None of the above

c. It gives more flexibility for policymakers when there are AD fluctuations

Which of the following is a case of cyclical unemployment? a. Hugo quit his job to move to another state b. John is a travel agent who lost his job because of Expedia and Travelocity c. Javier lost his job after the company he worked closed after the Covid-19 outbreak's recession d. Donald is still looking for a job where he can use his statistics knowledge

c. Javier lost his job after the company he worked closed after the Covid-19 outbreak's recession

Which of the following is the best example of cyclical unemployment? a. John, a coal miner, was laid off because of a lack of demand for workers in his industry.He is looking into new opportunities in computer programming, but they require him to gain some new skills b. Heather recently graduated with her doctorate in economics. She is searching for a job that matches her skills. c. Peter, a highly skilled construction worker, lost his job when the recession began. He is looking for work, but demand in the construction industry is still low. d. Allison, a recent high school graduate with high aspirations, is seeking a job as the CEOof a Fortune 500 company.

c. Peter, a highly skilled construction worker, lost his job when the recession began. He is looking for work, but demand in the construction industry is still low.

the govt. can increase AD by: a. increasing taxes and government spending b. decreasing taxes and govt spending c. decreasing taxes and increasing govt spending

c. decreasing taxes and increasing govt spending

a real price is a price that has been corrected for: a. population growth b. foreign currency exchange rates c. inflation

c. inflation

gM + gV equals: a. real growth b. inflation + nominal growth c. inflation + real growth

c. inflation + real growth

which of the following is NOT a function of the federal reserve? a. maintaining the US treasury account b. lending money to other banks c. lending money to consumers

c. lending money to consumers

which of the following is NOT fiscal policy? a. taxation b. government spending c. managing the money supply

c. managing the money supply

the costs associated with changing the prices of goods and services are called: a. inflation costs b. inflationary expectations c. menu costs

c. menu costs

According to the quantity theory, what causes inflation in the long run? a.unemployment b.unexpected inflation c. money supply growth d. aggregate demand shocks

c. money supply growth

a government monetizes its debt by: a. raising interest rates b. lowering interest rates c. printing money to pay off the debt

c. printing money to pay off the debt

which of the following should the Fed have used to limit the recent housing bubble? a. decrease the money supply b. lower interest rates c. regulate subprime mortgages

c. regulate subprime mortgages

the largest means of payment in the US is a. currency b. checkable deposits c. savings deposits

c. savings deposits

the annual difference between federal revenues and spending is called: a. the national debt b. government borrowing c. the deficit

c. the deficit

changing demographics, cultural attitudes about women, and government tax policies all affect: a. frictional unemployment b. cyclical unemployment c. the labor force participation rate d. none of the above

c. the labor force participation rate

if you have a PhD in physics and are working as a retail clerk, you are: a. unemployed b. partially employed c. underemployed

c. underemployed

automatic stabilizers

changes in fiscal policy that stimulate AD in a recession without the need for explicit action by policymakers

currency

coins and paper bills held by people and nonbank firms

shoe leather costs

cost of time and effort that people spend trying to counter-act the effects of inflation (ex: holding less cash and having to make additional trips to the bank)

menu costs

costs of changing prices

Table: Labor Data Adult population = 200 million Labor force = 150 million Employed persons = 138.75 million Discouraged workers = 10.5 million According to the accompanying labor data, the unemployment rate is _________ and the labor force participation rate is __________. a. 7%, 60.4% b. 0.7%, 99.3% c. 5.6%, 69.4% d. 7.5%, 75%

d. 7.5%, 75%

Which of the following does NOT cause a decrease in AD? a. a slower money growth rate b. Higher taxes c. Lower growth of Government spending d. A decrease in import growth

d. A decrease in import growth

According to the Bureau of Labor Statistics, an unemployed worker includes: I- discouraged workers II- workers who are overqualified for their work III- workers who have a part-time job but want a full time job a. I and II only b. II and III only c. I,II and III only d. None of the above

d. None of the above

According to the quantity theory of money, an increase in the money supply causes an increase in ------ over the long run a. The velocity of money b. Real GDP c. Production d. Prices

d. Prices

Why is it important for monetary policy to be credible? a. In general, the public does not want monetary policy to be credible b. To allow commercial banks to decrease their reserve ratio c. To allow the FED to increase money supply whenever people complain d. To boost market confidence, encouraging investment in the long-run

d. To boost market confidence, encouraging investment in the long-run

an unemployed person is one who... a. stays at home and does not look for jobs b. works for a job that pays less than expected c. is not willing to work even though he or she is able to work d. does not have a job but is actively looking for one

d. does not have a job but is actively looking for one

When an economist says the federal government is "monetizing the debt" she or he means that the government: a. is raising taxes to pay off the debt b. is issuing more debt to finance its budget deficit. c. is decreasing the money supply to pay off the debts. d. has decided to pays off its debts by printing money thereby using inflation as a widespread "general tax".

d. has decided to pays off its debts by printing money thereby using inflation as a widespread "general tax".

When the velocity of money and real GDP are fixed, increases in the money supply: a. result in lower velocity. b. are impossible because the money supply must also be fixed. c. must cause decreases in the price level. d. must cause increases in the price level.

d. must cause increases in the price level.

Which is NOT a function of the Federal Reserve? a. serving as the lender of last resort b. regulating the U.S. financial system c. regulating the U.S. money supply d. providing loans to small businesses

d. providing loans to small businesses

Alfredo has been repairing DVD players. However, he has lost his job because most of his old customers have started using Blu-Ray players. In this situation, Alfredo is said to be: a. a discouraged worker b. frictionally unemployed c. cyclically unemployed d. structurally unemployed

d. structurally unemployed

Long‐run aggregate supply has its characteristic form because a. inflation adjusts the value of real GDP. b. the federal government makes up the difference between GDP and potential output c. consumers adjust their decisions based on aggregate price. d. the ability of the economy to produce determines long‐run output. This ability is independent of price levels.

d. the ability of the economy to produce determines long‐run output. This ability is independent of price levels.

deflation

decrease in the average level of prices (negative inflation rate)

what happens when the Fed sells bonds?

demand for bonds decreases, pushing prices down, making interest rates higher

what happens when the Fed buys bonds?

demand increases, pushing price of bonds up, lowering interest rate

checkable deposits

deposits that you can write checks on or access with a debit card

labor force

employed people + unemployed people

hyperinflation

extremely high rates of inflation -- occurs when govts print currency to pay off debt

True or False: Monetary policy can shift the LRAS to the right or the left, by increasing or decreasing money supply

false

fiscal policy

federal government policy on taxes, spending, and borrowing that is designed to influence business fluctuations

counter-cyclical fiscal policy

fiscal policy that runs opposite or counter to the business cycle -- spending more when the economy is in a recession and less when the economy is booming

business fluctuations

fluctuations in the growth rate of real GDP around its trend growth rate

fiat money

good where the value of which is less than the value it represents as money

gM + gV = gP + gY

growth rate of money + growth rate of velocity = growth rate of prices + growth rate of real output

what effect does a positive real shock have? (in general, and on LRAS)

higher real growth rate, lower inflation, LRAS shifts right

what does the AD-AS model show?

how unexpected economic disturbances or "shocks" can temporarily increase or decrease rate of growth

how does the minimum wage affect the quantity of labor demanded

it decreases the wage, therefore decreasing the quantity of labor demanded

what happens if the Fed increases growth of money supply too much?

it will have to contract growth of money supply (disinflate), which causes a recession

discretion-based policy

keep Mv constant (or growing at a constant rate), because if MV doesn't change (or grows smoothly), then so does PY

what effect does a negative real shock have? (in general, and on LRAS)

lower real growth rate, higher inflation, LRAS shifts left

producer price index

measure the average price received by producers; includes intermediate and finished goods/services

consumer price index

measures the average price for a basket of goods and services bought by a typical american consumer; covers 80,000 goods and services and is weighted so major items count more - corresponds most directly to daily economic activity

credible monetary policy

monetary policy is credible when it is expected that a central bank will stick with its policy

who is counted as unemployed?

must be... - 16 years or older - not institutionalized - a civilian - looking for work

are fiscal and monetary policy good for real shocks?

no

real rate of return

nominal rate of return minus the inflation rate Gr = Gn - inflation (G = growth rate, r = real, n = nominal)

what is the effect of increasing money supply in the long run?

nothing -- money is neutral in the long run

open market operations

occur when the Fed buys or sells government bonds

nominal wage confusion

occurs when workers respond to their nominal wage instead of to their real wage, that is, when workers respond to the wage number on their paychecks rather than to what their wage can buy in goods and services

market confidence

one of the fed reserve's most powerful tool: its influence over expectations, not its influence over the money supply

federal funds rate

overnight lending rate from one major bank to another

labor force participation rate

percentage of adults in the labor force [labor force / population] * 100

unemployment rate

percentage of labor force without a job [unemployed / labor force] * 100

structural unemployment

persistent, long-term unemployment caused by long-lasting shocks or permanent features of an economy that make it more difficult for some workers to find jobs - caused by economy-wide shocks, globalization, technology, etc.

active labor market policies

policies like work tests, job search assistance, and job retraining programs that focus on getting unemployed workers back to work

what happens to purchasing power as inflation increases

purchasing power decreases

nominal rate of return

rate of return that does not account for inflation

natural unemployment rate

rate of structural plus frictional unemployment (b/c they change slowly throughout time, whereas cyclical changes dramatically)

GDP deflator

ratio of nominal to reap GDP multiplied by 100; covers finished goods/services nominal GDP/real GDP = GDP deflator

reserve ratio

ratio of reserves to deposits RR = reserves / total deposits

disinflation

reduction in the inflation rate

alternative minimum tax (AMT)

separate income tax code that took effect in 1969 to prevent the rich from not paying income taxes; not indexed to inflation and now an extra tax burden on many upper-middle-class families

quantity theory of money

sets general relationship between money, velocity, real output, and prices MV = PY - both sides also equal nominal GDP - V and Y are considered constant, so an increase in M causes an increase in P (inflation is caused by an increase in money supply)

frictional unemployment

short-term unemployment caused by the ordinary difficulties of matching employee to employer (ex: finding a job that you want at a wage you accept that the employer will pay takes time) - large share of total unemployment

aggregate demand curve

shows all the combinations of inflation and real growth that are consistent with a specified rate of spending growth

short-run aggregate supply (SRAS) curve

shows the positive relationship between the inflation rate and real growth during the period when prices and wages are sticky

recession

significant, widespread decline in real income and employment

employment at-will doctrine

states that an employee may quit and an employer may fire an employee at any time for any reason. there are many exceptions, but it is the most basic US employment law

fractional reserve banking

system in which banks hold only a fraction of deposits in reserve, lending the rest

fisher effect

tendency of nominal interest rates to rise with expected inflation rates Gn = Gr + inflation (G = growth rate, r = real, n = nominal)

money multiplier

the amount of money supply expands with each dollar increase in reserves MM = 1/RR

velocity of money

the average number of times a dollar is spent on finished goods and services in a year; refers to how fast money passes from one holder to the next - stable in the long run

rules-based policy

the central bank uses a consistent policy known in advance (don't adjust for every aggregate demand shock, be consistent)

crowding out

the decrease in private spending that occurs when government spending increases (AD shifts left)

systematic risk

the risk that the failure of one financial institution can bring down other institutions

marginal tax rate

the tax rate paid on an additional dollar of income

average tax rate

the total tax payment divided by total income

which direction would a decrease in spending growth shift the AD curve?

to the left (down)

which direction would an increase in spending growth shift the AD curve?

to the right (up)

cyclical unemployment

unemployment correlated with the business cycle (ex: unemployment increases during recessions)

long run aggregate supply curve

vertical line at the Solow growth rate, independent of inflation rate

moral hazard

what occurs when banks and other financial institutions take on too much risk, hoping that the Fed and regulators will later bail them out

money illusion

when people mistake changes in nominal price for change in real price

ricardian equivalence

when people see that lower taxes today mean higher taxes in the future, and so, instead of spending their tax cut, save it to pay future taxes - tax cut doesn't increase AD even in short run

quantitative easing

when the Fed buys longer-term government bonds or other securities

quantitative tightening

when the Fed sells longer-term government bonds or securities

monetizing the debt

when the government pays off its debts by printing money

discouraged workers

workers who have given up looking for work but who would still like a job - difficult to measure