Exam 2 test econ
How does high inflation affect lending?
It makes long term lending very difficult
Solow Growth Model
A model showing how saving, population growth, and technological progress determine the level of and growth in the standard of living.
Financial intermediation may fail if something causes:
an increase in the politicization of lending.
The amount that people save for retirement:
can be affected by simple psychological factors and effective marketing.
A significant, widespread decline in real income and employment
capital and labor become less productive.
_____ interest rates usually result in more _____.
higher; savings
how does an increase in wealth affects the AD curve
increase in aggregate demand
aggregate demand curve
inflation and real demand curve shows all of the combinations
deflation occurs when
inflation is negative
(P2 − P1) ÷ P1 is the formula used to calculate
inflation rate
higher _____ rates usually result in _____ savings.
interest; more
debts are
liabilities
An insolvent firm has _____ in excess of its _____.
liabilities; assets
money illusion
mistaking changes in nominal prices for changes in real prices
Prices are signals, and inflation makes price signals more difficult to interpret.
money illusion
in the long run money is
neutral
_____ are not adjusted for inflation
nominal prices
Infaltion
rise in the general level of prices
investment bank are part of the:
shadow banking system, and those investments are not government guaranteed.
collateral
something of large value given to the lender if the borrower defaults
Monetizing debt occurs when...
the government pays off its debts by printing money
equilibrium interest rate
the interest rate at which the quantity of loanable funds supplied equals the quantity of loanable funds demanded
rate of return
the percentage of increase in the value of your savings from earned interest
The Solow growth curve is vertical, because....
the potential growth rate does not depend on the rate of inflation
SRAS curve
upward sloping
LRAS curve
vertical
inflation prevents the redistribution of wealth
false
The real rate of return is the rate of return that does not account for inflation.
False
True or False Each SRAS curve is associated with many rates of expected inflation.
False
True or False In the short run, an increase in spending growth is split between increases in inflation and decreases in real growth.
False
True or False Long-run equilibrium in the AD-AS model means that the inflation rate that consumers and firms are expecting must exceed the actual inflation rate.
False
If nominal GDP is $10,000,000 and the money supply equals $1,000,000, then velocity equals 10.
True
Deflation
A situation in which prices are declining
Hyperinflation
A very rapid rise in the price level; an extremely high rate of inflation.
If a ceiling on interest rates is set too low can cause___
excess demands for loanable funds
unexpected inflation always turns into
expected inflation
When interest rates rise, bond prices
fall
inflation is painful to initiate
false
inflation transfers wealth from ___ to ____
the public; Government
inflation reduces tax revenues
false
rightward shift
increase in demand/supply
if the demand for loanable funds increases, the equilibrium interest rate will
rise
GDP deflator is calculated as ....
the ratio of nominal to real GDP x 100
Fisher effect
the tendency of nominal interests rates to rise with expected inflation rates
Nominal wage confusion occurs when workers respond to _____ instead of _____.
the wage number on their paychecks; what their wage can buy
A commercial bank where customers keep checking accounts is a part of the:
traditional banking system, and those deposits are government guaranteed.
True or False A spending increase creates a temporary increase in growth.
True
inflation can lead to a breakdown of financial intermediation
True
If the current interest rate is below the equilibrium interest rate, a ______ will be created, pushing the interest rate up.
shortage
aggregate supply curve
shows positive relationship between inflation rate and real growth during the period when prices and wages are sticky
Aggregate Demand
A rapid and unexpected shift in spending
Recession
A significant, widespread decline in real income and employment
If velocity and real GDP are fixed, then if the average price level increases by 10%, the money supply must increase by 10%.
True
Money illusion is mistaking changes in nominal prices for changes in real prices.
True
The quantity theory of money sets out the general relationship among money, velocity, real output, and prices.
True
what would cause the LRAS to shift left?
Bad Weather
Expected inflation rate
Eπ
According to Milton Friedman, "inflation is always and everywhere a real phenomenon."
False
Prices are signals, and inflation makes price signals easier to interpret.
False
The Fisher effect is the tendency of real interest rates to rise with expected inflation rates.
False
Which of the following is False -If velocity is stable at 9 and nominal GDP is $18,000, then the money supply must equal $2,000. -Real GDP in the long run is determined by capital, labor, and technology, none of which is affected by the price level. -If the money supply is $4,000, velocity is stable at 12, and the average price level is 80, then real GDP is $600. -If the money supply is $6,000, the average price level is 90, and real GDP is $900, then velocity is 10.
If the money supply is $6,000, the average price level is 90, and real GDP is $900, then velocity is 10.
What is a costs of inflation covered in the textbook?
Inflation redistributes wealth throughout society in arbitrary ways.
The key identity that relates to the velocity of money is:
M × v = P × YR
Equation to understand AD curve
M+V=inflation + real growth
"inflation is a monetary Phenpmenon"
Milton Friedman
Time preference
People would rather consume today than tomorrow
Which condition is an aggregate demand shock that contributed to the Great Depression?
Reduced Investment spendings
Inflation is a type of ___
Tax
leverage ratio
The ratio of debt to equity
If individuals choose to hold onto their money, afraid to spend it, what impact would this have on the velocity of money?
The velocity of money would decrease.
What determines the equilibrium interest rate
Trading between savers and borrowers
inflation is painful to stop
True
disinflation
When the inflation rate is lower than the rate from the previous year
inflation formula
[(new value − old value) ÷ old value] × 100
What does positive AD affect
both inflation and the real growth rate in the short run, but in the long run affects only inflation.
CPI
consumer price index
A ceiling on interest rates can:
create a shortage of savings
aggregate demand curve
curve shows all of the combinations of inflation and real growth that are consistent with a specified rate of spending growth
leftward shift
decrease in demand/supply
All else equal, if consumers decide to borrow less, the:
demand for funds in the loanable funds market will decrease.
if consumers decide to borrow more
demand for funds in the loanable funds market will increase.
Increased government borrowing, shifts the _____ curve in the market for loanable funds to the right, causing the equilibrium interest rate to _____.
demand; rise
AD curve
downward sloping
Which condition could break the bridge between savers and borrowers?
politicized lending
Increased export growth (or decreased import growth) would cause a ________ aggregate demand shock.
positive
Assume the average price level was 101 in 2016 and 104 in 2017. If the inflation rate was 3.96% in 2016, then the __________ rate in 2017 is _____________.
disinflation; 2.97
The quantity theory of money
is based on the identity that the product of the money supply + the velocity of money = nominal GDP
Interest rates and bond prices:
move in opposite directions
A tariff acts as a negative productivity shock by
moving capital and labor away from industries where it produces the goods for which it has a comparative advantage.
interest rates and bond prices have a ____ relationship
negetive
financial intermediation
primary route for moving funds from lenders to borrowers
what represents the rate of return in interest rate questions
r
nominal price
rate of return that does not account for inflation
Time preference reflects the fact that today feels more _____ than tomorrow.
real