Exam 3 Macro

15. If the exchange rate between the U.S. dollar and the euro is $1 for €0.75, then the price of €1 is:

$1.33.

1. Suppose the Fed carries out an open market purchase and credits the account of a bank by $160,000. Further suppose that the reserve ratio (RR) is 10%. By how much is the money supply expected to change?

$1.6 million

4. If the Fed credits Alex's checking account with $8,000 and Alex's bank decides to keep the entire $8,000 in the form of reserves instead of lending it out, how much does the money supply increase?

$8,000

6. Bank A has $100 million in deposits, $15 million in required reserves, and $85 million in loans. Bank A's reserve ratio is:

15%

16. (Figure: Aggregate Demand) Point A on this aggregate demand curve represents a real GDP growth rate of:

5%

13. On a given aggregate demand curve, if the rate of spending growth is 10% and the growth rate of the money supply is 2%, then the velocity of money must be growing at:

8%

3. Which of the following transactions can be classified as foreign direct investment for the United States?

A Beijing antique dealer opens a store in downtown New York City.

11. Which of the following explains why a budget deficit can cause a trade deficit?

An increase in the budget deficit raises domestic interest rates, resulting in a capital account surplus and an appreciation of the currency.

19. Which of the following best describes the conditions during the Great Depression?

Both real GDP growth and inflation were negative.

1. Which of the following would be recorded as a debit in the U.S. current account?

British financial investments in the United States pay higher dividends.

10. How do budget deficits lead to trade deficits?

Budget deficits lead to higher interest rates, which lead to net capital inflow, which leads to currency appreciation, thus reducing net exports.

6. Which statement is TRUE?

By the time fiscal policy is in place, it is likely that macroeconomic conditions may have changed entirely.

19. Ben Bernanke was _____ during the financial crisis of 2008.

Chairman of the Federal Reserve

20. What happened to the price level between 1929 and 1932?

Deflation reached 10%.

15. _____ is a significant reduction in the rate of inflation, while _____ is a reduction in the level of prices.

Disinflation; deflation

8. _____ and _____ are some of the most important aggregate demand shifters, and _____ is one of the Federal Reserve's most powerful tools.

Fear; confidence; market confidence

20. In the United States, federal government expenditures must be approved by the:

House of Representatives, the Senate, and the president of the United States.

16. How did the housing boom of 1997-2006 increase aggregate demand?

It created more jobs and increased wages in the construction sector.

6. Which statement is TRUE regarding the effects of monetary policy when a real shock occurs?

Monetary policy cannot simultaneously achieve a high real growth rate and lower the inflation rate.

11. If the economy is hit by a negative real shock that raises inflation and unemployment, which fiscal policy action should the government take in order to keep inflation and unemployment stable?

No government action can achieve those goals.

1. If the economy is hit by a negative real shock that reduces real GDP growth below its long-run potential rate, which of the following is the appropriate monetary policy to move real GDP growth back to the long-run rate without raising inflation?

No monetary policy can achieve this goal.

18. (Figure: Oil Market Diagrams) Consider the world oil market diagrams presented in the figure. Which of the panels correctly depicts what happened in the market for oil during the 1973 OPEC oil crisis?

Panel B

3. Since people will always come to expect the actual inflation rate in the long run, the expected inflation rate is found graphically where the:

SRAS curve intersects the LRAS curve.

13. _____ are usually _____ in developing countries because of lower wages and immigration laws that prevent the free movement of labor.

Services; less expensive

2. Which describes one of the difficulties that make it hard for the Fed to effectively implement monetary policy?

The Fed's control of the money supply is incomplete and subject to uncertain lags.

20. Which is the MOST credible monetary policy action?

The central bank announces its policy in public and sticks with the policy over time.

14. Which of the following is NOT a constraint on trade that prevents prices from being fully equalized across borders?

The qualities of goods sold in different countries vary.

1. In what way are monetary and fiscal policies similar?

They both target aggregate demand to overcome business fluctuations.

4. During a recession, consumers hold more money by cutting back on their spending, resulting in _____ in inflation and _____ in real growth.

a decrease; a decrease

11. When the Fed responds to a negative spending shock by increasing the money supply, it is using:

a discretionary policy.

8. According to the text, the consensus about the effects of the 2009 fiscal stimulus was that:

a lot of the tax cuts did not turn into consumer spending.

5. Which of the following real shocks would likely have the largest impact on U.S. GDP?

a reduction in the overall supply of oil

13. Under Paul Volcker, the Fed reduced the inflation rate in the early 1980s by more than 10 percentage points, causing:

a severe recession to take place.

19. A nominal GDP rule requires the Fed to:

adjust the money supply enough to make up for changes in velocity.

12. According to the AD-AS model, if the economy is initially at its long-run potential growth rate, then a temporary increase in the growth rate of investment spending will cause:

an increase in both the inflation and real growth rates in the short run.

2. If wages are not as flexible as prices in the AD-AS model, an increase in money growth will lead to:

an increase in inflation and in the profits of firms.

3. If the reserve ratio is 10%, then a $100 increase in bank deposits can potentially lead to:

an increase of $1,000 in the money supply.

18. An appreciation of the Mexican peso would most likely be a result of:

an increase of foreign investment in Mexico.

1. Using a graph of the AD and long-run aggregate supply curves, the Internet revolution of the 1990s caused:

both real growth and inflation to decrease.

7. President Obama's fiscal policy response to the 2008 recession involved changes in:

both taxation and government spending.

5. Which could be sources of funding for a government that wants to increase government expenditures?

both taxes and borrowing

19. Portfolio investment takes place in the United States when foreigners:

buy U.S. stocks and bonds.

6. With a floating exchange rate, an increase in the U.S. interest rate will cause:

capital to flow into the United States, an increase in the demand for dollars, and an appreciation of the dollar.

16. The capital account measures:

changes in foreign ownership of domestic assets.

14. When the government sells bonds, some of the funds that would have gone to private investments go to the government. This situation is called:

crowding out.

20. The _____ is the sum of the balance of trade, net income on capital held abroad, and net transfer payments.

current account

4. A low saving rate in the United States is one possible reason for the U.S.:

current account deficit, capital account surplus, and trade deficit.

5. A savings glut in other countries is one possible reason for the U.S.:

current account deficit, capital account surplus, and trade deficit.

19. One way the government can use fiscal policy to fight a recession is to:

cut taxes.

9. To reduce inflation in response to a negative real shock, the Federal Reserve would:

decrease the money growth rate, which would lower both the inflation rate and economic growth rate.

12. In the short run, a decrease in consumption growth will cause the real GDP growth to:

decrease.

3. When a negative shock to aggregate demand occurs, the inflation rate will:

decrease.

16. As the recession continued in early 2009, consumer confidence most likely:

decreased.

18. In a fractional reserve banking system, banks hold only a fraction of their:

deposits as reserves.

7. If the Central Bank of China decides to hold more dollars as reserves, the:

dollar will appreciate.

16. Reserves held by banks are mainly held in the form of:

electronic claims.

15. When countries have severe debt problems:

expansionary fiscal policy can reduce real growth.

6. An increase in _____ will shift the SRAS curve.

expected inflation, but not actual inflation

9. In the short run, an increase in the money supply tends to increase employment because:

exports only increase.

15. The Federal Reserve is the:

federal government's bank, central bank, and banker's bank in the United States.

5. The disinflation experiment reduced inflation in the United States, but at the cost of:

high unemployment.

14. The money multiplier is greater than one because banks:

hold only a fraction of deposits as reserves.

7. To reduce the money supply in the economy, the Fed would:

increase the discount rate.

14. To offset the effect of negative growth in money velocity (v), the central bank should:

increase the growth rate of the money supply.

13. An increase in the banking system's willingness to lend will cause the money multiplier to:

increase.

9. Which of the following would cause the AD curve to shift to the left?

increased growth in imports

11. In the basic model that includes the AD and LRAS curves only, an increase in aggregate demand:

increases the inflation rate, but not the growth rate.

13. Refer to the figure. Suppose the economy is initially at point A in the diagram. If an increase in investment spending causes a shift of the AD curve from AD1 to AD4, then the government can avoid a short-run increase in inflation by:

increasing taxes so that the AD curve shifts back to AD1.

10. As a result of a positive shock to C

inflation and output growth increase in the short run, but in the long run they return to the rates before the shock.

4. An economy in which the central bank overstimulates aggregate demand will suffer from:

inflation.

8. When the Fed lowers the Federal Funds rate:

interest rates decrease but the money supply increases.

17. Fiscal policy:

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

3. Ricardian equivalence:

is less significant when consumers deem tax cuts or rebates as permanent.

12. Disinflation in the 1980s was a result of:

leftward shifts in the aggregate demand curve due to money supply reductions.

11. When banks take on too much risk with the hope that the Fed will eventually bail them out, a condition of _____ exists.

moral hazard

2. All else held constant, an increase in U.S. exports will cause the U.S. current account to:

move in a positive direction.

8. In the long run, with a floating exchange rate, changes in _____ will have an impact on the real exchange rate.

neither the U.S. money supply nor the foreign country's money supply

10. Tight monetary policy results in a long period of disinflation and high unemployment if:

nominal wages are sticky.

15. Many economists blame the severity of the Great Depression on:

poor monetary policy conducted by the Federal Reserve.

17. The short-run aggregate supply curve shows the _____ relationship between the inflation rate and real growth during the period when prices and wages are _____.

positive; sticky

12. Which is NOT a function of the Federal Reserve?

providing loans to small businesses

9. If the Fed was concerned about the economy falling into recession, it might try to stimulate the economy by:

purchasing additional government securities.

2. Suppose the federal government gives taxpayers a tax rebate financed by borrowing. If taxpayers use the tax rebate to pay off their debts, total spending will:

remain unchanged.

14. An increase in expected inflation will cause the economy's long-run aggregate supply curve to:

remained unchanged

4. Sustained inflation:

requires ongoing increases in the money supply.

17. A country can adopt a fixed exchange rate system through:

setting up a currency union.

8. A decrease in spending growth will cause the economy's aggregate demand curve to:

shift to the left.

18. When C falls, the aggregate demand curve:

shifts to the left.

10. Fiscal policy is MOST effective in keeping both inflation and real growth stable when there is a:

shock to aggregate demand.

7. For a given aggregate demand curve, the specified rate of spending growth is the growth rate of money:

supply plus the growth in velocity.

2. The possibility that the failure of one bank affects the performance of other banks is called:

systemic risk.

18. The Fed's job in manipulating monetary policy is made harder by the fact that:

the Fed operates in real time and information on recessions becomes available with a lag.

10. When the Federal Reserve conducts monetary policy, the Federal Reserve usually focuses on:

the Federal Funds rate.

5. Which institution usually has the most influence over aggregate demand in the United States?

the Federal Reserve

17. Open market operations refer to:

the buying and selling of government bonds by the Fed.

9. Fiscal policy is MOST effective if:

the economy is hit by a shock to aggregate demand.

7. Economist Milton Friedman called for a policy rule that keeps the growth rate of the money supply at 3% because:

the economy's long-run potential growth rate is 3%.

12. The United States currently has a net _____ with the rest of the world.

trade deficit

17. When an economy is adjusting to a recent reduction in the money supply, what is a likely consequence?

unemployment is high

20. If instead of buying short-term Treasury securities the Fed decides to purchase the country's supply of paper clips, the money supply:

will expand.