Macro Final (PS 6-10)
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.
Suppose you have $2000 in currency in a shoebox in your closet. One day, you decide to deposit the money in a checking account. How will this action ultimately affect M1 and M2?
M1 will increase and M2 will increase.
Suppose we know that a country has been receiving large inflows of foreign investment. This means that the financial account balance is most likely to be ________, and thus the current account balance is most likely to be ________.
a surplus; a deficit
The short-run Phillips curve exhibits ________, whereas the long-run Phillips curve shows ________.
a trade-off between inflation and unemployment; no trade-off between inflation and unemployment
When actual GDP is below potential GDP the budget deficit increases because of:
an increase in transfer payments and a decrease in tax revenues.
When the economy is experiencing a recession automatic stabilizers will cause:
transfer payments to increase and tax revenues to decrease.
Friedman defined the "natural rate of unemployment" as the
unemployment rate that exists when the economy produces potential GDP.
"The challenge of monetary policy is to interpret data on the economy and financial markets with an eye to anticipating future inflationary forces and to countering them by taking action in advance." Why should the Fed take action in anticipation of inflation? Why not just wait until the increase in the inflation rate has occurred? The answer is that the Fed does not want a higher inflation rate to persist because, if it does, the short-run Phillips curve may shift ________. This would mean that for any given rate of unemployment, the associated inflation rate would be ________, and for any given inflation rate, the associated rate of unemployment would be ________.
up higher; higher
If menu costs were eliminated, the SRAS curve will be ________ because of ________.
upward sloping; wage price stickiness and slow wage adjustment by firms
If the Fed believes the inflation rate is about to increase, it should
use a contractionary monetary policy to increase the interest rate and shift AD to the left.
If the Fed believes the economy is about to fall into recession, it should
use an expansionary monetary policy to lower the interest rate and shift AD to the right.
When the Fed conducts an open market purchase, the Fed ________, the money supply ________, and the interest rate should ________.
buys securities from banks; increases; decrease
Stagflation is a ________. Stagflation occurs when ________.
combination of inflation and recession; a supply shock shifts the SRAS to the left, increasing the price level and decreasing actual GDP
Net exports ________ net foreign investment.
equal
Contractionary monetary policy: The price level and real GDP both ________.
fall (leftward shift from AD1 to AD2 to reach equilibrium at LRAS and SRAS)
If you move $100 from your savings account to your checking account, then M1 will ________ and M2 will ________.
increase by $100; remain the same
Assume the tax multiplier is estimated to be 1.8 and the aggregate supply curve has its usual upward slope. Suppose the government lowers taxes by $70 million. Aggregate demand will ________ by $________ million.
increase; $126.0 million
Suppose the economy is in long-run equilibrium. If there is increased pessimism about the future of the economy, the AD curve will shift ________. The new short-run equilibrium occurs at ________. Long-run adjustment will shift the SRAS curve ________ as workers adjust to lower-than-expected prices. The new long-run equilibrium occurs at ________.
leftward; where AD2 and SRAS1 intersect (leftward movement along SRAS1); rightward; where AD2, SRAS2, and LRAS1 intersect
Excess reserves are ________.
reserves banks keep above the legal requirement
Expansionary monetary policy: The price level and real GDP both ________.
rise (rightward shift from AD1 to AD2 to reach equilibrium at LRAS and SRAS)
The Fed can increase the federal funds rate by
selling Treasury bonds, which decreases bank reserves.
More capital accumulation will cause the LRAS curve to ________.
shift to the right
As the public starts expecting a higher inflation rate, the short-run Phillips curve will ________.
shift up and to the right
An increase in interest rates affects aggregate demand by
shifting the AD curve to the left, reducing real GDP and lowering the price level.
Menu costs are ________.
the costs to firms of changing prices
The position of the LRAS curve is determined by
the number of workers, the amount of capital, and the available technology.
When the Federal Reserve purchases Treasury securities in the open market,
the sellers of such securities deposit the funds in their banks and bank serves increase.
Increases in the value of the dollar relative to foreign currencies will make the aggregate demand curve shift ________.
to the left
Suppose the required reserve ratio is 9% and a bank has the following balance sheet: Assets: Reserves $2,300 Loans $9,200 Liabilities: Deposits $11,500 This bank keeps required reserves of ________ and excess reserves of ________.
$1,035; $1,265
Suppose you deposit $1,300 cash into your checking account. By how much will the total money supply increase as a result when the required reserve ratio is 0.10? The change in the money supply is ________.
$11,700
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
Suppose you deposit $800 cash into your checking account. By how much will checking deposits in the banking system increase as a result when the required reserve ratio is 0.20? The change in checking deposits is equal to ________.
$4,000
Suppose a BU student deposits in his checking account the $200 in tips he earns over the weekend working at The Pub. As a result, the money supply increases by $800. Given this result, what must R (the required reserve ratio) be equal to? (Assume banks hold no excess reserves.)
0.2
The formula for the money multiplier is ________. If the required reserve ratio is 0.05, and the excess reserve ratio is 0, the maximum increase in checking account deposits that will result from an increase in bank reserves of $20,000 is ________.
1/(R+E); $400,000
In 2012, domestic investment in a country was 15% of GDP, and the country's net foreign investment was 3.1% of GDP. The country's national saving was ________ of GDP.
18.1% (domestic investment + NFI)
Natural rate of unemployment = 5% Current rate of unemployment = 4% Expected inflation rate = 4% Current inflation rate = 6% The short-run and long-run Phillips curves intersect at the point where the inflation rate is ________ and the unemployment rate is ________.
4%; 5%
(Not pictured: status AD-AS model) Suppose the economy is initially in long-run equilibrium at point A (AD2, SRAS2, and LRAS intersect). The government decides to decrease government spending. In the short-run, this contractionary fiscal policy will cause:
A leftward shift from AD2 to AD1 and a movement to point D (left of LRAS, AD1 and SRAS2 intersect), with a lower price level and lower output.
Suppose the economy is initially in long-run equilibrium. The Fed decides to increase the required serve ratio. In the short-run, this contractionary monetary policy will cause:
A leftward shift from AD2 to AD1 and a movement to point D (where AD1 and SRAS2 intersect), with a lower price level and lower output.
(Not pictured: status AD-AS model) Suppose the economy is initially in long-run equilibrium. The government enacts a policy to increase government spending. In the short-run, this expansionary fiscal policy will cause:
A rightward shift from AD1 to AD2 and a movement to point B (right of LRAS, AD2 and SRAS1 intersect), with a higher price level and higher output.
Changes in interest rate affect AD. Which of the following is/are affected by changes in interest rates and, as a result, impacts AD? A. The value of the dollar B. Business investment projects C. Government spending D. Consumption of durable goods
A, B, and D
The aggregate demand curve slopes downward for all of the following reasons except: A. A lower price level makes imports from other countries less expensive, and US citizens buy more imports. B. A lower price level increases the real wealth of households, thereby increasing household consumption. C. A lower price level decreases the rate of interest, which increases private investment and consumption. D. A lower price level makes US exports less expensive, thereby increasing net exports.
A. A lower price level makes imports from other countries less expensive, and US citizens buy more imports.
Which of the following statements is most accurate regarding fiscal policy and monetary policy? A. Fiscal policy includes changes in government spending and taxes and is controlled by the federal government. Monetary policy includes changes in the money supply and interest rates and is controlled by the Federal Reserve. Both policies are intended to achieve macroeconomic objectives. B. Fiscal policy includes changes in government spending and interest rates and is controlled by the federal government. Monetary policy includes changes in the money supply and taxes and is controlled by the Federal Reserve. Both policies are intended to achieve macroeconomic objectives. C. Fiscal policy includes changes in government spending and taxes and is controlled by the Federal Reserve. Monetary policy includes changes in the money supply and interest rates and is controlled by the federal government. Both policies are intended to achieve macroeconomic objectives. D. Fiscal policy includes changes in interest rates and taxes and is controlled by the federal government. Monetary policy includes changes in the money supply and government spending and is controlled by the Federal Reserve. Both policies are intended to achieve macroeconomic objectives.
A. Fiscal policy includes changes in government spending and taxes and is controlled by the federal government. Monetary policy includes changes in the money supply and interest rates and is controlled by the Federal Reserve. Both policies are intended to achieve macroeconomic objectives.
Which of the following is NOT a correct statement about M2? A. M2 is the best definition of money as a medium of exchange. B. M2 includes all of the assets in M1. C. M2 is a broader definition of money compared to M1 and currency. D. M2 includes savings accounts, small-denomination time deposits, and money market mutual funds.
A. M2 is the best definition of money as a medium of exchange.
Explain how each of the following would affect the short-run aggregate supply curve. A. An increase in the price level will ________ the SRAS curve because this is a change in ________. B. An increase in what the price level is expected to be in the future will ________ the SRAS curve because this is a change in ________. C. The price level that is currently higher than expected will ________ the SRAS curve because this is a change in ________. D. An unexpected increase in the price of an important raw material will ________ the SRAS curve because this is a change in ________. E. An increase in the labor force will ________ the SRAS curve because this is a change in ________.
A. not change; the price level B. decrease (shift leftward); expectations about future prices C. decrease (shift leftward); an adjustment to past errors in expectations about future prices D. decrease (shift leftward); the price of an important natural resource E. increase (shift rightward); the productive capacity of the economy
Explain how each of the following would affect the long-run aggregate supply curve. A. The price level increases. Because this is a change in ________, the LRAS curve will ________. B. The labor force increases. Because this is a change in ________, the LRAS curve will ________. C. There is an increase in the quantity of capital goods. Because this is a change in ________, the LRAS curve will ________. D. Technological change occurs. Because this is a change in ________, the LRAS curve will ________.
A. the price level; not change B. the productive capacity of the economy; shift to the right C. the productive capacity of the economy; shift to the right D. the productive capacity of the economy; shift to the right
What is the effect of a monetary policy change that causes a decrease in interest rates on the AD curve? ________ would cause a similar shift in the AD curve.
AD curve shifts to the right; A decrease in taxes
Suppose the economy is initially in long-run equilibrium. The Fed decides to sell bonds. In the short-run, this contractionary monetary policy will cause:
AD to shift leftward, with a lower price level and lower output (point is left of LRAS)
To have growth without inflation
AD, SRAS, and LRAS must increase by the same amount.
The current inflation rate and then expected inflation rate are both 4%. The current unemployment rate and the natural rate of unemployment are both 5%. What is the effect on the economy of a severe (adverse) supply shock? If the Federal Reserve keeps monetary policy unchanged, eventually the unemployment rate will be:
As a result of the supply shock, the inflation rate has increased. back to the 5% natural rate of unemployment.
Which of the following would cause a decrease in the real GDP in the short run? A. An increase in the interest rates that causes short-run aggregate supply to fall. B. A reduction in consumer confidence that causes aggregate demand to fall. C. A reduction in consumer confidence that causes short-run aggregate supply to fall. D. An increase in government purchases that causes aggregate demand to rise.
B. A reduction in consumer confidence that causes aggregate demand to fall.
Which of the following scenarios would lead to an increase in the price level in the short run? A. An increase in business pessimism regarding future profitability that decreases short-run aggregate supply. B. An increase in business optimism regarding future profitability that increases aggregate demand. C. An increase in payroll taxes leading to an increase in aggregate demand. D. An increase in oil prices that leads to a reduction in aggregate supply.
B. An increase in business optimism regarding future profitability that increases aggregate demand.
Suppose the economy was in equilibrium at potential GDP (point where AD, SRAS, and LRAS intersect) when the demand for housing sharply declined. What actions can Congress and the president take to move the economy back to potential GDP?
Increase government spending or decrease taxes.
Which of the following events would cause in increase in long-run aggregate supply? A. an increase in the price level B. an increase in the capital stock C. workers and firms adjust to a lower-than-expected price level D. expectations that the price level will increase in the future
B. an increase in the capital stock
Which one of the following does not describe balance of trade?
Balance of trade is equal to the sum of current account balance and financial account balance.
Which of the following are NOT included in the M1 definition of the money supply? A. The coins in your pocket. B. The funds in your checking account. C. The funds in your savings account. D. The traveler's check that you have left over from a trip. E. Your Citibank Platinum MasterCard.
C & E
Which of the following would cause an increase in the price level in the short run? A. An increase in government purchases that decreases short-run aggregate supply. B. A reduction in personal income taxes that reduces aggregate demand. C. An increase in government purchases that increases aggregate demand. D. An increase in the exchange rate of the dollar in relation to foreign currencies that decreases short-run aggregate supply.
C. An increase in government purchases that increases aggregate demand.
Which of the following will not have an effect on the long-run Phillips curve? A. Extended periods of high unemployment. B. Changes in unemployment insurance. C. Changes in monetary policy. D. Changes in demographics.
C. Changes in monetary policy.
Which of the following is NOT one of the policy tools the Fed uses to control the money supply? A. Reserve requirements. B. Open market operations. C. Moral suasion. D. Discount policy.
C. Moral suasion.
Which one of the following is NOT true when the economy is in macroeconomic equilibrium? A. When the economy is at long-run equilibrium, SRAS = AD = LRAS. B. When the economy is at long-run equilibrium, total unemployment = frictional unemployment + structural unemployment. C. When the economy is at long-run equilibrium, there is positive cyclical unemployment. D. When the economy is at long-run equilibrium, actual GDP = potential GDP.
C. When the economy is at long-run equilibrium, there is positive cyclical unemployment.
How does an increase 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.
What is a contractionary fiscal policy?
Contractionary fiscal policy includes decreasing government spending and increasing taxes to decrease aggregate demand.
Which of the following is an example of an expansionary fiscal policy? A. An increase in the money supply. B. A decrease in government spending. C. An increase in investment spending. D. A decrease in taxes.
D. A decrease in taxes.
Which of the following would lead to a reduction in real GDP in the short run? A. An increase in oil prices that causes short-run aggregate supply to increase. B. A reduction in taxes that causes aggregate demand to fall. C. A recession in a foreign trading partner's country that causes short-run aggregate supply to fall. D. A reduction in the growth rate in foreign countries compared to the US that causes aggregate demand to fall.
D. A reduction in the growth rate in foreign countries compared to the US that causes aggregate demand to fall.
Expected inflation is initially at 1.5%. When expected inflation increases to 4.5%, which of the following will occur? (LR Phillips curve is at 5%) A. To have 3.5% unemployment rate, inflation would be 7.5%. B. At the natural rate of unemployment, inflation is 4.5%. C. Unemployment reaches the natural rate of 5%. D. All of the above.
D. All of the above.
If US borrows more from the foreign countries than it lends to the foreign countries, then US must have A. a net capital flow. B. a financial account surplus. C. a current account deficit. D. All of the above.
D. All of the above.
The saving and investment equation A. can be written: S = I + NFI. B. shows that a country with negative NFI must be saving less than it is investing domestically. C. tells us that a savings will be invested domestically or overseas. D. All of the above.
D. All of the above.
Which of the following is a monetary policy tool used by the Federal Reserve Bank? A. Decreasing the rate at which banks can borrow money from the Federal Reserve. B. Increasing the reserve requirement from 10% to 12.5%. C. Buying $500 million worth of government securities, such as Treasury bills. D. All of the above.
D. All of the above.
Which of the following is NOT a policy tool the Federal Reserve uses to manage the money supply? A. Reserve requirements. B. Discount policy. C. Open market operations. D. Changing Income tax rates.
D. Changing Income tax rates.
"Assets are things of value that people own. Liabilities are debts. Therefore, a bank will always consider a checking account deposit to be an asset and a car loan to be a liability." Agree or disagree?
Disagree. Checking accounts represent something that the bank owes to the owner of the account. It is a bank liability.
"I recently read that more than half of the money issued by the government is actually held by people in foreign countries. If that's true, then the US is less than half as wealthy as the government statistics indicate." Agree or disagree?
Disagree. Money is currency plus checking deposits. Wealth is the value of assets minus debts.
Suppose the economy is in long-run equilibrium. Then AD1 increases (shifts rightward) to AD2. How will the economy adjust from the short-run equilibrium point to the new long-run equilibrium point?
Due to the higher price level, workers will demand higher wages, and firms will raise prices and cause SRAS to shift to the left to the new long-run equilibrium point.
What is the general relationship between the business cycle and unemployment and inflation?
During an expansion, unemployment falls and inflation increases.
If the government increases expenditure without raising taxes, this will A. increase the budget deficit and require the government to borrow additional funds. B. cause the interest rate to increase, thereby, reducing private investment and crowding out the private sector. C. cause a decrease in the modest exchange rate which will increase exports and decrease imports. D. All of the above. E. A and B only.
E. A and B only.
What is an expansionary fiscal policy?
Expansionary fiscal policy includes increasing government spending and decreasing taxes to increase aggregate demand.
The term "crowding out" refers to a situation where:
Government spending increases interest rates and decreases private investment.
Suppose that real GDP is currently $13.8 trillion and potential real GDP is $14.0 trillion, or a gap of $200 billion. The government purchases multiplier is 5.0, and the tax multiplier is 4.0. Holding other factors constant, by how much will government purchases need to be increased to bring the economy to equilibrium at potential GDP? Holding other factors constant, by how much will taxes have to be cut to bring the economy to equilibrium at potential GDP?
Government spending will need to be increased by $40 billion. Taxes will need to be cut by $50 billion.
In addition to the Federal Reserve Bank, what other economic actors influence the money supply?
Households, firms, and banks.
If Congress and the president decide an contractionary fiscal policy is necessary, what changes should they make in government spending or taxes?
In this case, Congress and the president should enact policies that decrease government spending and increase taxes.
If Congress and the president decide an expansionary fiscal policy is necessary, what changes should they make in government spending or taxes?
In this case, Congress and the president should enact policies that increase government spending and decrease taxes.
The US ran a current account surplus every year during the 1960s. What must have been true about the US financial account balance during those years?
Must have been a deficit
"Because in 2012 national saving was a smaller percentage of GDP in the US than in the UK, domestic investment must also have a smaller percentage of GDP in the US than in the UK." Agree or disagree? Why?
No. National saving is domestic investment plus net foreign investment. Domestic investment may exceed national saving by the absolute value of NFI. The domestic investment in the US could have been a higher percentage of her GDP than that in the UK.
Which of the following correctly states the saving and investment equation in an open economy? If national saving declines and domestic investment does not change, it must be true that foreign investment has ________.
S = I + NFI; decreased
How will the economy adjust back to long-run equilibrium (after large increase in demand for US exports)? At the new long-run equilibrium,
Short-run aggregate supply will decrease (shift leftward) as firms and workers adjust to the new price level. real GDP and the unemployment rate will remain the same, but price level will be higher compared to the initial equilibrium, prior to the increase in exports.
How and why will the economy adjust back to long-run equilibrium (after an unexpected increase in the price of oil)?
Short-run aggregate supply will increase (shift rightward) as the recession makes firms and workers willing to accept lower wages and prices.
Which of the following shows the same saving and investment equation (S = I + NX)?
Sprivate + Spublic = (Y + TR - C - T) + (T - (G + TR))
What is the difference between the federal budget deficit and federal government debt?
The federal budget deficit is the year-to-year short fall in tax revenues relative to government spending (T < G + TR), financed through government bonds. The federal government debt is the accumulation of all past deficits.
Which policy tool (used to control the money supply) is the most important?
The Fed conducts monetary policy principally through open market operations.
Suppose the government increases expenditures by $130 billion and the marginal propensity to consume is 0.50. By how will equilibrium GDP change?
The change in equilibrium GDP is $260.0 billion.
Suppose the government increases taxes by $60 billion and the marginal propensity to consume is 0.50. By how will equilibrium GDP change?
The change in equilibrium GDP is -$60.0 billion.
Which interest rate does the Fed target?
The federal funds rate
If the SRAS curve were a horizontal line, what would be the impact on the size of the government purchases and tax multipliers?
The impact of the multiple would be larger if the SRAS curve is horizontal.
Latest estimates published by the government of Rossland, a small open economy, shows that the government's expenses over the next year are expected to be $50 million. Tax revenue is likely to be $45 million. The data also projects that the real GDP will be approximately $130 million and that the household spending on consumption is likely to amount to $70 million. Domestic investment, however is expected to be low at $40 million. What can be inferred from the info given?
The net capital inflow to Rossland is expected to be $30 million next year.
"The US has run a balance of payments in deficit in every year since 1982." True or false?
The statement is false; the balance of payments must always equal zero.
Why does a $1 increase in government purchases lead to more than a $1increase in income and spending?
Through the government purchases multiplier, the $1 increase in government spending will lead to an increase in aggregate demand and national income, which will lead to an increase in induced spending.
"The Fed has been pouring more money into the banking system by cutting the target federal funds rate to 0 to 0.25 percent in December 2008." What is the relationship between the federal funds rate falling and the money supply increasing? How does lowering the target for the federal funds rate "pour money" into the banking system?
To decrease the federal funds rate, the Fed must increase the money supply. To increase the money supply, the Fed buys bonds on the open market, which increases bank reserves.
How do banks "create money"?
When there is an increase in checking account deposits, banks gain reserves and make new loans, and he money supply expands.
Is it possible for Congress and the president to carry out an expansionary fiscal policy if the money supply does not increase?
Yes, because fiscal policy and monetary policy are separate things.
Suppose that you are a bank manager, and the Federal Reserve raises the required reserve ratio from 10% to 12%. What actions would you need to take? As your actions and those of other bank managers reduced the amount of loans made, we would expect that the money supply would end up ________.
You would have to reduce loans to make up for the necessary increase in reserves. decreasing
Suppose you decide to withdraw $100 in cash from your checking account. What is the effect of this transaction on your bank's balance sheet?
Your bank's balance sheet shows a decrease in reserves by $100 and a decrease in deposits by $100.
A negative supply shock is
a sudden increase in the price of an important natural resource, resulting in a leftward shift of the SRAS curve.
The table shows what the situation will be in 2017 in the federal government does not use fiscal policy: Year Potential GDP Real GDP Price lev 2016 $17.8 trillion $17.8 tril 113.7 2017 $18.2 trillion $17.8 tril 115.9 If Congress and the president want to keep real GDP at its potential level in 2017, they should use ________, which would mean ________. If Congress and the president are successful in keeping real GDP at its potential level in 2017, state whether each of the following will be higher, lower, or the same as it would have been if they had taken no action: Real GDP will be ________. Potential real GDP will be ________. The inflation rate will be ________. The unemployment rate will be ________.
an expansionary fiscal policy; increasing government spending or cutting taxes higher; the same; higher; lower
When the Federal Reserve decreases the discount rate, the money supply will ________.
increase
The LRAS curve is vertical because in the long run,
change in the price level do not affect potential GDP, as potential GDP depends on the size of the labor force, capital stock, and technology.
As the interest rate increases,
consumption, investment, and net exports decrease; aggregate demand decreases.
William McChesney Martin (FR chairman from 1951-70) said, "The role of the Federal Reserve is to remove the punchbowl just as the party gets going." By "to remove the punchbowl," he meant to engage in ________ policy. In terms of the economy, "just as the part gets going" refers to a situation in which real GDP ________ potential GDP, which will result in ________ the inflation rate.
contractionary is greater than; an increase in
Suppose the inflation rate has been 15% for the past four years. The unemployment rate is currently at the natural rate of unemployment of 5%. The Federal Reserve decides that it wants to permanently reduce the inflation rate to 5%. To do this, the Fed would use a ________ policy. As a result of this policy, the unemployment rate will be ________ the natural rate of 5% and the inflation rate will be edging ________ slowly. If the Fed's policy is successful, the inflation rate will be ________ and the unemployment rate will be ________.
contractionary greater than; down 5%; 5%
Richard Gephardt once proposed that tariffs be imposed on imports from countries with which the US has a trade deficit. Assume that no other federal government economic policy is changed. If this proposal were enacted and if it were to succeed in reducing the US current account deficit to zero, domestic investment spending would be likely to ________.
decrease
Problem --> Policy --> Actions --> Result: Recession --> Expansionary --> Increase government spending or ________ --> Real GDP and price level ________ Rising inflation --> Contractionary --> ________ or increase taxes --> Real GDP and price level ________
decrease taxes; rise decrease government spending or increase taxes; fall
The widespread use of computers and the Internet has ________ menu costs.
decreased
The opportunity cost of holding money ________ when moving down along the money demand curve.
decreases
Since the US has negative net foreign investment, its
domestic saving must be less than its domestic investment.
Each year that the federal government runs a deficit, the federal debt ________. Each year that the federal government runs a surplus, the federal debt ________.
grows; shrinks
In the new short-run equilibrium, the unemployment rate is ________ the unemployment rate in the initial equilibrium prior to the increase in the price of oil.
higher than
Credit cards are
included in neither the M1 definition of the money supply nor in the M2 definition.
"The economy's potential to supply goods and services [is] determined by such things as labor force and capital stock, as well as inflation expectations." This list of the determinants of potential GDP is
incorrect since changes in the expected price level affect short run aggregate supply but not the long run aggregate supply.
Suppose the government increases expenditures while holding taxes the same. This will ________ deficits or ________ surpluses. The increase in government expenditures will ________ the interest rate, which will cause ________ in private investment spending, and is referred to as ________.
increase; decrease increase; a decrease; crowding out
Assume the economy is in macroeconomic equilibrium. In the short run, an increase in the aggregate demand ________, whereas in the long run, an automatic mechanism brings________.
increases the price level and actual GDP beyond potential GDP; the economy back to potential GDP but the price level remains higher
In 2010, France had a current account deficit of 41.0 billion euros (approximately $54.4 billion). This means that France experienced a net capital ________ in 2010. The surplus in the financial account means that France is ______________________________.
inflow; this is because the sum of the current account balance and the financial account balance must be equal to zero. The current account deficit must be offset by the financial account surplus. selling more assets than it buys
The federal funds rate
is the rate that banks charge each other for short-term loans of excess reserves.
If a country saves more than it invests domestically then its net foreign investment must be ________.
positive
"Real GDP is currently $17.7 trillion, and potential real GDP is $17.4 trillion. If Congress and the president would decrease government purchases by $300 billion or increase taxes by $300 billion, the economy could be brought to equilibrium at potential GDP." If government purchases were to decrease by $300 billion or if taxes were increased by $300 billion, the equilibrium level of real GDP would decrease by ________. Therefore, the statement above is ________.
more than $300 billion; incorrect
A change in the price level causes a ________ the SRAS curve. A change in any other factor causes a ________ the SRAS curve.
movement along; shift in
The balance on the financial account is
net capital flows = capital inflows - capital outflows.
Given that the Phillips curve is derived from the aggregate demand and aggregate supply model, why use the Phillips curve? The answer is that while the AD and AS model shows the ________, the Phillips curve explicitly shows the ________. Further, the AD and AS model explicitly shows changes in the ________, while the Phillips curve explicitly shows the ________.
price level; inflation rate; level of real GDP; unemployment rate
The decline in China's current account surplus influences the amount that China is investing in foreign countries relative to the amount that foreign countries are investing in China because it
reduces China's ability to invest in other countries.
When the People's Bank of China "cut the amount of cash that banks must set aside as reserves," the monetary policy tool they used was a change in the ________. How would this action "pump money into the financial system to support lending"?
required reserve ratio; Banks can make more loans.
The economy is in long-run equilibrium. Now assume that there is a large increase in demand for US exports. Then consider the adjustment of the economy back to long-run equilibrium. AD ________. SRAS ________. LRAS ________. New short-run equilibrium point is located ________. New long-run equilibrium point is located ________.
shifts rightward; shifts leftward; stays the same; where AD2 and SRAS1 intersect (upward movement along SRAS1); where LRAS1, AD2, and SRAS2 intersect (upward movement along LRAS1)
In the 1960s and early 1970s, some economists argued that one of the US political parties was willing to have higher unemployment in order to achieve lower inflation and that the other major political party was willing to have higher inflation in order to achieve lower unemployment. Such views of the trade-off between inflation and unemployment might have existed in the 1960s because the Phillips curve was widely viewed as ________. Such views are rare today because ________.
stable; in the long run there is no tradeoff between inflation and unemployment
The economy is in long-run equilibrium. Now assume that there is an unexpected increase in the price of oil. AD ________. SRAS ________. LRAS ________. New short-run equilibrium point is located ________.
stays the same; shifts leftward; stays the same; where AD1 and SRAS2 intersect (upward rightward movement along AD1)
When Federal Reserve Chairman Ben Bernanke said that the public's expectations of inflation could "become embedded in wage and price decisions," he meant
that workers, firms, consumers, and the government will all take the inflation rate into account when making decisions.
If, in the long run, real GDP returns to its potential level, then in the long run,
the Phillips curve is vertical.
When the Federal Reserve sells Treasury securities in the open market,
the buyers of these securities pay for them with checks and bank reserves fall.
When the Federal Reserve decreases the required reserve ratio,
the money supply will increase.
The part of the balance of payments that records purchases of assets a country has made abroad and foreign purchases of assets in the country is called
the financial account.
Milton Friedman argued that the Phillips curve did not represent a permanent trade-off between unemployment and inflation, since
the long-run Phillips curve is vertical, there is no trade-off between unemployment and inflation in the long run.
Suppose the economy is in long-run equilibrium. Then AD1 increases (shifts rightward) to AD2. The new short-run equilibrium will be at ________. The new long-run equilibrium will be at ________.
where AD2 and SRAS2 intersect (AD1 shifts rightward, SRAS1 shifts rightward); where AD2 and LRAS1 intersect (AD1 shifts rightward, LRAS1 stays the same)
At what point is the inflation rate stable? That is, at what point can we refer to the inflation rate as the non accelerating inflation rate of unemployment?
where LR Phillips curve and expected inflation rate intersect
After the adjustment of aggregate supply is complete, the economy returns to equilibrium at ________. When the economy returns to long-run equilibrium again ________.
where LRAS1, AD1, and SRAS1 intersect (downward leftward movement along AD1) real GDP, the unemployment rate, and the price level will be the same as the initial equilibrium values prior to the increase in the price of oil.
Suppose that workers and firms could always predict next year's price level with perfect accuracy. Under these circumstances, the SRAS curve ________.
would be the same as the LRAS
