Macroeconmics Final

Suppose that Congress and the President are considering an increase in government expenditures of $50 billion. They consult with two economists: Alan and Robert. Alan believes that the marginal propensity to consume (MPC) is 0.9 and Robert believes that it is 0.5. If Alan is correct, then the increase in government spending will cause GDP to increase by ______, and if Robert is correct, then the government spending increase will cause GDP to increase by ________.

$500 billion ; $100 billion

Suppose that today the actual Federal Funds Rate is 0.40% and the Federal Reserve Bankʹs target for the Federal Funds Rate is 0.25%. What is the Federal Reserve Bank likely to do? A) Engage in open market purchases, which will increase the amount of reserves in the banking system and put downward pressure on the Federal Funds Rate. B) Engage in open market sales, which will decrease the amount of reserves in the banking system and put downward pressure on the Federal Funds Rate. C) Engage in open market sales, which will increase the amount of reserves in the banking system and put downward pressure on the Federal Funds Rate. D) Engage in open market purchases, which will decrease the amount of reserves in the banking system and put downward pressure on the Federal Funds Rate. E) None of the above -- Since the Federal Funds Rate is directly set by the Federal Reserve, it will simply lower the rate.

A) Engage in open market purchases, which will increase the amount of reserves in the banking system and put downward pressure on the Federal Funds Rate.

If the Fed buys Treasury bills, this will shift the money ____________________, which causes interest rates to ____________. A) supply curve to the right ; decrease B) demand curve to the left ; decrease C) supply curve to the left ; decrease D) demand curve to the right ; increase E) supply curve to the left ; increase

A) supply curve to the right ; decrease

Suppose you decide to withdraw​ $100 in cash from your checking account. Which one of the following choices accurately shows the effect of this transaction on your​ bank's balance sheet. A. Your​ bank's balance sheet shows a decrease in reserves by​ $100 and a decrease in deposits by​ $100. B. Your​ bank's balance sheet shows an increase in reserves by​ $100 and an increase in deposits by​ $100. C. Your​ bank's balance sheet shows an increase in reserves by​ $100 and a decrease in deposits by​ $100. D. Your​ bank's balance sheet shows a decrease in reserves by​ $100 and an increase in deposits by​ $100.

A. Your​ bank's balance sheet shows a decrease in reserves by​ $100 and a decrease in deposits by​ $100.

Suppose there has been an increase in investment. As a​ result, real GDP will​ ________ in the short​ run, and​ ________ in the long run. A. increase; decrease to its initial value B. ​increase; increase further C. ​decrease; increase to its initial level D. ​decrease; decrease further

A. increase; decrease to its initial value

Money serves as a standard of deferred payment when A. payments agreed to today but made in the future are in terms of money. B. sellers are willing to accept it in exchange for goods or services. C. it can be easily stored today and used for transactions in the future. D. All of the above are examples of money serving as a standard of deferred payment.

A. payments agreed to today but made in the future are in terms of money.

A supply shock is A. an increase in both the inflation and the unemployment rates that may sometimes result in a rightward shift of the SRAS curve. B. a sudden increase in the price of an important natural​ resource, resulting in a leftward shift of the SRAS curve. C. an increase in potential GDP caused by a government expenditure​ multiplier, resulting in a leftward shift of the AD curve. D. an increase in the rate of inflation as a result of expansionary fiscal​ policy, resulting in a leftward shift of the SRAS curve.

B

Consider the short-run money market (i.e. money supply and money demand). Suppose that Fed increases the money supply. Which of the following explains how the interest rate adjusts? A) Due to the increase in money supply, there is a surplus of money at the original interest rate. Thus the public increases its demand for bonds, which decreases the price of bonds. This decrease in bond prices increases the interest rate paid by the bonds. B) Due to the increase in money supply, there is a surplus of money at the original interest rate. Thus the public increases its demand for bonds, which increases the price of bonds. This increase in bond prices reduces the interest rate paid by the bonds. C) Due to the increase in money supply, there is a shortage of money at the original interest rate. Thus the public increases its demand for bonds, which increases the price of bonds. This increase in bond prices reduces the interest rate paid by the bonds. D) Due to the increase in money supply, there is a shortage of money at the original interest rate. Thus the public decreases its demand for bonds, which decreases the price of bonds. This decrease in bond prices reduces the interest rate paid by the bonds.

B) Due to the increase in money supply, there is a surplus of money at the original interest rate. Thus the public increases its demand for bonds, which increases the price of bonds. This increase in bond prices reduces the interest rate paid by the bonds.

Which of the following describes an inside lag of monetary policy? A) After realizing that the economy needs expansionary policy, it takes the Congress and the President 20 weeks to get together and make the necessary policy change. B) It takes the Fed many months to realize that the economy is beyond potential GDP and requires contractionary policy. C) Citizens often only get paid once a month by their employers and thus have to wait for their paychecks for weeks at a time. D) The Fed lowers interest rates but it takes many months for investment spending to increase. E) More than one of the above is correct

B) It takes the Fed many months to realize that the economy is beyond potential GDP and requires contractionary policy.

In the short run, contractionary monetary policy on the part of the Fed results in A) a decrease in the money supply, a decrease in interest rates, and a decrease in GDP. B) a decrease in the money supply, an increase in interest rates, and a decrease in GDP. C) an increase in the money supply, an increase in interest rates, and an increase in GDP. D) an increase in the money supply, a decrease in interest rates, and an increase in GDP.

B) a decrease in the money supply, an increase in interest rates, and a decrease in GDP.

The economic definition of money​ is: A. Anything authorized by the government to be used in an exchange. B. Any asset that people are generally willing to accept in exchange for goods and services. C. A good that has intrinsic value. D. Anything of value owned by a person or a firm.

B. Any asset that people are generally willing to accept in exchange for goods and services.

if a person withdraws​ $500 from​ his/her checking account and holds it as​ currency, then M1 will​ ________ and M2 will​ ________. A. ​decrease; decrease B. not​ change; not change C. ​increase; decrease D. ​decrease; increase E. not​ change; increase

B. not​ change; not change

Which one of the following is not true when the economy is in macroeconomic​ equilibrium? A. When the economy is at​ long-run equilibrium, total unemploymentequals=frictional unemploymentplus+structural unemployment. B. When the economy is at​ long-run equilibrium, actual GDPequals=potential GDP. C. When the economy is at​ long-run equilibrium, firms will have excess capacity. D. When the economy is at​ long-run equilibrium, SRASequals=ADequals=LRAS

C

Monetary policy refers to the actions the A) Federal Reserve takes to manage government spending and taxes to pursue its economic objectives. B) President and Congress take to manage government spending and taxes to pursue their economic objectives. C) Federal Reserve takes to manage the money supply and interest rates to pursue its macroeconomic policy objectives. D) President and Congress take to manage the money supply and interest rates to pursue their economic objectives.

C) Federal Reserve takes to manage the money supply and interest rates to pursue its macroeconomic policy objectives.

How A) The Fed simply increases the Federal Funds Rate since it is directly set by the Fed. B) The Fed engages in open market purchases which makes reserves more plentiful, thus causing the Federal Funds Rate to rise. C) The Fed engages in open market sales which makes reserves more scarce, thus causing the Federal Funds Rate to rise. D) The Fed lowers the Discount Rate, which in turn, causes the Federal Funds Rate to rise. E) The Fed raises the Discount Rate, which in turn, causes the Federal Funds Rate to rise.

C) The Fed engages in open market sales which makes reserves more scarce, thus causing the Federal Funds Rate to rise.

The opportunity cost of holding money A) decreases when the interest rate increases, so people desire to hold more of it. B) decreases when the interest rate increases, so people desire to hold less of it. C) increases when the interest rate increases, so people desire to hold less of it. D) increases when the interest rate increases, so people desire to hold more of it.

C) increases when the interest rate increases, so people desire to hold less of it.

Which of the following best describes an outside lag of monetary policy? A) after realizing that the economy needs expansionary policy, it takes the Fed six weeks to get together and make the necessary policy change B) it takes the Fed many months to realize that the economy is beyond potential GDP and requires contractionary policy C) the Fed lowers interest rates but it takes many months for investment spending to increase D) citizens often only get paid once a month by their employers and thus have to wait for their paychecks for weeks at a time

C) the Fed lowers interest rates but it takes many months for investment spending to increase

The Federal Reserve uses two definitions of the money​ supply, M1 and​ M2, because A. M2 is also known as cash and cash​ equivalent, whereas M1 represents the standard of deferred payment function. B. M2 satisfies the medium of exchange function of​ money, whereas M1 satisfies the store of value function. C. M1 is a narrow definition focusing more on​ liquidity, whereas M2 is a broader definition of the money supply. D. M2 is a narrow definition focusing more on​ liquidity, whereas M1 is a broader definition of the money supply.

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

How do the banks​ "create money"? A. When there is a decrease in checking account​ deposits, banks lose reserves and reduce their​ loans, and the money supply expands. B. Banks buy bonds in the open market and gain​ reserves; this excess reserve holding increases the money supply. C. When there is an increase in checking account​ deposits, banks gain reserves and make new​ loans, and the money supply expands. D. Banks sell bonds in the open market and lose​ reserves; the excess cash holding by households increases the money supply.

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

The process of an economy adjusting from a recession back to potential GDP in the long run without any government intervention is known as A. monetary policy. B. ​"releasing sticky​ prices." C. an automatic mechanism. D. fiscal policy.

C. an automatic mechanism.

Money serves as a unit of account when A. sellers are willing to accept it in exchange for goods or services. B. it can be easily stored and used for transactions in the future. C. prices of goods and services are stated in terms of money. D. All of the above are examples of money serving as a unit of account.

C. prices of goods and services are stated in terms of money.

f a person withdraws​ $500 from​ his/her savings account and puts it in​ his/her checking​ account, then M1 will​ ________ and M2 will​ ________. A. not​ change; not change B. not​ change; increase C. ​increase; not change D. ​increase; decrease E. not​ change; decrease

C. ​increase; not change

Which of the following best describes how monetary policy affects the macroeconomy? 24) A) The Fed changes tax rates which shifts the AD curve which changes the price level and real GDP. B) The Fed changes interest rates which affects the money supply which shifts the SRAS curve which changes the price level and real GDP. C) President and the Congress change government spending which shifts the SRAS curve which changes the price level and real GDP. D) The Fed changes the money supply which affects interest rates which shifts the AD curve which changes the price level and real GDP. E) President and the Congress change government spending which shifts the AD curve which changes the price level and real GDP.

D) The Fed changes the money supply which affects interest rates which shifts the AD curve which changes the price level and real GDP.

Which of the following is a possible policy for the Federal Reserve to pursue if it wants to increase 25) the money supply? A) raise taxes B) raise the discount rate C) raise the reserve requirement D) buy U.S. treasury bonds E) More than one of the above is correct

D) buy U.S. treasury bonds

The money demand curve has a negative slope because A) lower interest rates cause households and firms to switch from money to stocks. B) lower interest rates cause households and firms to switch from money to financial assets (bonds). C) lower interest rates cause households and firms to switch from money to bonds. D) lower interest rates cause households and firms to switch from financial assets (bonds) to money. E) More than one of the above is correct

D) lower interest rates cause households and firms to switch from financial assets (bonds) to money

f the Fed pursues expansionary monetary policy then A) the money supply will decrease, interest rates will rise and GDP will fall. B) the money supply will increase, interest rates will rise and GDP will rise. C) the money supply will decrease, interest rates will fall and GDP will fall. D) the money supply will increase, interest rates will fall and GDP will rise. 16)

D) the money supply will increase, interest rates will fall and GDP will rise.

Which of the following best explains the difference between commodity money and fiat​ money? A. Commodity money has no value except as​ money, whereas fiat money has value independent of its use as money. B. Commodity money is usually authorized by the central​ bank, whereas fiat money has to be exchanged for gold by the central bank. C. All money is commodity​ money, as it has to be exchanged for gold by the central bank. D. Fiat money has no value except as​ money, whereas commodity money has value independent of its use as money.

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

The Fed engages in open market purchases which makes reserves more plentiful, thus causing -the Federal Funds Rate to rise. -The Fed engages in open market sales which makes reserves more scarce, thus causing the -Federal Funds Rate to rise. -The Fed lowers the Discount Rate, which in turn, causes the Federal Funds Rate to rise. -The Fed raises the Discount Rate, which in turn, causes the Federal Funds Rate to rise. The Fed simply increases the Federal Funds Rate since it is directly set by the Fed.

The Fed engages in open market sales which makes reserves more scarce, thus causing the Federal Funds Rate to rise.

Which of the following is true? A) The ʺmultiplier effectʺ occurs when spending by the government increases the incomes of some people, which causes them to increase their spending, which increases the incomes of other people, and so on. B) The ʺcrowding out effectʺ is less of a problem if actual GDP is greater than potential GDP. C) The ʺmuliplier effectʺ becomes larger as the marginal propensity to consume becomes smaller. D) The ʺcrowding out effectʺ refers to the decrease in imports than occurs when exports increase. E) More than one of the above is correct.

The ʺmultiplier effectʺ occurs when spending by the government increases the incomes of some people, which causes them to increase their spending, which increases the incomes of other people, and so on.

When does stagnation occur?

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

The primary tool the Federal Reserve uses to increase the money supply is

buying Treasury securities.

a. 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. Which of the things above are NOT included in the M1 LOADING... definition of the money​ supply?

c and e

If money demand is extremely sensitive to changes in the interest rate, the money demand curve 9) becomes almost horizontal. If the Fed expands the money supply under these circumstances, then the interest rate will

change very little and investment and consumer spending will change very little.

Define stagflation:

combonation of inflation and recession

If (the absolute value of ) the tax multiplier equals 1.6, real GDP is $13 trillion, and potential real GDP is $13.4 trillion, then taxes would need to be ____________ to restore the economy to potential real GDP.

cut by $250 billion

In the short run, expansionary fiscal policy ________ the price level and ________ equilibrium real GDP.

decrease, decrease

The opportunity cost of holding money -increases when the interest rate decreases, so people desire to hold less of it. -decreases when the interest rate decreases, so people desire to hold less of it. -decreases when the interest rate decreases, so people desire to hold more of it. -increases when the interest rate decreases, so people desire to hold more of it.

decreases when the interest rate decreases, so people desire to hold more of it.

Decreasing government spending ________ the price level and ________ equilibrium real GDP in the short run.

decreases; decreases

Suppose that there is an increase in the number of people selling bonds. This will cause the price 7) of bonds to _______ , thus ________ their interest rates.

fall ; increasing

Compare the time lags involved in stabilizing the economy using monetary and fiscal policy. Inside lags are likely longer for _______ policy and outside lags are likely longer for _______ policy.

fiscal ; monetary

An increase in government spending causes money demand to _________, which causes interest rates to _________, which causes investment spending to __________. This is known as ʺcrowding outʺ.

increase ; increase ; decrease

An increase in government spending causes money demand to _________, which causes interest rates to _________, which causes investment spending to __________. This is known as ʺcrowding outʺ.

increase ; increase ; decrease

Tax reduction and simplification should ________ long-run aggregate supply and ________ aggregate demand.

increase; increase

If the MPC is 0.8, real GDP is $15 trillion, and potential real GDP is $13 trillion, then taxes would need to be ____________ to restore the economy to potential real GDP.

increased by $0.5 trillion

If (the absolute value of ) the tax multiplier equals 1.6, real GDP is $13.8 trillion, and potential real GDP is $13.4 trillion, then taxes would need to be ____________ to restore the economy to potential real GDP.

increased by $250 billion

n the dynamic aggregate demand and aggregate supply​ model, if aggregate demand increases faster than potential real​ GDP, there will be?

inflation

Given our class discussion, we expect that poor people have ________ MPCs than richer people. Thus, a tax cut given to poor people would have a __________ multiplier effect than one given to richer people.

larger ; larger

If there are multiplier effects, then an increase in government purchases of $200 billion will shift the aggregate demand curve to the right by

more than $200 billion

The economy is in long-run equilibrium. Technological change shifts the long-run aggregate supply curve $120 billion to the right. At the same time, government purchases increase by $30 billion. If the MPC equals 0.8 and the crowding-out effect is $60 billion, we would expect that in the long-run,

real GDP would be higher but the price level would be lower.

The economy is in long-run equilibrium. Technological change shifts the long-run aggregate supply curve $120 billion to the right. At the same time, government purchases increase by $30 billion. If the MPC equals 0.8 and the crowding-out effect is $30 billion, we would expect that in the long-run,

real GDP would be higher but the price level would be the same.

In the dynamic aggregate demand and aggregate supply​ model, if aggregate demand increases slower than potential real​ GDP, there will be?

recession

Government budget deficits are most likely to increase during economic

recessions

If the Fed raises the interest rate, this will ________ prices and ________ real GDP in the short run.

reduce; lower

During recessions, government expenditure automatically

rises, because of programs such as unemployment insurance and Medicaid.

Suppose the federal budget deficit for the year was $100 billion and the economy was in a recession. If the economy had been at potential GDP, it is estimated that tax revenues would have been $60 billion higher and government spending on transfer payments $50 billion lower. Using these estimates, the cyclically adjusted budget

surplus was $10 billion.

During a recession, what automatically (due to ʺautomatic stabilizersʺ) happens to the governmentʹs budget situation?

tax revenues fall, government spending increases, and the budget deficit gets larger.

It is estimated that the tornadoes in Alabama earlier this year caused $645 million of damage in Jefferson County, Alabama alone. Suppose that Ben Gleck, a news analyst on the Coyote News Network, argues that the tornado, while tragic, will have a positive impact on the U.S. economy as it will create jobs for those involved in the clean up and reconstruction, and thus increase the amount of employment in the U.S.. Mr. Gleckʹs argument is an example of

the broken window fallacy.

Monetary policy refers to the actions the Federal Reserve takes to manage

the money supply and interest rates to pursue its economic objectives.

Crowding out will be greater

the more sensitive investment spending is to changes in the interest rate.