Macroeconomics Exam 3

An adverse supply shock causes inflation to

rise and the short-run Phillips curve to shift right

In a fractional-reserve banking system, a bank

keeps only a fraction of its deposits in reserve

If the reserve ratio is 15 percent, the money multiplier is

6.7 (divide the reserve ratio by 1)

Which of the following is not correct?

A recession is a period of declining real incomes and declining unemployment

Reserves are

deposits that banks have received but have not yet loaned out

Other things the same, when the price level falls, interest rates

fall, so firms increase investment

If the reserve ratio is 10 percent, the money multiplier is

10

John and Jane decide to go on a vacation. As a result, they withdraw $2,500 from their savings account to purchase $2,500 worth of traveler's checks. As a result of these changes

M1 increases by $2,500 and M2 stays the same

An increase in the money supply will

Reduce interest rates and increase aggregate demand

Suppose Congress decides to reduce government expenditures by reducing its purchases of weapons systems. Which of the following would you expect to occur as a result of this change?

The economy will move down and to the right along the short-run Phillips Curve

All U.S. paper dollars read "This note is legal tender for all debts, public and private." This statement represents which characteristic of US currency?

U.S. paper money is fiat money

Which of the following is correct?

When real GDP falls, the rate of unemployment rises

Economists who are skeptical about the relevance of "liquidity traps" argue that

a central bank continues to have tools to stimulate the economy, even after its interest rate target hits its lower bound of zero

An increase in government spending initially and primarily shifts

aggregate demand to the right

The equation: quantity of output supplied = natural rate of output + a(actual price level - expected price level), where a is a positive number, represents

an upward-sloping short-run aggregate supply curve

The federal funds rate is the interest rate

banks charge each other for short-term loans of reserves

In a system of 100-percent-reserve banking

banks do not make loans

In the long run, policy that changes aggregate demand changes

both unemployment and the price level

Which of the following is a store of value?

cash and stocks

When the price level falls the quantity of

consumption goods demanded and the quantity of net exports demanded both rise

Proponents of rational expectations argued that the sacrifice ratio

could be low because people might adjust their expectations quickly if they found anti-inflation policy credible

An increase in government purchases is likely to

crowd out investment spending by business firms

When taxes increase, consumption

decreases, so aggregate demand shifts left

Assume the money market is initially in equilibrium. If the price level increases, then according to liquidity preference theory there is an excess

demand for money until the interest rate increases

Aggregate demand shifts right if

government purchases increase and shifts left if stock prices fall

According to liquidity preference theory, the money-supply curve would shift rightward

if the Federal Reserve chose to increase the money supply

According to liquidity preference theory, if the quantity of money demanded is greater than the quantity supplied, then the interest rate will

increase and the quantity of money demanded will decrease

If the Fed wants to reverse the effects of an adverse supply shock on unemployment, it should

increase the money supply growth rate, which raises the inflation rate

An increase in the MPC

increases the multiplier, so that changes in government expenditures have a larger effect on aggregate demand

If the economy is initially at long-run equilibrium and aggregate demand declines, then in the long run the price level

is lower and output is the same as the original long-run equilibrium

Real GDP

measures economic activity and income

If people decide to hold less money, then

money demand decreases, there is an excess supply of money, and interest rates fall

Other things the same, a decrease in the price level makes consumers feel

more wealthy, so the quantity of goods and services demanded rises

The short-run effects of the housing and financial crisis are shown by

moving to the right along the short-run Phillips curve

A decrease in the expected price level shifts

only the short-run aggregate supply curve right

Monetary policy and fiscal policy influence

output in the short run only

Assume the multiplier is 5 and that the crowding-out effect is $30 billion. An increase in government purchases of $20 billion will shift the aggregate-demand curve to the

right by $70 billion (multiply government purchases by 5, then subtract the crowding-out effect)

If banks and speculators in the U.S. decided to exchange U.S. dollars for the foreign currencies of other countries, but foreigners do not desire to increase their holdings of U.S. dollars, then U.S. net exports would

rise and aggregate demand would shift right

The short-run effects of rising world commodity prices are shown by

shifting the short-run Phillips curve right

The aggregate demand curve shifts left if either

speculators gain confidence in U.S. assets or foreign countries enter into recession

Liquidity refers to

the ease with which an asset is converted to the medium of exchange

The discount rate is

the interest rate the Fed charges banks

According to liquidity preference theory, a decrease in money demand for some reason other than a change in the price level causes

the interest rate to fall, so aggregate demand shifts right

Milton Friedman argued that the Fed's control over the money supply could be used to peg

the level or growth rate of a nominal variable, but not the level or growth rate of a real variable

An improved functioning of the labor markets will shift

the long-run Phillips curve to the left and the long-run aggregate supply curve to the right

If the actual price level is 165, but people had been expecting it to be 160, then

the quantity of output supplied rises, but only in the short run

When the Fed buys bonds

the supply of money increases and so aggregate demand shifts right

Milton Friedman and Edmund Phelps argued in the late 1960s that in the long run the Phillips curve is

vertical, which implies that monetary and fiscal policies cannot influence the level of unemployment in the long run