Macroeconomics Finals

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Real and nominal variables are highly intertwined, and changes in the money supply change real GDP. Most economist would agree that this statement accurately describes

The short run, but not the long run

shifts in aggregate supply curve

labor, capital, natural resources, technological knowledge,

classical theory is believe to describe ___ but not ___ by most economist

long run short run

aggregate supply curve

long run : vertical short run : upward only impacts overall price level but not output

exchange-rate effect

lower price level reduces the interest rate, investors move some of their funds overseas in search of higher returns. Real value of the domestic currency to fall in the market for foreign-currency exchange. Domestic goods become less expensive relative to foreign goods. This increases the quantity of goods and services demanded.

Stick wage theory

- In the short run, nominal wages do not adjust to market forces quickly. - When nominal wages are fixed, an increase in price level decreases the real wages. - Firms will hire more workers due to lower real wages, which increases the quantity of goods and services supplied.

If the sacrifice ratio is 3, then reducing the inflation rate from 5 percent to 3 percent would require sacrificing

6% of annual output

If M = 2,000, P = 2.25, and Y = 6,000. What is the velocity?

6.75 (MV=PY or V = PY/M = 2.25 * 6,000 / 2,000 = 6.75)

Board of Governors

7 members appointed 14 year terms chair is most important - presides over board meetings, testifies in front of congressional committees, 4-year terms

interest-rate effect

A lower price level reduces the amount of money people want to hold. People try to lend out their excess money holdings, the interest rate falls. The lower interest rate stimulates investment spending and thus increases the quantity of goods and services demanded.

Consider the figure above with four different lines A, B, C and D. In this order, which curve is a long-run Phillips curve and which is a short-run Phillips curve?

A, D

The short-run relationship between inflation and unemployment is often called

The Phillips curve

The long-run aggregate supply curve shifts right if

Technology improves

reserves

deposits that banks have received but have not loaned out

rational expectations

expectations formed by using all available information about an economic variable and policies, people adjust their expectations of inflation

quantity theory of money

expl

Unit of account

the yardstick people use to post prices and record debts

problems Fed's have to handle

1 : Fed does not control the amount of money that households choose to hold as deposits in banks 2 : Fed does not control the amount that bankers lend

reasons for fall in price level and increase in demand

1 : consumers become wealthier 2: interest rate falls 3: currency depreciates (NX increase) all can work conversely

Steps to analyzing fluctuations

1 : decide which curve it changes 2 : decide direction it shifts 3 : determine the impact on the price level and demand 4 : move the curve and analyze how he economy moves to adjust to this change

The Employee Act

1 : government should avoid being a cause in economic fluctuation 2 : government should respond to changes in the private economy to stabilize aggregate demand

analysis of interest-rate effect

1 : higher prices raise money demanded 2 : higher money demanded leads to higher interest rates 3 : higher interest rates reduces the quantity of goods and service demanded

Feds jobs

1. Regulate banks and ensure the health of the banking system 2. Control the quantity of money that is available in the economy

If the reserve ratio is 12.5%, then 2,000 of additional reserves can create up to __

16,000 of new money ( 1 / 0.125 = 8; 8 * 2,000 = 16,000)

The nominal interest rate is % and the inflation is 3%. What is the real interest rate?

3% (R - i - inflation: 6% - 3% = 3%)

If the MPC = 0.75, then the government purchases multiplier is about

4

How long does it take for monetary policies to impact? How long does the impact stay?

6 months several years

Which of the following effects helps to explain the slope of the aggregate demand curve?

ALL - interest-rate effect, wealth effect, exchange-rate effect.

multiplier effect

An effect in economics in which an increase in spending produces an increase in national income and consumption greater than the initial amount spent. and has an effect on aggregated DEMAND

Which of the following is an example of crowding out?

An increase in government spending increases interest rates, causing investment to fall

supply shock

An unexpected event that causes the short-run aggregate supply curve to shift and the phillips curve - pandemic

If the central bank unexpectedly increases the money supply, then in the short run unemployment will move

Below its natural rate. The short-run Phillips curve shifts right as the economy moves back to its natural rate of unemployment

In 2009 Congress passed legislation providing states with funds to build roads and bridges. It also institutes tax cuts. Which of these shifts aggregate demand right?

Both increased funding for states and the tax cuts

Consider the economy is in long-run equilibrium. Then stock prices rise more than expected and stay high for some time. In the short run what happens to the price level and real GDP?

Both the price level and real GDP rise

When the Federal Reserve conducts open-market operations to increase the money supply, it

Buys government bonds from the public

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

Which list ranks assets from most to least liquid?

Currency, stocks, fine art

Sale of bonds

Decreases the money supply

When the price level falls, the number of dollars needed to buy a representative basket of goods

Decreases, so the value of money rises

According to the quantity equation (also known as the equation of exchange), the price level would change less than proportionately with a rise in the money supply if there were also

Either a rise in output or a fall in velocity

Consider the figure above, if the current money supply is MS1, then

Equilibrium exists when the value of money is 2

During a recession the economy experiences

Falling employment and income

If the Fed increases the money supply, the 1/P

Falls, so the value of money falls

business cycle

Fluctuations in economic activity, such as employment and production

FORMULA

GDP : Y = C + I + G + NX

Fiscal policy

Government policy that attempts to manage the economy by controlling taxing and spending.

Fiat Money :

Has no intrinsic value

Last year, Jane spent all of her income to purchase 200 units of corn at $5 per unit. This year, she spent all of her income to purchase 180 units of corn for $6 per unit.

Jane's nominal income increased this year, but her real income decreased.

If the reserve ratio decreases, the money multiplier

Increase

Keynes believed that economies experiencing high unemployment should adopt policies to

Increase aggregate demand

If monetary neutrality holds, then an increase in the money supply

Increases nominal but not real variables. Most economists think that monetary neutrality is a good description of the long run.

Buying of bonds

Increases the money supply

When the interest rate increases, the opportunity cost of holding money

Increases, so the quantity of money demanded decreases

theory of liquidity preferance

Keynes's theory that the interest rate adjusts to bring money supply and money demand into balance

Martha lends money at a fixed interest rate and then inflation turns out to be higher than she expected it to be. The real interest rate she earns is

Lower than she had expected, and the real value of the loan is lower than she had expected.

Higher inflation makes relative prices

More variable, making it less likely that resources will be allocated to their best use

FORMULA

Multiplier = 1+MCP +MPC^2+MCP^3+... -OR- Multiplier = 1/(1-MPC)

According to Friedman and Phelps, policymakers face a tradeoff between inflation and unemployment

Only in the short run

The left-hand graph shows a short-run aggregate-supply (SRAS) curve and two aggregate-demand (AD) curves. On the right-hand diagram, there is a Philips curve and the axis label U represents the unemployment rate. If the price level in the previous year was 100, point F on the right-hand graph corresponds to

Point B on the left hand graph

FORMULA

Quantity Equation = M*Y=P*Y

Economic variables whose values are measured in goods are called

Real variables

In 2021 the U.S. has seen ______ inflation and if it continues you would expect the Federal Reserve to _____ interest rates.

Relatively high; raises

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

Rise, so firms decrease investments

Which is included in M2 but not in M1?

Savings deposits

Money

Set of assets in the economy that people regularly use to buy goods and services from each other

Suppose that the MPC is 0.7, and there are no crowding-out effects. If government expenditures increase by $30 billion, then aggregate demand

Shifts rightward by $100 billion

Again consider the economy is in long-run equilibrium and then stock prices rise more than expected and stay high for some time. In the long run, the change in price expectations created by the stock market boom shifts

Short-run aggregate supply left

You save $500 in currency on your piggy bank to purchase a new laptop. The $500 you kept in your piggy bank illustrates money's function as a ____. The laptop's price is posted as $500. The $500 price illustrates money's function as a ______. You use the $500 to purchase the laptop. This transaction illustrates money's function as a ____.

Store of value, unit of account, medium of exchange

shoeleather cost

The cost of inflation from reducing real money balances, such as the inconvenience of needing to make more frequent trips to the bank.

The interest rate the Fed charges on loans it makes to banks is called

The discount rate

Using the liquidity-preference model, when the Federal Reserve decreases the money supply,

The equilibrium interest rate increases

Marginal Propensity to Consume (MPC)

The fraction of any change in disposable income spent for consumer goods; equal to the change in consumption divided by the change in disposable income

Critics of stabilization policy argue that

The lag problem ends up being a cause of economic fluctuations

Which of the following is not an automatic stabilizer?

The minimum wage

If aggregate demand shifts left, then in the short run

The price and real GDP both fall

Again consider the economy is in long-run equilibrium and then stock prices rise more than expected and stay high for some time. After the economy adjusts to a new long run equilibrium how is the new long-run equilibrium different from the original one?

The price level is higher and real GDP is the same

The sticky-wage theory of the short-run aggregate supply curve says that the quantity of output firms supply will increase if

The price level is higher than expected making production more profitable

crowding-out effect

The reduction in aggregate demand that results when a fiscal expansion raises the interest rate

A change in expected inflation shifts

The short-run Phillips curve, but not the long run Phillips curve

An increase in the expected price level shifts the

The short-run but not the long-run aggregate supply left

A basis for the slope of the short-run Phillips curve is that when UNEMPLOYMENT is LOW there are

Upward pressures on prices and wages

FORMULA

Velocity of Money = (P [Price of output] * Y [amount of output])/M [quantity of money]

wealth effect

a lower price level increases real wealth, which stimulates spending on consumption

depression

a severe recession

inflation tax

a tax to everyone that is holding money price levels rise and money falls, so money in wallets become less valuable

double coincidence of wants

the unlikely occurrence that two people each have a good or service the other wants

Fisher effect

adjustment of the nominal interest rate to the inflation rate

Federal Reserve - Fed

agency in America that is responsible for regulating the money system

money multiplier

amount of money the banking system generates with each dollar of reserves

excess reserves

amount that the banks choose to hold over the legal minimum

central bank

an institution designed to oversee the banking system and regulate the quantity of money

Store of value

an item that can use to transfer purchasing power from the present to the future

Medium of exchange

an item that the buyer givers the seller when they purchase goods or services

demand deposit

balances in bank accounts that depositors can access on demand simply by writing a check or swiping a debit card at a store

capital requirement

bank regulators require banks to hold a certain amount of capital

discount rate

banks borrow from the Fed's discount window and pay an interest rate on a loan high rates discourage borrowing - decrease supply low rates encourage borrowing - increase supply

Automatic stabilizers

changes in fiscal policy that stimulate aggregate demand when the economy goes into a recession without policymakers having to take any deliberate action - tax system - government spending

real interest rate

corrects nominal interest rate for the effect of inflation to tell how fast you the purchasing power of your saving account will raise overtime

menu cost

cost of price adjustment

Why should I NOT reject the conclusions of the rational expectations theorists?

cost was not as large as economist originally expects it was aimed at monetary policies to lower inflation, although people did not believe it, the inflation lower quickly

M1

currency, demand deposits, traveler's checks, and other checkable deposits

monetary policy

decisions by policy makers concerning the money supply

a ___ price level reduces the interest rate. Therefore, __ the demand

decrease, raises

a ___ in price levels encourages spending and raises the real value of money and makes consumers wealthier. This _____ the demand of items.

decrease; increase

module of aggregate supply and aggregate demand

demand downward sloping supply upward sloping price level as vertical axis quantity of output as horizontal axis

short run

focuses on fluctuations in 1 : economy's output in goods and services measured by real GDP 2 : average level of prices measured by CPI or GDP deflator

reserve ratio

fraction of total deposits that banks hold as reserves

misery index

gauge the health of the economy

aggregate demand curve

if the price level changes, it inversly changes the quantity demands (low price = high demand)(high price = low demand) GDP is shown in demand curve

Federal Reserve Board

in Washington DC 12 regional Federal Reserve Banks

Monetary policies

in terms of money supply or interest rates 1 : expanding aggregate demand = increase money supply or decrease interest rates 2 : contracting aggregated demand = lower money supply or increase interest rates

a ___ price level raises the interest rate. Therefore, __ the demand

increase, lowers

a ___ in price levels does not encourage spending and lowers the real value of money and makes consumers poorer. This _____ the demand of items.

increase; decrease

money neutrality

irrelevance of monetary changes to real variables

reserve requirement

minimum amount of reserves that banks must hold

FORMULA

money multiplier = 1/(reserve ratio)

Fiat money

money that does not have real value attached to it other than the value that the government (or maker of the money) states

Commodity money

money that takes form of a commodity with intrinsic value - gold, cigarettes

inflation

overall increase in prices

the misperceptions theory

overall price changes can temporarily mislead suppliers about what it happening in their market. this can cause suppliers to change the levels of prices and response equals an upward facing aggregate supply curve

sacrifice ratio

percentage points of annual output lost per 1 percentage point reduction in inflation

recession

period when income is falling and unemployment is rising relatively mild

investment accelerator

positive feedback from demand to investment

equilibrium interest rate

quantity of money demanded exactly balances the quantity of money supplied

money supply

quantity of money that is made available in the economy

nominal inter

rate that your hear about at your bank

leveraging ratio

ratio of the banks total assets to bank captial

FORMULA

real interest rate = nominal interest rate - inflation rate

inflation rate DOES NOT

reduce people's real purchasing power itself

deflation

reduction in the price level

disinflation

reduction in the rate of inflation

Quantity equation

relates the quantity of money to the nominal value of output

bank captial

resources that a bank obtains from issuing equity to its owners

M2

savings deposits, small time deposits, money market mutual funds, a few minor categories, and everything in M1

classical dichotomy

separation of real and nominal variables

when price levels rise

the value of money falls

Phillips curve

short run relationship between inflation and unemployment

aggregate-demand curve

shows quantity of goods and services that households, firms, and the government want to buy at each price level

aggregate-supply curve

shows the quantity of goods and services that firms produce and sell at each level

velocity of money

speed at which the typical dollar bill travels around the economy from wallet to wallet

Shifts in aggerate demand curve

taxes, saving for retirement, investment, money policies, government purchases, net exports (consumption, investment, government purchases, net exports)

fractional-reserve banking

the amount of reserves held are a fraction of the amount of deposits made

Liquidity

the easy with which an asset can be converted into the economy's medium of exchange

stagflation

the economy is experiencing both stagnation (falling output) and inflation (rising prices) the event is called

federal funds rate

the interest rate banks charge each other for short-term loans

natural rate of unemployment

the normal rate of unemployment around which the unemployment rate fluctuates

Currency

the paper bills and coins in the hands of the public

reserve requirements

the regulations that set the minimum amount of reserves that banks must hold against their deposits

quantitative easing

the targeted use of open market operations in which the central bank buys securities specifically targeted in certain markets (mortgaged backed securities and longer-term government bonds) to lower interest rates

barter

to exchange of good or service for another

FORMULA

unemployment rate = natural rate of unemployment - a (actual inflation - expected inflation)

leverage

use of borrowed money to supplement existing funds

real variables

variables measured in physical units

natural level of output

what the economy produces when unemployment is at its natural or normal rate

open-market operations

when the Feds buy or sell government bonds


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