Macroeconomics - Review Ch 24, 27, 28, & 30

Stealth bank has deposits of $600 million. It holds reserves of $30 million and government bonds worth $80 million. If the bank sells its loans at market value of $400 million, what will its total assets equal?

$510 Million

Board of Governors of the Federal Reserve System

A board with seven governors (including the chair) that plays an essential role in decision making within the Federal Reserve System.

If the state of Washington's government collects $75 billion in tax revenues in 2013 and total spending in the same year is $74.8 billion, the result will be a:

A budget surplus

Price of inputs

A change in the price of an input—anything used in the production of a good or service—is the most likely factor to cause the supply curve for a product to shift. (temporary) Ex: oil & gas prices

US deficit

An excess of federal expenditures over federal revenues

expansionary fiscal policy

An increase in government purchases of goods and services, a decrease in net taxes, or some combination of the two for the purpose of increasing aggregate demand and expanding real output

Explain what will happen to the money multiplier process if there is an increase in the reserve requirement?

An increase in the reserve requirement means that the bank is afraid that loans are less likely to be repaid. If the reserve requirement is increased then the volume of deposits are reduced. If any other action is not present then money stock is reduced and credit is increased.

Which of the following is a valid criticism of the use of money as a store of value in modern economies?

Annual inflationary loss of buying power

_____________________ are a form of tax and spending rules that can affect aggregate demand in the economy without any additional change in legislation

Automatic Stabilizers

What is the main advantage of automatic stabilizers over discretionary fiscal policy?

Automatic stabilizers take effect very quickly. They automatically shift the aggregate demand curve when the economy starts to off-balance.

A central bank that wants to increase the quantity of money in the economy will:

Buy bonds in open market operations

Monetary

Central Bank & Federal Reserve

When the economy of a country is operating close to its full capacity:

Cyclical employment is close to zero

What term is used to describe the interest rate charged by the central bank when it makes loans to commercial banks?

Discount Rates

If a government reduces taxes in order to increase the level of aggregate demand, what type of fiscal policy is being used?

Expansionary

fiscal policy

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

As the aggregate price level in an economy decreases,

Imports decrease

When the central bank decides to increase the discount rate, the:

Interest rate increases

Aggerate supply

Represents the total quantity that firms choose to produce and sell at each price level

required reserves

The minimum amount of reserves a bank must hold against its deposits as mandated by the Fed

When the central bank decides it will sell bonds using open market operations:

The money supply decreases

Short Run Aggregate Supply (SRAS)

a curve that shows the relationship in the short run between the price level and the quantity of real GDP supplied by firms

contractionary monetary policy

a monetary policy that reduces the supply of money and loans

M1 money supply

a narrow definition of the money supply that includes currency and checking accounts in banks, and to a lesser degree, traveler's checks. (liquid)

Stagflation

a period of slow economic growth and high unemployment (stagnation) while prices rise (inflation)

By June, 2010, the U.S. government owed $13.6 trillion dollars ________________ that, over time, has remained unpaid.

in accumulated government debt

US Debt

money the U.S. has borrowed and must repay

Name some factors that could cause AD to shift, and say whether they would shift AD to the right or to the left.

1. Behaviors of consumers and firms - right 2. Government policy increased govt spending - right decreased tax rates - right increased tax rates - left

List the three traditional tools that a central bank has for controlling the money supply.

1. Open Market Operations- buying and selling of govt. bonds 2. Changing reserve requirements- the amount of money a bank has to keep in the vault. 3. Changing discount rates.

Name some factors that could cause the SRAS curve to shift, and say whether they would shift SRAS to the right or to the left.

1. Productivity Growth - SRAS shift to the right 2. Price of Inputs- AS shift to the left 3. Supply shocks - the the left

time lags in fiscal policy

1. recognition lag 2. legislative 3. implementation

What is the formula for the money multiplier?

1/required reserve ratio

Proportional Tax

A tax by which the government takes the same share of income from everyone, rich and poor alike.

Regressive Tax

A tax in which the burden falls relatively more heavily on low-income groups than on wealthy taxpayers. The opposite of a progressive tax, in which tax rates increase as income increases.

Why might banks want to hold excess reserves in time of recession?

-To cover liabilities -Acts as a buffer when banks are in fear of borrowers not being able to pay back their loans -Panic

Which of the following is the approximate percentage of annual US government spending allocated to foreign aid?

1%

Price Level Aggregate Demand Aggregate Supply 100 10,000 4,000 200 9,000 5,000 300 8,000 5,000 400 7,000 7,000 500 6,000 8,500

Equilibrium output = 7,000

Progressive Tax

a tax that collects a greater share of income from those with high incomes than from those with lower incomes

money

anything that serves as a medium of exchange, a unit of account, and a store of value

Aggergate Demand

the amount of goods and services in the economy that will be purchased at all possible price levels (Domestic)

____ are a form of financial instrument through which corporations and governments borrow money from financial investors and promise to repay with interest. Question options:

Bonds

How are the specific interest rates for the lending and borrowing markets determined?

By supply and demand

The ___________________ is the institution designed to control the quantity of money in the economy and also to oversee the:

Central bank ; Safety and stability of the banking system

Fiscal

Congress and the president

__________________ are a form of deposits held in banks that are available by making a cash withdrawal or writing a check.

Demand Deposits

When the government passes a new law that explicitly changes overall tax or spending levels, it is enacting:

Discretionary fiscal policy

Whether the economy is in a recession is illustrated in the AD/AS model by how close the _____________________ is to the potential GDP line. Question options:

Equilibrium

Which kind of monetary policy would you expect in response to recession: expansionary or contractionary? Why?

Expansionary, b/c loose policy reduces the interest rate and increases borrowing. This increases the money supply in the economy. More money, ^ in demand.

expansionary monetary policy

Federal Reserve system actions to increase the money supply, increases borrowing and lowers interest rates. expansion of real GDP

Which of the following terms is used to describe the set of policies that relate to government spending, taxation, and borrowing?

Fiscal Policies

contractionary fiscal policy

Fiscal policy used to decrease aggregate demand or supply. Deliberate measures to decrease government expenditures, increase taxes, or both. Appropriate during periods of inflation.

_______________ happens when the economy is producing at its potential and unemployment is at the natural rate of unemployment.

Full employment GDP

How is long-term growth illustrated in an AD/AS model?

Gradual right-wards shift

Federal Government Spending

Healthcare, Social Security, National Defense

if the price level of what firms produce is rising across an economy, but the costs of production are constant, then:

Higher Profits will induce expanded production

M2 money supply

Includes all of M1 money supply plus most savings accounts, money market accounts, and certificates of deposit.

When banks hold excess reserves because they don't see good lending opportunities: Question options:

It negatively affects the expansionary monetary policy

Which of the following terms is considered to be a narrow definition of the money supply that includes, among other things, currency?

M1

In modern economies, credit cards are a _________________ because of their wide acceptance as a method of payment for both goods and services.

Medium of exchange

A bank has deposits of $400. It holds reserves of $50. It has purchased government bonds worth $70. It has made loans of $500. Set up a T-account balance sheet for the bank, with assets and liabilities, and calculate the bank's net worth.

Net Worth=Total assets-Total Liabilities

Which of the following is a traditional tool used by the Fed during recessions?

Open Market Operations

What term is used to describe the maximum quantity that an economy can produce, in the context of its existing inputs, market and legal institutions?

Potential GDP

A __________________________ policy will cause a greater share of income to be collected from those with high incomes than from those with lower incomes. Question options:

Progressive Tax

How is recession illustrated in an AD/AS model?

Recession is illustrated by equilibrium values of real GDP well below potential GDP. The primary cause is a leftward shift of the AD curve, but leftward shifts of the SRAS curve can also cause recessions (think about stagflation).

If government tax policy requires Peter to pay $15,000 in tax on annual income of $200,000 and Paul to pay $10,000 in tax on annual income of $100,000, then the tax policy is:

Regressive

Which of the following terms is used to describe the proportion of deposits that banks are legally required to deposit with the central bank?

Reserve requirements

__are funds that the bank keeps on hand that are not loaned out or invested in bonds.

Reserves

Lance paid $175,000 for his house in 2003 and sold it for $325,000 in 2006. What function did the house serve during the time Lance owned it?

The house served as a medium of exchange

Potential GDP in the U.S. will be unaffected by _______

The unemployment rate

Potential GDP

The value of real GDP when all the economy's factors of production—labor, capital, land, and entrepreneurial ability—are fully employed.

What is the main reason for employing expansionary fiscal policy during a recession?

To increase employment. During a recession there is increased unemployment and lower income so expansionary fiscal policy increases spending and decreases taxes. AD shift to right.

Why is it important for the members of the Board of Governors of the Federal Reserve to have longer terms in office than elected officials, like the President?

To keep politics out of the federal reserve.

What is the main reason for employing contractionary fiscal policy in a time of strong economic growth?

Too keep prices from rising too much or too rapidly. Contractionary fiscal policy is used to reduce inflation and government spending. AD shift to left

The money multiplier is equal to the _______________ in the economy divided by the original _________________.

Total Money/Original quantity of Money

Banks typically come under financial stress because of:

a widespread decline in the value of their assets

The government can use _____________ in the form of ____________________ to increase the level of aggregate demand in the economy.

an expansionary fiscal policy; an increase in government spending

If the economy is in recession with high unemployment and output below potential GDP, then __________________ would cause the economy to return to its potential GDP?

an expansionary monetary policy

Productivity Growth

an increase in the output of each worker per hour of work. (permanent)

central bank

an institution that oversees and regulates the banking system and controls the monetary base

balanced budget

annual budget in which expenditures equal revenues

fractional reserve banking system

banks keep a fraction of deposits as reserves and use the rest to make loans

How do banks create money?

by making loans

Federal Reserve

the central bank of the United States

crowding-out effect

the offset in aggregate demand that results when expansionary fiscal policy raises the interest rate and thereby reduces investment spending

monetary policy

the setting of the money supply by policymakers in the central bank

Aggregate supply (AS) denotes the relationship between the __________________ that firms choose to produce and sell and the _________________, holding the price of inputs fixed.

total quantity; price level for output