cheating :)

If current output is billion and potential output billion, then the economy is in a ________ and is about ________ percent.

recessionary gap; −4.7

Last quarter, GDP grew at a rate of .5 percent. The annualized rate of GDP growth is 2 percent.

True

Short-run output is measured as a percentage.

True

The unemployment rate in the Great Recession peaked at approximately 10 percent.

True

Suppose that a hypothetical bank had loans of $500, deposits of $500, investments of $400, cash and reserves of $50, short-term debt of $200, and long-term debt of $150. The bank will become insolvent if the value of investments drops below:

$300

The unemployment rate is 6% and the natural rate of unemployment is 3%. If potential output is $100, what is actual output?

$94

Consider a bank with loans of $500, equity of $100, deposits of $500, investments of $400, cash and reserves of $50, and short-term debt of $200. How much long-term debt does this bank have?

$150

Suppose that the loss of GDP resulting from a recessionary slump is 8%. If Total GDP in a given year is equal to $200,000, and the population in this economy is 100 people, what is the cumulative loss in income per person?

$160

Suppose that a hypothetical bank has a 20 percent capital requirement. The hypothetical bank has $500 in loans, $500 in deposits, $400 in investments, $100 in cash and reserves, and $250 in debt. In dollars, what is the bank's capital requirement?

$200

Suppose a hypothetical bank had a 5 percent reserve requirement. Consider a bank with loans of $500, equity of $100, deposits of $500, investments of $400, and short-term debt of $200. What is the amount of the bank's reserve requirement?

$25

The savings glut in the early and mid-2000s led to an increase in U.S. interest rates, which spurred a stock market bubble.

False

Inflation changes from 0 percent to 1 percent. Given empirical data on the Phillips curve and Okun's law, we can expect cyclical unemployment to be approximately

-1.5 percent.

Consider an economy for which you have three data points: and Δπ1 =1 percentage point; and Δπ2 =1.5 percentage points, and and Δπ3 =2 percentage points. The slope of this economy's Phillips curve is:

1/2

Potential output is $100 in 2010. Actual output is $110 in 2010. Actual output in 2009 was $105. Short-run output for 2010 is

10 percent.

In terms of loss of employment, which recession in the post-World War II period saw the greatest losses?

2007-2009

A hypothetical bank has $500 in loans, $500 in deposits, $400 in investments, $100 in cash and reserves, and $250 in debt. What is the leverage ratio of this bank?

3

Suppose an economy's natural rate of unemployment is 5 percent. If the unemployment rate is 3 percent, according to Okun's law, is ________ percent.

4

Which of the following explains the enormous increase in housing prices during the early 2000s?

A substantial deterioration in lending standards

Which of the following poses the largest threat to institutions that purchased mortgage-backed securities?

Aggregate risk results in many mortgages going bad at the same time.

Suppose a negative aggregate demand shock causes short-run output to drop to -1%. To stimulate investment and bring the economy back to potential output the interest rate decreases by 1 percentage point. However, as a result investment increases more than expected and short-run output reaches 1%. This result could be caused by:

All of these are correct

Which of the following explains why an increase in the interest rate reduces short-run output?

All of these choices are correct.

Which of the following components of GDP fell dramatically in the Great Recession but is traditionally stable in a recession?

Consumption

If the inflation rate is high and the Federal Reserve seeks to best lower the inflation rate, the Federal Reserve should

raise interest rates

The U.S. government and the Federal Reserve desire to keep actual GDP as high as possible in order to reduce unemployment and increase per capita income.

False

Which of the following is NOT an example of a short-term macroeconomic shock?

None of these answers are correct

Which of the following statements is false?

The increases in demand from the global saving glut contributed to declining asset markets in the United States.

A person who speeds faster on the highway because he or she is wearing a seatbelt is an example of moral hazard.

True

During 2009, the inflation rate on all prices turned negative even though the core inflation rate was positive.

True

During the financial turmoil of 2008, the government took over the mortgage companies Fannie Mae and Freddie Mac.

True

If aggregate consumption responds to changes in temporary income, fluctuations in short-run output will be larger than if consumption is unresponsive to a temporary change in income.

True

The name given to low-quality loans is:

subprime loans.

Which of the following is the Fisher equation?

t=R+(pi)

In the text, Okun's law is given as:

u-u(bar)=-1/2xY(~)

Defining as current output, as potential output, and as short-run output, which of the following equations defines short-run output as the short-run fluctuation's share of potential GDP?

y=y(bar)-y/y(bar)

Between 2009 and 2015, the federal funds rate was roughly equal to:

zero.

In which of the following situations is the economy likely in a recession?

Δπ=-2%

The natural rate of unemployment is 5 percent. Cyclical unemployment is 2 percent. The level of short-run output is

-4 percent.

Suppose that last year a hypothetical bank had loans of $500, deposits of $500, investments of $400, cash and reserves of $50, short-term debt of $200, and long-term debt of $150. If the value of the bank's investments decrease to $325 this year, what is the percentage change in equity from last year to this year?

-75%

Which of the following is not an example of an automatic stabilizer?

Discretionary spending on highways

A recession is usually declared to be over when short-run output returns to potential output.

False

According to the text, the slope of the Phillips curve in the United States is about −1/3.

False

An increase in the aggregate demand parameter for imports will shift the IS curve in the same direction as an increase in the aggregate demand parameter for consumption.

False

Defining Y as current output, Y(bar) as potential output, and Y(~) as short-run fluctuations, the text uses the following equation to measure the fluctuations component of output: y(~)=(Y+Y(bar))/Y

False

Defining u as the unemployment rate and u(bar) as the natural rate of unemployment, Okun's law is given by Y(~)=2x(u-u(bar)).

False

During a recession, the inflation rate increases.

False

During the Great Recession, exports dramatically reduced the severity of the recession.

False

During the financial crisis, the Federal Reserve balance sheet remained unchanged.

False

Equity is reported on the asset side of the balance sheet for a financial institution.

False

Foreign savings is equal to exports minus imports.

False

If a mortgage on a house is highly leveraged, when housing prices are falling, the homeowner's equity in the house will fall by a smaller percentage than the value of the house.

False

If the economy begins at its long-run values and the parameter b̄ increases, short-run output will increase.

False

If the economy is in a period of deflation, the Phillips curve implies that actual output is below potential output.

False

In the short-run model, potential output is endogenously determined.

False

Suppose the government increases discretionary spending. Ricardian equivalence implies that consumption will be higher today if the government announces that taxes will be increased next year as opposed to if it announces taxes will be increased in two years.

False

In 1933, the ________ was established to prevent bank runs; in 2008, ________ was set up to increase liquidity in financial markets.

Federal Deposit Insurance Corporation; the Troubled Asset Relief Fund

Which of the following might explain why firms will raise prices when the economy is booming?

Firms seek to take advantage of high demand; and firms need to pay laborers higher wages in order to produce more output, are both correct answers to this question.

Which of the following financial institutions was taken over by the federal government?

Freddie Mac

Which of the following financial institutions converted to bank holding companies in the financial collapse?

Goldman Sachs

Which of the following statements is true?

Investment and exports fell by a larger amount during the recent recession than in the typical recession.

If the marginal product of capital decreases, what happens to the IS curve?

It shifts inward.

Which of the following is reported on the asset side on a bank's balance sheet?

Reserves

Potential output is defined as:

the amount of total output if all inputs were utilized at their long-run, sustainable levels.

If an economy has actual output equal to potential output, then the aggregate demand shock equals zero.

True

The term structure of interest rates shows the relationship between:

U.S. Treasury rates and municipal bond yields.

In the LC/PI model do individuals prefer a smooth consumption path (corresponding to their permanent income) over a fluctuating consumption path (corresponding to their actual income)?

Yes, they do because the utility of every additional unit of consumption is smaller.

In 1979, the inflation rate reached about 14 percent, due in part to ________. The Board of Governors of the Federal Reserve under ________ decided to ________ interest rates, sending the economy into a ________.

an increase in oil prices; Volcker; raise; recession

The LC/PI hypothesis implies that an individual will make consumption decisions based on

average income.

The "flight to safety" in the fall of 2007 led investors to ________, which led to ________.

buy T-bills; a rise in the spread between LIBOR rates and T-bill yields

The acronym "CDO" stands for:

collateralized debt obligation.

Which of the following is NOT a securitized asset?

commercial bonds

According to the LC/PI hypothesis, a college student should

consume more than she has in income.

The short-run model determines

current output and current inflation.

Firms alter their prices based on:

expected inflation and demand conditions.

Suppose that last year the investment parameter āi was equal to .12 but this year it fell to .1. This change can be explained by:

firms being pessimistic about the future and willing to invest less at any level of the interest rate.

The housing bubble was NOT fueled by which of the following factors:

high unemployment.

Which of the following is the mission of the Federal Reserve Bank? i. Preserve price stability ii. Foster economic growth and employment iii. Ensure taxes are fair

i and ii

The short-run model is built on which of the following? i. The economy is constantly being hit by so-called shocks. ii. Economic policy has no impact on output. iii. There is trade-off between output and inflation.

i and iii

If y(~).>0, the macroeconomy is

in an expansionary gap.

In our model, a hurricane that damages some physical capital in an economy will typically

increase short-run output and decrease potential output.

According to Okun's law, if the Federal Reserve wants to increase unemployment, it should ________ interest rates, which would ________ output.

increase; reduce

When economists say "sticky inflation," they mean:

inflation does not immediately react to changes in monetary policy.

Suppose an economy exhibits a large unexpected increase in productivity growth that lasts for a decade; however, monetary policymakers are slow to recognize that the change is to potential—not current—output, and they interpret the increase in output as a boom that leads current to exceed potential output. In this scenario, policymakers believe that ________ pressures are building and incorrectly respond by ________ interest rates, sending the economy into a(n) ________ gap.

inflationary; raising; recessionary

The marginal product of capital can differ from the real interest rate because:

installing new capital takes time to equalize the MPK and the real interest rate.

The majority of mortgage-backed securities were held by:

large commercial and investment banks.

Normally, yields on short-term Treasury bonds are ________ long-term Treasury bond yields.

lower than

Securitization is defined as:

lumping large numbers of financial instruments together and selling pieces to different types of investors.

The MP curve stands for ________ and describes how ________.

monetary policy; the Federal Reserve sets the nominal interest rate

Suppose the United States is currently at its trend level of potential output. All economies are open. Europe enters into a recession. Short-run output in the United States will be

negative.

According to The Economist, by 2006 ________ of new home loans were ________ loans.

one-fifth; subprime

The increased spread between three-month LIBOR and three-month bond yields led to ________. This is a classic example of ________.

reduced lending; a liquidity crisis

In mid-2008 oil prices:

rose to $140 per barrel.

New technology, oil price changes, pork-barrel spending, interest rate changes, changes in planned investment, and disasters are examples of:

short-term economic shocks.

Adaptive expectations imply that firms:

slowly adjust their inflation expectations.

An incumbent Democratic president is up for reelection. Real GDP growth is very high and inflation very low. Ray Fair's model will likely predict

the Democrat will win reelection

An inverted yield curve is usually the result of:

the Fed fighting inflation.

The link between real and nominal interest rates is summarized in:

the Fisher equation.

One of the key differences between the United States and the European euro area countries in the aftermath of the Great Recession is that:

the U.S. unemployment rate has largely returned to prerecession levels, whereas European unemployment is still above prerecession levels.

If the change in inflation is positive, we know that:

the economy is in a boom, and actual unemployment is less than the natural rate of unemployment.

What is the main policy tool available to the Federal Reserve?

the federal funds rate

One implication of the Keynes quote, "In the long run we are all dead," is that:

the long run is made up of a sequence of short runs.