ECON-100 Midterm 2
If the Marginal Propensity to Spend (MPS) is 0.8, then an initial increase in autonomous spending of $120 billion will eventually shift the aggregate demand curve to the right by
$600 billion.
real wage
(Nominal wage) / (price level)
The economy is in a recession. Real GDP is well below potential GDP. If the government wants to increase real GDP so that it is closer to potential GDP, it could ____. - decrease taxes - decrease government spending - increase government spending - increase taxes
- decrease taxes - increase government spending
Indicate whether each is likely to increase or decrease the duration of unemployment for the worker. - the worker is older - the worker's spouse is employed - the unemployment rate in the economy is high - the worker is wealthy - there is generous unemployment insurance - the worker is highly skilled
- increase - increase - increase - increase - increase -decrease
The ____ model predicts that a decrease in wealth can cause a recession. (Select all that apply.)
-- Aggregate demand-aggregate supply -- Aggregate expenditure
The ____ model predicts that increasing government spending can help an economy recover from recession. (Select all that apply.)
-- Aggregate demand-aggregate supply -- Aggregate expenditure
You previously learned about the quantity equation of money and what it tells us about inflation. Which are correct? (Select all that apply.)
-- growth in price level + growth in real GDP = growth in money supply + growth in velocity of money -- price level x real GDP = money supply x velocity of money
The marginal propensity to spend is 0.6, and autonomous spending decreases by $500. What is the change in output predicted by the aggregate expenditures model? (Include a negative sign and comma if needed, but do not include a $.)
-1,250
If the multiplier is 2, and autonomous spending decreases by 4 million, what happens to real GDP? (Answer in millions. If GDP decreases, include a negative sign (e.g., enter 1 if GDP increases by 1 million, and enter -1 if GDP decreases by 1 million.)
-8
which of the following are unemployed? -a full-time student who also works part time in a store selling CDs -a worker who would like a job but has given up looking because she was unable to find one -an autoworker who was recently laid off and is looking for a new job -a woman on maternity leave from her job -a 70-year-old man who is actively applying for jobs
-an autoworker who was recently laid off and is looking for a new job -a 70-year-old man who is actively applying for jobs
Refer to the graph shown above. The economy is at point A. In that situation the economy is experiencing a ___, meaning that the unemployment rate is ___, and inflation ___. If you were to advise the monetary authorities, you would suggest ___, implying that the Fed would need to set __.
-contractionary -quite high -is rather stable -expansionary monetary policy -a lower level for the IORB rate
Comparative advantage
Ability to produce a good at a lower opportunity cost than another
According to the AS/AD model, if the economy is in a recession and the Fed wants to increase output and employment, it should:
Act to increase the money supply.
Which of the following are problems that can be caused by inflation?
All answer options
Medium of exchange
Anything that will be widely accepted in exchange
Firms in county A produce wheat at a lower cost than firms in county B. It is easy to transport wheat, and there are no tariffs on it. Which is correct?
Arbitrage in wheat will result in its price being the same in both countries
Monetary policy
Decision of a monetary authority to influence interest rates, taken to affect real GDP, unemployment, and the price level
According to the AS/AD model, an expansionary monetary policy:
Decreases interest rates, raises investment, and increases income.
The government balances its budget by reducing government spending. Use the aggregate supply-aggregate demand model to predict what happens to real GDP.
GDP decreases
What constitutes stagflation?
High unemployment and high inflation
Velocity of money
How rapidly money circulates around the economy; (nominal GDP) / (money supply)
Contractionary monetary policy
Increasing interest rate to control inflation
What is the IORB rate?
Interest on reserve banks rate
The price of a long-term bond is ___________ related to its interest rate.
Inversely
Price level
Measure of average prices in the economy
When a clerk gives you a pair of jeans for your $20 bill, money is serving which function?
Medium of exchange
Real GDP is 1200 units, and the velocity of money is 8. The money supply falls from $300 to $150 (a 50% decrease) at the same time real GDP increases by 5%. According to the quantity theory of money, what should happen to the price level?
The price level must fall by more than 50%
Firms in country A produce haircuts at lower cost than firms in country B. Which is correct?
The price of haircuts is always lower in country A than in country B
Which of the following is the correct action to take if the Fed wants to pursue expansionary monetary policy? How does that action affect aggregate demand?
They should lower interest rates, which will increase spending on investment, housing, and durable goods (all components of AD).
Planned spending
Total spending minus unplanned inventory investment
True or false? Policies that make it easier to fire people help to reduce the unemployment rate.
True
cyclical unemployment
Unemployment because of recession
Seasonal unemployment
Unemployment caused by predictable changes in demand during a year
Opportunity cost
What you must give up in order to do something else
The real interest rate tells you
how fast the purchasing power of your bank account changes over time.
Suppose over some period of time the money supply increases by 20%, velocity does not change, and real GDP increases by 15%. According to the quantity equation the price level will have
increased by 5%.
Fiat money
intrinsically worthless items that have value because everyone agrees they do
multiplier
1 / (1 - marginal propensity to spend)
Match the following changes with the appropriate shift. 1. The government increases taxes 2. The value of housing assets decreases 3. Domestically amde goods become more desirable abroad 4. The government begins a major new social safety net program 5. Prices of inputs go throughout the economy. Example: Wages
1. Decrease in aggregate (shifts left) 2. Decrease in aggregate (shifts left) 3. increase in aggregate (shifts right) 4. increase in aggregate (shifts right) 5. does not shift aggregate demand
If autonomous spending is $100 the marginal propensity to spend is 0.5 and income (real GDP) is $100, what is total spending?
150
Suppose that the money supply is $300, real GDP is 1200 units, and the velocity of money is 8. According to the quantity equation of money, what is the price level?
2
Asset A and asset B are equally risky and equally liquid. Asset A matures sooner than asset B. An exogenous event causes the interest rate on asset A to go up. Which is correct?
Because of arbitrage, soon the interest rate on asset B will also go up.
Asset A and asset B are equally risky, equally liquid, and have the same maturity. Right now, the interest rate on asset A is lower than the interest rate on asset B. Which is correct?
Because of arbitrage, soon the interest rates on the assets will be the same.
Arbitrage
Buying then selling to profit
How does a higher policy rate affect household spending?
By raising the cost of borrowing, households will spend less now.
If the economy is underperforming and there is a need to increase demand, which of the following policies is most appropriate to bring the economy to potential?
Cut in taxes
Inventory investment
Change in inventories of final goods
Non-durable goods
Consumption goods that do not last (examples: groceries, clothing)
Durable goods
Consumption goods that last (examples: cars, refrigerators)
Countercyclical
Moves in the opposite direction from change in real GDP
Procyclical
Moves in the same direction as growth in real GDP
Real variables
Not measured in terms of money, but goods and services; adjusted for inflation
Aggregate supply
Output produced and sold by firms at each price level
Ralph puts money in the bank and earns a 5 percent nominal interest rate. If the inflation rate is 2 percent, then after one year,
Ralph will have 5 percent more money, which will purchase 3 percent more goods.
Consumption
Spending by households on final goods and services (C)
Autonomous spending
Spending if income (real GDP) is zero
government purchases
Spending on goods and services by government (G)
Consumption smoothing
Steadying flow of consumption when income changes by borrowing and saving
The economy of a country is in long-run equilibrium when the legislature cuts taxes and increases government spending. What monetary policy should the central bank use to stabilize the economy? How does this policy affect aggregate demand?
The central bank should use contractionary policy (raising interest rates), which will decrease aggregate demand.
How is the federal funds rate determined?
The federal funds rate is determined in the federal funds market.
Inflation
an increase in the price level
Fiscal policy
decisions of a government about spending, taxes, and transfers
Assume that the minimum wage is set in nominal terms. If there is inflation, the unemployment rate is likely to ____ while the level of employment is likely to ____ .
decrease; increase
Law of one price
different prices for the same thing can't persist because of arbitrage
Civilian labor force
employed + unemployed, excluding military
Natural rate of unemployment
expected unemployment at potential GDP; unemployment after removing cyclical and seasonal variation
Net exports
exports minus imports (NX)
Other things equal, if the amount of money demanded is greater than the amount of money supplied, then the interest rate may fall.
false
Unemployment is procyclical
false
Search theory
framework for understanding how matching process results in frictional unemployment
Unemployment insurance
government payment to eligible unemployed
In the labor market, the product is the ___, demand for labor comes from ___, and the supply is provided by ___.
labor, firms, workers
An inflationary gap caused by a demand shock can be addressed by _____ to _____.
lowering government spending; lower the aggregate price level
Which function of money does Bitcoin best fulfill?
medium of exchange
Stabilization policy
monetary and fiscal policy undertaken to prevent fluctuations in real GDP
Investment
new purchases of capital goods by firms (examples: factories, machines, computers)
Before 2008, the Fed's main tool for targeting the fed funds rate was ____, but today its main tool is ___.
open market operations; the interest on reserve balances rate
Transfers
payment from government to individual or firm, not for a purchase (example: unemployment insurance, Social Security)
inflation rate
percentage change in the price index from one period of time to the next
Sticky prices
prices do not adjust immediately; markets are not always in equilibrium
National income identity
production = GDP = C + I + G + (X - M)
real interest rate
rate earned on $1 savings or paid on $1 borrowing, after correction for inflation
Nominal interest rate
rate earned on $1 savings or paid on $1 borrowing, no correction for inflation
yield curve
relationship between time to maturity and annualized return for similar assets with different maturities
Store of value
reliably maintains value over time
An increase in government purchases will:
shift aggregate demand to the right
Unit of account
standardized measure of value
unit of account
standardized measure of value
Aggregate spending
total spending (C + I + G + NX) at a given price level
aggregate spending
total spending (C + I + G + NX) at a given price level
Aggregate demand
total spending (C + I + G + NX) at each price level
If European countries made it easier to fire people, it could reduce the unemployment rate
true
People hold less cash in their wallets when the interest rate on checking accounts is high.
true
Unemployment rate
unemployed / (employed + unemployed)
Fictional umeployment
unemployment caused by workers moving between jobs
According to the quantity theory of money, if the money supply increases by 12 percent, then in the long run prices go:
up by 12 percent.
nominal wage
wage in currency per unit of time, no adjustment for inflation
Efficiency wages
wages in excess of equilibrium to incentivize workers to perform
Maturity
when final payment on a loan is due
credit market (or loan market)
where suppliers and demanders of credit meet and trade