Econ Exam 3
A leftward shift of the money demand curve is most likely caused by
a decrease in the price level
Most economists believe that fiscal policy primarily affects
aggregate demand
If the stock market crashes, what happens to aggregate demand and how does the Fed react?
aggregate demand decreases, which the fed could offset by increasing the money supply
A reduction in personal income taxes increases aggregate demand through
an increase in personal consumption
If expected inflation is constant, then when the nominal interest rate increases, the real interest rate
increases by the change of the nominal interest rate
An increase in the MPC
increases the multiplier, so that changes in government expenditures have a larger effect on aggregate demand
What happens to the quantity of money demanded when the opportunity cost and interest rate decrease?
it increases
What happens to the money supply curve when the Fed buys bonds
it shifts rightward
Inflation costs are minimized during periods of
large, unexpected deflation
Is the increase in the dollar value of your savings in a bank nominal or real variable?
nominal
According to liquidity preference theory, the slope of the money demanded curve is explained by
people will want to hold more money as the cost of holding it falls
Inflation can be measured by the
percentage change in the consumer price index
In the language of macroeconomics, saving refers to
purchasing of stocks and bonds
Is the change in the number of goods you can buy with your savings a nominal or real variable?
real
Increases in government expenditures shift the aggregate demand to the
right
If people are voluntarily quitting their jobs where are we likely on the AS curve, are we at equilibrium, to the right of the equilibrium, or to the left of the equilibrium?
right because real wages are lower than what they are expecting
What do tax cuts do to the monetary demand curve?
shift to the right
The GOP is planning to lower taxes by a large amount. How does this kind of plan affect the ADAS diagram in the short-run?
tax cut = higher government spending AD shifts right
The supply of money is determined by
the Fed
Menu costs refers to
the cost of more frequent price changes induced by higher inflation
The lag problem associated with monetary policy is due mostly to
the fact that business firms make investment plans far in advance
Monetary policy is determined by
the federal reserve and involves changing the money supply
According to liquidity preference theory, equilibrium in the money market is achieved by adjustments in
the interest rate
The opportunity cost of holding money falls when
the interest rate decreases
Tax increases shift aggregate demand to
the left
In recent years, the Fed has chosen to target interest rates rather than the money supply because
the money supply is hard to measure with sufficient precision
The lag problem associated with fiscal policy is due mostly to
the political system of checks and balances
In the language of macroeconomics, investment refers to
the purchase of physical capital, such as equipment and buildings
Hyperinflation can be explained by
the quantity theory of money
An increase in government spending shifts the aggregate demand curve
to the right. the larger the multiplier is, the further it shifts
In the graph of the money market, the money supply curve is
vertical
Velocity is computed by
Price level times real GDP divided by the money supply
What happens to the aggregate demand curve when the Fed purchases government bonds on the open market
Shifts to the right
What are the factors that affect MPC
income and wealth
Monetary neutrality implies that in increase in the quantity of money will do what to the price level
increase it
Gov spending multiplier
1/(1-MPC)
If expected inflation is constant and the nominal interest rate decreased by 2 percent, then the real interest rate decreases by
2 percent
How does the GOP's plan to cut taxes affect the ADAS diagram in the short run?
AD shifts right
In the short run, open market purchases a. decrease the price level and real GDP b. decreases the price level and increases real GDP c. increases the price level and real GDP d. increases the price level and decreases real GDP
c
Which of the following shifts aggregate demand to the right? a. the price level rises b. the price level falls c. the fed purchases government bonds d. none of the above
c
The idea that nominal variables are heavily influenced by the quantity of money and that money is largely irrelevant for understanding the determinants of real variables is called the
classical dicotomy
If the CPI rises, the number of dollars needed to buy a representative basket of goods
increases and so the value of money falls
A leftward shift in the aggregate demand curve is a result of a. households saving a smaller fraction of their income b. a decrease in net exports c. an increase in gov. purchases d. a decrease in the price level
decrease in net exports
People are more likely to want to hold more money if the interest rate
decreases
When the interest rate decreases, the opportunity cost of holding money
decreases
The opportunity cost of holding money
decreases when the interest rate decreases, so people desire to hold more of it
If Y and V are constant and M doubles, the quantity equation implies that the price level
doubles
When the money market is drawn with the value of money on the vertical axis, the money demand curve slopes
downward at higher prices, people want to hold more money
What kind of policy is higher gov spending? (monetary or fiscal)?
expansionary fiscal
What kind of policy is Fed purchases of bonds? (monetary or fiscal)?
expansionary monetary
If the Fed increases the money supply, then 1/p
falls, so the value of money falls
Fiscal policy refers to the idea that aggregate demand is affected by changes in
government spending and taxes
If you want your tax cut to have the largest possible effect, should you target people with high MPC or low MPC?
high MPC
Money demand refers to
how much wealth people want to hold in liquid form