ECON exam 4
Choose the statement about money that is correct
A. Money acts as a store of value in the sense that it can be held and exchanged later for goods and services.Money acts as a store of value in the sense that it can be held and exchanged later for goods and services.
Following the change in aggregate supply, the new macroeconomic equilibrium is at ______. If potential GDP is $1 trillion, the economy has _______ gap.
A. point A; a recessionary
Which of the following items are examples of fiscal policy that increase aggregate demand?
An increase in government expenditure, a decrease in taxes, and an increase in transfer payments
A bank maximizes its stockholders' wealth by ______.
C. lending for long terms at high interest rates and borrowing from depositors and others
If the Fed makes an open market sale of $1 million of securities to a bank, the bank's reserves ______.
Excess reserves ______. -decrease; decrease Bank deposits ______ and the quantity of money ______. -decrease; decreases
All of the following are elements in the structure of the Fed EXCEPT the
Executive Council to the Governor.
Choose the correct statement.
Inflation is a tax on holding money.
Ari takes $1100 from his savings account and deposits the $1100 in his money market fund. What is the immediate change in M1 and M2?
M1 does not change and M2 does not change.
Choose the statement about the Fed that is correct.
The FOMC meets approximately every six weeks to review the state of the economy
________ the quantity of money in the United States.
The Federal Reserve System regulates
Choose the correct statement..
The increased uncertainty of inflation misallocates resources.
A midyear burst of minimum-wage increases starts on July 1 On July 1, 2016, the minimum wage will increase in 14 U.S. cities, states and counties, and in the District of Columbia. In San Francisco, the minimum wage will rise to $13.00 by 2018.
The rise in the minimum wage _______. -decreases aggregate supply because firms' costs increase If the rise in the minimum wage increases the natural unemployment rate, potential GDP ______ and aggregate supply ______. -decreases; decreases further
If the Fed increases the discount rate,
a bank pays a higher interest rate if they borrow money from the FED
Your bank manager tells you that she does not create money; she just lends what is deposited. Explain why she is wrong and how she creates money. The banking system creates money because ______.
a bank that has excess reserves can make loans. When a bank creates a loan, the bank increases the balance of the borrower's account and that increase in deposits is new money
Which of the following can start an inflation?
a decrease in aggregate supply an increase in aggregate demand
Inflation can be started by
a decrease in aggregate supply or an increase in aggregate demand.
Which of the following are examples of monetary policy that decrease aggregate demand?
a decrease in the quantity of money and an increase in interest rates
An increase in the money wage rate leads to`
a leftward shift of the aggregate supply curve.
Money serves the function of being ______.
a medium of exchange, which means that it is generally accepted in return for goods and services
When the U.S. price level rises, ______.
a movement up along the AD curve occurs and the quantity of U.S. real GDP demanded decreases
In the figure, the economy is at an equilibrium with real GDP of $13 trillion and a price level of 110. At this point there is
a recessionary gap
The gap in the graph is ______ because ______.
a recessionary gap; potential GDP exceeds real GDP
The events which could have changed short-run aggregate supply from AS0 to AS1 are ______.
a rise in the money wage rate or a rise in the money price of any other factor of production
The Board of Governors of the Federal Reserve is
a seven member board, each one serving a 14−year term
Excess reserves are the
amount of reserves held over what is desired.
Fed starts buying government debt The Fed announced that it would buy up to $300 billion in Treasury securities over the next six months from big government "primary" securities dealers, such as Barclays Capital, Banc of America Securities, and Citigroup Global Markets. What type of transaction is the Fed's purchase of government securities from securities dealers? With no other actions, will these transactions change the quantity of money? If so, will they increase or decrease the quantity of money? This transaction is an example of ______. With no other actions, these transactions will ______ the quantity of money.
an extraordinary crisis measure; increase
Demand−pull inflation starts with
an increase in aggregate demand
Demand pull inflation can be started by
an increase in govt expenditure
Cost−push inflation can start with
an increase in oil prices
Aggregate demand decreases if monetary policy ______ the quantity of money and ______ interest rates.
decreases; increases
The Fed decreases the quantity of money. In the short run, the quantity of money demanded ______ and the nominal interest rate ______.
decreases; rises
When cost−push inflation starts, real GDP ________ and the unemployment rate ________
decreases; rises
Over the business cycle, factors such as the quantity of capital, human capital and technology
grow but do not fluctuate as much as the quantity of labor employed.
Which of the following changes aggregate supply and shifts the AS curve? i. a change in the price of a major resource ii. increases in the amount of capital iii. a change in the money income of consumers
i and ii
When Japanese and European firms establish new plants in China, China's aggregate demand ______.
increases and China's AD curve shifts rightward
How do banks create new deposits by making loans, and what factors limit the amount of deposits and loans they can create? When a bank makes a loan, ______. The amount of loans and new deposits that a bank can create is limited by ______.
it creates a new deposit for the person who receives the loan; the banks' excess reserves, the desired reserve ratio, and the currency drain ratio
The Federal Open Market Committee is
the main policy making body of the Fed.
The aggregate supply curve shifts rightward when
the money wage rate falls.
An open market operation is ______.
the purchase or sale of government securities by the Federal Reserve System in the open market
Which of the following does NOT affect potential GDP?
the quantity of money
When the price level in Mexico rises, _______.
the quantity of real GDP demanded in Mexico decreases
The greater the desired reserve ratio, _______.
the smaller the money multiplier
South Korea: Bank reserves raised To rein in spending, the Bank of Korea raised the required reserve ratio to 7 percent from 5 percen—the first raise in almost 17 years. With higher required reserves, banks will have to cut the amount of loans they make Explain why the higher required reserve ratio means that banks will have to cut the amount of loans they can make.
they have fewer excess reserves with which to make loans
If the Fed changes the quantity of money, the immediate effects are on ______ and the long-run effects are on ______.
the short-term nominal interest rate; the price level and the inflation rate
The price of a bond _____ and the interest rate ______.
falls; rises
In December 2001, currency held by individuals and businesses and traveler's checks was $589 billion; checkable deposits owned by individuals and businesses were $593 billion; savings deposits were $2, 313 billion; small time deposits were $975975 billion; and money market funds and other deposits were $982 billion. Calculate M1 and M2 in December 2001.
M1 in December 2001 is $1182 billion. M2 in December 2001 is $5452 billion.
When Europe trades with Mexico and goes into a recessiona recession, ______.
Mexico's exports to Europe decrease Mexico's aggregate demand decreases and Mexico's AD curve shifts leftward
Think about the banking system and then choose the correct statement.
Money in the United states today is called flat money
The U.S. economy is at full employment when the following events occur: 1. A deep recession hits the world economy. 2. The world oil price rises by a large amount. 3. U.S. businesses expect future profits to fall. Which event, if any, brings stagflation?
Stagflation is rise in the price level and a decrease in real GDP. Only Event 2 has this effect.
What is the Fed and what is the FOMC?
The FED is the central bank of the United States FOMC meets every 6 weeks to review the state of the economy
An economy has a recessionary gap. With no change in aggregate demand, how does the economy return to full employment?
The money wage rate falls, aggregate supply increases, and the price level falls.
Helicopter Money Primer: The possible next frontier in quantitative easing Central banks—the Fed, the Bank of Japan, the European Central bank, the People's Bank of China, and others—have bought trillions of dollars of bonds. The Fed alone has bought $4 trillion-worth.
The Fed's policy tools include ______. -the required reserve ratio, discount rate, and open market operations To increase its assets to $4 trillion, the Fed used ______. -large-scale open market operations called quantitative easing
When the Fed engages in open market operations, it is buying or selling
U.S. government securities.
The fraction of a bank's total deposits that it holds in reserve is the ______, and the ratio of reserves to deposits that a bank wants to hold is its ______.
actual reserve ratio; desired reserve ratio
The business cycle occurs because ______.
aggregate demand and aggregate supply fluctuate, but they don't always fluctuate by the same amount and in the same direction
When investment increases, _______
aggregate demand increases and income increases. The increase in income induces an increase in consumption expenditure so aggregate demand increases by more than the initial increase in investment
By itself, an increase in the price of oil shifts the
aggregate supply curve leftward and does not shift the aggregate demand curve
If the costs of production decrease, there is
an increase in aggregate supply and the AS curve shifts rightward.
The costs of inflation do not include _______.
an increase in saving and investment
Cost−push inflation can be started by
an increase in the money prices of raw material
Some events that could have changed aggregate demand from AD0 to AD1 are ______.
an increase in the quantity of money or an increase in foreign income
In the most recent quarter (the fourth 2019), U.S. real GDP was $19.2trillion, potential GDP was $19.1 trillion, and the price level measured by the GDP deflator was 113.0 In the fourth quarter of 2019 the output gap was ______.
an inflationary gap
Starting from a situation of full employment, an increase in aggregate demand creates ________ and ________ the price level
an inflationary gap; raises
If the economy is above full employment, there is ________ gap and as the economy adjusts toward full employment the price level ________.
an inflationary; rises
As the central bank, the Federal Reserve System provides banking services to
banks and regulates financial institutions and markets
To increase the quantity of money in the economy, the Federal Reserve can
buy government bonds in an open market operation.
The monetary base is the sum of _______.
coins, Federal Reserve notes, and banks' reserves at the Fed
The institutions that make up the banking system are ______.
commercial banks, federal reserves, money market funds, thrift institutions
Demand−pull inflation persists because of
continuing increases in the quantity of money
The change in exports and imports _______ aggregate demand because _______.
decrease; exports increased by less than imports increased
Other things remaining the same, a rise in the foreign exchange rate of the U.S. dollar ______.
decreases U.S. aggregate demand
In the short run, the global expansion ______.
decreases U.S. unemployment
When the Chinese yuan strengthens against the U.S. dollar, China's aggregate demand ______.
decreases and China's AD curve shifts leftward
When the United States goes into recession, China's aggregate demand ______.
decreases and China's AD curve shifts leftward
Aggregate demand decreases if expected future income, inflation, or profits ______. And aggregate demand decreases if fiscal policy ______ government expenditure
decreases; decreases
If the price level falls, the _______.
demand for money decreases and the nominal interest rate falls
When the economy starts to recover from recession and interest rates are low, there is a "threat of inflation" because the _______ in a recovery.
demand for money increases
When the price level in Japan rises Japan's aggregate demand ______.
does not change, but the quantity of real GDP demanded decreases and a movement up along the AD curve occurs
To restore full employment, the money wage rate will ______. The price level _______.
fall and aggregate supply increases; falls
If the interest rate is 5 percent, people will sell bonds. Bond prices ______ and the interest rate will ______.
fall; rise
Along the adjustment path back to full employment with no change in monetary policy or fiscal policy, the money wage rate will _______ and aggregate _______.
fall; supply will increase
The real wage rate _____ and unemployment _____ in the short run in Event 1.
falls; decreases
The real wage rate _____ and unemployment _____ in the short run in Event 3.
falls; decreases
The Fed conducts an open market purchase of securities. In the short run, the nominal interest rate ______. In the long run, the value of money ______.
falls; falls
The uncertainty costs of inflation cause people to
focus on the short run, which decreases investment and slows growth.
As more people in India have access to higher education ______ and in the long run ______.
human capital increases; both potential GDP and aggregate supply increase
In its macroeconomic equilibrium, the economy can be producing at i. below full employment. ii. full employment. iii. above full employment.
i,ii, or iii
Suppose the Fed makes an open market purchase of $1 million of securities from a bank. The bank's reserves ______ and its deposits ______, so it has excess reserves of $1 million.
increase by $1 million; do not change
The tax credits _______.
increase disposable income, which increases consumption expenditure
Bank deposits ______ and the quantity of money ______.
increase; increases
Reserves in the banking system ______. Banks ______ loans.
increase; make more
In the short run, Event 1 _____ real GDP and _____ the price level.
increase; raises
In the short run, Event 3 _____ real GDP and _____ the price level
increase; raises
In the short run, when Indian universities increased the number of engineering graduates India's aggregate supply ______.
increased
South Africa's aggregate supply ______ when unemployment decreased.
increased
When U.S. businesses established branches in South Africa, in the short run, South Africa's aggregate supply ______.
increased
In the short run, when U.S. firms moved their IT and data functions to India, India's aggregate supply ______.
increases
When Mexico increases the quantity of money, Mexico's aggregate demand ______.
increases and its AD curve shifts rightward
When Japan adopts an expansionary fiscal policy and cuts taxes, Japan's aggregate demand ______.
increases and the AD curve shifts rightward
When growth in the Asian economies is strong Japan's aggregate demand ______.
increases and the AD curve shifts rightward
Aggregate demand decreases if fiscal policy ______ taxes or ______ transfer payments.
increases; decreases
Aggregate demand decreases if the exchange rate ______ or foreign income ______.
increases; decreases
Inflation ________ the cost of holding money and ________ the afterminus−tax real interest rate.
increases; decreases
The increase in the demand for durable goods ______ aggregate demand. The increase in new-home sales ______ aggregate demand.
increases; increases
In the short run, Event 2 _____ real GDP and _____ the price level.
increases; lowers
The Fed must continually ______ the quantity of money to keep the nominal interest rate low. As a result, the inflation rate ______ in the long run.
increases; rises
Demand−pull inflation results from continually increasing the quantity ofmoney, which leads to a continually
increasing aggregate demand
The discount rate is the
interest rate at which the Fed will loan reserves to commercial banks.
Ben Bernanke says "interest rates will stay low" for some time because the Fed is planning to ______.
keep the quantity of money growing at a rate that will not increase the nominal interest rate
After the increase in the quantity of money, at an interest rate of 77 percent a year, people want to hold _____ so they _____ bonds.
less money than the quantity supplied; buy
An economy's business cycle is a continuous series over time of different ______.
macroeconomic equilibriums
High inflation
makes money function less well as a store of value.
Uncertainty costs arise from inflation because inflation makes longminus−term planning ________ so people respond by ________ investment.
more difficult; decreasing
Following the change in aggregate demand, the new equilibrium is at ______. If potential GDP is $1 trillion, the economy has _______ gap
point C; an inflationary
If the Fed wants to increase the quantity of money, it makes an open market _______.
purchase
In order to influence the interest rate, the Federal Reserve System can immediately adjust the
reserves of the banking system
The automatic adjustment path back to full employment (no change in fiscal or monetary policy) begins with a ______ in the _____.
rise; moneywage rate
In the short run, the nominal interest rate _______.
rises
The real wage rate _____ and unemployment _____ in the short run in Event 2.
rises; decrease
In the long run, the value of money ______ and the price level ______.
rises; falls
The price of a bond _____ and the interest rate ______.
rises; falls
The price of a bond ______, and the interest rate ______.
rises; falls
What is a bank's balancing act? A bank must balance ______ against ______
security for depositors; profit for stockholders
The voting members of the Federal Open Market Committee consists of the
seven Board of Governor members and five Federal Reserve Bank presidents
An increase in the money wage rate ________ and an increase in the money prices of raw materials ________.
shifts the AS curve leftward; shifts the AS curve leftward
A combination of recession and inflation is called
stagflation
Aggregate ______ will ______.
supply; decrease
The Fed's chief executive is ______ and the Fed's main policy tools are ______.
the Chairman of the Board of Governors; required reserve ratios, discount rate, and open market operations. In unusual times, extraordinary crisis measures are an additional tool
When the world economy goes into a strong expansion, ______.
the demand for U.S. exports increases and the demand for U.S. real GDP increases
When Congress raises income taxes, ______.
the demand for U.S. real GDP decreases and the AD curve shifts leftward
The increase in the quantity of money is determined by ______.
the desired reserve ratio and the currency drain ratio. The larger the desired reserve ratio or the currency drain, the smaller is the increase in the quantity of money
When the Fed ________ securities in an open market operation, banks' reserves ________ and therefore lending ________.
buys; increase; increases
When the price level in South Africa increased, South Africa's aggregate supply ______
didn't change, but as the price level increased the quantity of real GDP supplied increased
In the short run, when the price level in India increased India's aggregate supply ______.
didn't change, but the quantity of real GDP supplied increased
The costs of inflation ________ when inflation is more rapid and ________ when inflation is more unpredictable.
increase; increase
When the Fed purchases government securities, bank reserves ______ and bank deposits ______.
increase; increase
If the Fed purchases the government securities on the open market, the quantity of money ______ because _______.
increases; bank reserves increase The nominal interest rate _______. falls
The quantity of money ______ and the nominal interest rate ______.
increases; falls
After the decrease in the quantity of money, at an interest rate of 77 percent a year, people want to hold _____ money so they _____ bonds.
more; sell
The ________ the desired reserve ratio, the ________ the ________ in the quantity of money created from an initial increase of $100,000 in the monetary base.
smaller; larger; increase
