Econ Macro Ch. 13-14

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If the economy adjusts through the automatic​ mechanism, then a decline in aggregate demand causes If the economy is initially at​ full-employment equilibrium, then an increase in aggregate demand causes​ _____________ in real GDP in the short run and​ ___________ in the price level in the long run. Which of the following is usually the cause of​ stagflation?

a recession in the short run and a decline in the price level in the long run. an​ increase; an increase a supply shock as a result of an unexpected increase in the price of a natural resource

Banks can continue to make loans until their

actual reserves equal their required reserves.

The​ ________ shows the relationship between the price level and quantity of real GDP demanded.

aggregate demand curve

Which of the following assets is most​ liquid?

money

Long-run macroeconomic equilibrium occurs when

the aggregate demand and​ short-run aggregate supply curves intersect at a point on the​ long-run aggregate supply curve.

Where the aggregate demand curve and the​ short-run aggregate supply curve​ intersect,

the economy is in​ short-run macroeconomic equilibrium.

In response to the destructive bank panics of the Great​ Depression, future bank panics are designed to be prevented by

the establishment of the Federal Deposit Insurance Corporation.

Increases in firms' expectations of their future profitability and investment spending will make the aggregate demand curve shift

to the right

When money is acting as a store of​ value, it allows an individual to Money is an imperfect standard of deferred payment because ---causes the value of money to decrease over time.

transfer​ dollars, and therefore purchasing​ power, into the future. inflation

In the long run,

unemployment is at its natural rate.

Which of the following would cause a decrease in aggregate​ demand?

a decrease in government spending

Open market operations refer to the purchase or sale of​ ________ to control the money supply.

U.S. Treasury securities by the Federal Reserve

When the price of oil rises​ unexpectedly, the equilibrium price level​ ________ and the unemployment rate​ ________ in the short run.

rises; rises

Suppose that you deposit​ $2,000 in your bank and the required reserve ratio is 10 percent. The maximum loan your bank can made as a direct result of your deposit is

$1,800

Imagine that Kristy deposits​ $10,000 of currency into her checking account deposit at Bank A and that the required reserve ratio is​ 20%. Refer to the scenario above. As a result of​ Kristy's deposit, Bank​ A's reserves immediately increase by

$10,000

Imagine that Kristy deposits​ $10,000 of currency into her checking account deposit at Bank A and that the required reserve ratio is​ 20%. Refer to the scenario above. As a result of​ Kristy's deposit, Bank​ A's required reserves increase by

$2,000

Suppose the reserve requirement is 15​%. What is the effect on total checkable deposits in the economy if bank reserves increase by ​$50 ​billion?

$333 billion increase

Suppose a bank has​ $100 million in checking account deposits with no excess reserves and the required reserve ratio is 20 percent. If the Federal Reserve reduces the required reserve ratio to 15​ percent, then the bank will now have excess reserves of

$5 million

Imagine that Kristy deposits​ $10,000 of currency into her checking account deposit at Bank A and that the required reserve ratio is​ 20%. Refer to the scenario above. As a result of​ Kristy's deposit, checking account deposits in the banking system as a whole​ (including the original​ deposit) could eventually increase up to a maximum of

$50,000

Imagine that Kristy deposits​ $10,000 of currency into her checking account deposit at Bank A and that the required reserve ratio is​ 20%. Refer to the scenario above. As a result of​ Kristy's deposit, Bank A can make a maximum loan of

$8,000

Imagine that Kristy deposits​ $10,000 of currency into her checking account deposit at Bank A and that the required reserve ratio is​ 20%. Refer to the scenario above. As a result of​ Kristy's deposit, Bank​ A's excess reserves increase by

$8,000

Which of the following is a monetary policy tool used by the Federal Reserve​ Bank?

- Buying​ $500 million worth of government​ securities, such as Treasury bills. - Increasing the reserve requirement from 10 percent to 12.5 percent. - Decreasing the rate at which banks can borrow money from the Federal Reserve. ** ALL OF THE ABOVE.

The United States is divided into -- Federal Reserve Districts. The Federal Reserve​ Bank's Board of Governors consists of -- members appointed by the president of the U.S. to​ 14-year, ​ non-renewable terms. One of the board members is appointed to a -- ​year, renewable term as the chairman.

12 , 7 , 4

If the reserve requirement ratio ​(RR​) is​ 0.20, the simple deposit multiplier is

5

Which of points​ A, B,​ C, or D can represent a​ long-run equilibrium? Suppose that initially the economy is at point A. Then aggregate demand increases from AD1 to AD2. The new​ short-run equilibrium will be at point --- The​ long-run equilibrium point will be at point --- Which of the following best explains how the economy will adjust from the​ short-run equilibrium point to the new​ long-run equilibrium​ point?

A and C D , C Due to the higher price​ level, workers will demand higher​ wages, and firms will raise prices and cause SRAS to shift to the left to point C.

Refer to the figure to the right. Ceteris​ paribus, a decrease in government spending would be represented by a movement from

AD2 to AD1.

Interest rates in the economy have fallen. How will this affect aggregate demand and equilibrium in the short​ run?

Aggregate demand will​ rise, the equilibrium price level will​ rise, and the equilibrium level of GDP will rise.

Distinguish among​ money, income, and wealth. The central bank of a country controls the money​ supply, which equals the currency held by

A​ person's money is the currency held and the checking account​ balance, income is the earning and wealth is equal to value of assets minus all debts. the public plus their checking acount balances.

Refer to the diagram to the right. Which of the points in the diagram are possible short run equilibria but not long run​ equilibria? Assume that Upper Y 1 represents potential GDP.

B and D

Which of the following best describes how banks create​ money?

Banks create checking account deposits when making loans from excess reserves.

How does an increase in the price level affect the quantity of real GDP supplied in the long​ run?

Changes in the price level do not affect the level of GDP in the long run.

Evaluate the following​ statement: Banks use deposits to make consumer loans to households and commercial loans to businesses. Banks will loan out every penny of their deposits in order to make a profit.

False. Banks must hold a fraction of their deposits as vault cash or with the Federal Reserve.

Which of the following best explains the difference between commodity money and fiat​ money?

Fiat money has no value except as​ money, whereas commodity money has value independent of its use as money.

If​ full-employment GDP is equal to​ $4.2 trillion, what does the​ long-run aggregate supply curve look​ like?

It is a vertical line at​ $4.2 trillion of GDP.

The Federal​ Reserve's narrowest definition of the money supply is

M1

Suppose you decide to withdraw​ $100 in currency from your checking account. What is the effect on M1?Ignore any actions the bank may take as a result of your having withdrawn the​ $100.

M1 remains unchanged

The M2 definition of the money supply includes

M1, savings​ accounts, small time​ deposits, and money markets.

Which of the following is not a correct statement about​ M2? If you move​ $100 from your savings account to your checking​ account, then M1 will --- and M2 will ---

M2 is the best definition of money as a medium of exchange. increase by $100, remain the same

Which of the following is included in M2 but not​ M1? The Federal Reserve uses two definitions of the money​ supply, M1 and​ M2, because

Money market deposit accounts in banks M1 is a narrow definition focusing more on​ liquidity, whereas M2 is a broader definition of the money supply.

Refer to the figure to the right. Ceteris paribus​, an increase in the expected price of an important natural resource would be represented by a movement from

SRAS2 to SRAS1.

"An increase in aggregate supply causes a shift from SRAS1 to SRAS2. Because this shift in the aggregate supply curve results in a lower price​ level, consumption,​ investment, and net exports will increase. This change causes the aggregate demand curve to shift to the right from ADl to AD2. We know that real GDP will​ increase, but we​ can't be sure whether the price level will rise or fall because that depends on whether the aggregate supply curve or the aggregate demand curve has shifted farther to the right. I assume that aggregate supply shifts out farther than aggregate​ demand, so I show the final price​ level, P3​, as being lower than the initial price​ level, P1​." Which of the following is a correct statement about the​ student's analysis?

The student is incorrect because the aggregate demand curve does not shift because of the price level change.

Spending on the war in Afghanistan is essentially categorized as government purchases. How do increases in spending on the war in Afghanistan affect the aggregate demand​ curve?

They will shift the aggregate demand curve to the right.

The recession of 2007minus2009 made many consumers pessimistic about their future incomes. How does this increased pessimism affect the aggregate demand​ curve?

This will shift the aggregate demand curve to the left.

Which of the following best describes the​ "wealth effect"?

When the price level​ falls, the real value of household wealth rises.

How do the banks​ "create money"?

When there is an increase in checking account​ deposits, banks gain reserves and make new​ loans, and the money supply expands.

A supply shock is Stagflation is a Stagflation occurs when

a sudden increase in the price of an important natural​ resource, resulting in a leftward shift of the SRAS curve. combination of inflation and recession a supply shock shifts the SRAS to the left, increasing the price level and decreasing actual GDP

Which of the following will shift the aggregate demand curve to the​ right, ceteris paribus​?

an increase in net exports

the SRAS curve will shift to the right if there is the SRAS curve will shift to the right if there is the SRAS curve will shift to the right if there is the SRAS curve will shift to the left if there is the SRAS curve will shift to the left if there is the SRAS curve will shift to the left if there is

an increase in the labor force or capital accumulation an increase in productivity a technological change an increase in the expected price of an important natural resource an increase in the adjustment of workers' and firms' prior underestimation of the price level an increase in expected future prices

Which of the following is considered a negative supply​ shock?

an unexpected decrease in the refining capacity for oil

Economies where goods and services are traded directly for other goods and services are called​ ________ economies.

barter

At the new short run​ equilibrium, the unemployment rate will --- compared to the unemployment rate at the initial​ equilibrium, prior to the increase in exports. Which of the following best explains how the economy will adjust back to​ long-run equilibrium? At the new​ long-run equilibrium,

be lower Short-run aggregate supply will decrease​ (shift leftward) as firms and workers adjust to the new price level. real GDP and the unemployment rate will remain the​ same, but price level will be higher compared to the initial​ equilibrium, prior to the increase in exports.

Look carefully at the following list. (a.) The coins in your pocket. (b.) The funds in your checking account. (c.) The funds in your savings account. (d.) The​ traveler's check that you have left over from a trip. (e.) Your Citibank Platinum MasterCard. Which of the things above are NOT included in the M1 LOADING... definition of the money​ supply?

c and e

The​ long-run aggregate supply curve is vertical because in the long​ run,

changes in the price level do not affect potential​ GDP, as potential GDP depends on the size of the labor​ force, capital​ stock, and technology.

Which of the following is not a policy tool the Federal Reserve uses to manage the money​ supply?

changing income tax rates

Silver is an example of a

commodity money

To increase the money​ supply, the Federal Reserve could

conduct an open market purchase of Treasury securities.

Which of the following is not counted in​ M1?

credit card balances

Higher personal income taxes

decrease aggregate demand

The required reserves of a bank equal its​ ________ the required reserve ratio.

deposits multiplied by

Compared to the U.S. aggregate demand​ curve, the reason that the demand curve for an individual​ product, such as​ bananas, slopes downward is

different, because consumers can substitute between individual products.

Changes in the price level

do not affect the level of aggregate supply in the long run.

Congress passed legislation to create the Federal Reserve System in 1913 in order to The most important role of the Federal Reserve in​ today's U.S. economy is

end the instability created by bank panics by acting as a lender of last resort. controlling the money supply to pursue economic objectives.

The​ long-run aggregate supply curve will shift to the right if the economy

experiences technological change.

The U.S. dollar can best be described as

fiat money

Give the three reasons the aggregate demand curve slopes downward. The U.S. aggregate demand curve slopes downward due to all of the following reasons except the

government-spending effect, where a change in the price level affects government purchases.

Aggregate demand​ (AD) is comprised of expenditure components that​ include

government​ spending, consumption,​ investment, and net exports.

In the new​ short-run equilibrium, the unemployment rate is --- the unemployment rate in the initial equilibrium prior to the increase in the price of oil. Which of the following best explains how and why the economy will adjust back to​ long-run equilibrium? After the adjustment of aggregate supply is​ complete, the economy returns to equilibrim at When the economy returns to​ long-run equilibrium again

higher than Short-run aggregate supply will increase​ (shift rightward) as the recession makes firms and workers willing to accept lower wages and prices. A real​ GDP, the unemployment​ rate, and the price level will be the same as the initial equilibrium values prior to the increase in the price of oil.

When the price level in the United States falls relative to the price level of other​ countries, ________ will​ fall, ________ will​ rise, and​ ________ will rise.

imports; exports; net exports

Deflation will

increase the quantity of real GDP demanded.

The purchase of Treasury securities by the Federal Reserve​ will, in​ general,

increase the quantity of reserves held by banks.

A decrease in the discount rate​ ________ bank reserves and​ ________ the money supply if banks respond appropriately to the change in the rate.

increases; increases

A decrease in the reserve requirement​ ________ bank reserves and​ ________ the money supply.

increases; increases

Stagflation occurs when

inflation rises and GDP falls.

Which of the following is not a function of the Federal Reserve System or the​ "Fed"?

insuring deposits in the banking system

The​ "interest rate​ effect" can be described as an increase in the price level that raises the interest rate and chokes off

investment and consumption spending

Firms become more optimistic and increase their spending on machinery and equipment. Because this is a change in --- it will cause a --- the aggregate demand curve. The federal government increases taxes in an attempt to reduce a budget deficit. Because this is a change in --- it will cause a --- the aggregate demand curve. The U.S. economy experiences 4 percent inflation. Because this is a change in --- it will cause a --- the aggregate demand curve.

investment, shift to the right in consumption, shift to the left in the price level, movement along

Which of the following about fiat money is​ false? Fiat money

is backed by gold

The long run aggregate supply curve

is vertical

Banks can make additional loans when required reserves are

less than total reserves.

You earn​ $500 a​ month, currently have​ $200 in​ currency, $100 in your checking​ account, $2,000 in your savings​ accounts, $3,000 worth of illiquid assets and​ $1,000 of debt. Using the M1 measure of​ money, you have

money​ = $300, annual income​ = $6,000, and wealth​ = $4,300.

Which one of the following is not one of the policy tools the Fed uses to control the money​ supply? Which tool is the most​ important?

moral suasion The Fed conducts monetary policy principally through open market operations.

An increase in the price level will

move the economy up along a stationary aggregate demand curve.

In the diagram to the​ right, moving from point A to point B is called a --- the AD curve Moving from point A to point C is referred to as a --- the AD curve

movement along shift in

A change in the price level causes a --- the​ short-run aggregate supply​ (SRAS) curve. In the​ figure, this is shown by moving from point --- A change in any other factor causes a --- the SRAS curve. In the​ figure, this is shown by moving from point ---

movement along, A to B shift in, B to C

An increase in the price level will cause a ---- the aggregate demand curve. An increase in government purchases will cause a ---- the aggregate demand curve. An increase in state income taxes will cause a ---- the aggregate demand curve. An increase in interest rates will cause a ---- the aggregate demand curve. A faster income growth in other countries will cause a ---- the U.S. aggregate demand curve.

movement up along rightward shift of leftward shift of leftward shift of rightward shift of

If a person withdraws​ $500 from​ his/her checking account and holds it as​ currency, then M1 will​ ________ and M2 will​ ________.

not change; not change

Of the three primary tools the Federal Reserve uses to conduct monetary​ policy, the tool used most often is

open market operations

The three main monetary policy tools used by the Federal Reserve to manage the money supply are

open market​ operations, discount​ policy, and reserve requirements.

Dollar bills in the modern economy serve as money because

people have confidence that others will accept them as money.

Full-employment GDP is also known as

potential GDP

A baseball fan with a Mike Trout baseball card wants to trade it for a Giancarlo Stanton baseball​ card, but everyone the fan knows who has a Stanton card​ doesn't want a Trout card. Economists characterize this problem as a failure of the

principle of a double coincidence of wants.

An increase in the labor force or capital stock is illustrated as a An increase in the expected price of an important natural resource is indicated by An improvement in technology is shown as a An increase in the expected future price level causes

shift from A to B a shift from B to A shift from A to B a shift from B to A

In​ 2005, Hurricane Katrina destroyed oil and natural gas refining capacity in the Gulf of Mexico which subsequently drove up natural​ gas, gasoline, and heating oil prices. Three years​ later, once the refining capacity was​ restored, these prices came back down. The restoration of refining capacity should

shift the​ short-run aggregate supply curve to the right.

More capital accumulation will cause the​ long-run aggregate supply curve to

shift to the right

Which aggregate supply curve has a positive​ slope?

short run only

The formula for the simple deposit multiplier is If the required reserve ratio is 0.05​, the maximum increase in checking account deposits that will result from an increase in bank reserves of ​$15,000 is

simple deposit multiplier = 1/RR $300,000

If whole tomatoes were​ money, which of the following functions of money would be the hardest for tomatoes to​ satisfy?

store of value

The position of the​ long-run aggregate supply​ (LRAS) curve is determined by

the number of​ workers, the amount of​ capital, and the available technology.

The seven members of the Board of Governors of the Federal Reserve are appointed by

the president

What relationship is shown by the aggregate demand​ curve? The aggregate demand curve shows the relationship between

the price level and the quantity of real GDP demanded by​ households, firms, and the government.

What relationship is shown by the aggregate supply​ curve? The short run aggregate supply curve shows the relationship in the short run between

the price level and the quantity of real GDP supplied by firms.

The price level increases. Because this is a change in --- the LRAS curve will --- The labor force increases. Because this is a change in --- the LRAS will --- There is an increase in the quantity of capital goods. Because this is a change in --- the LRAS will --- Technological change occurs. Because this is a change in --- the LRAS will

the price level, not change the productive capacity of the economy, shift to the right the productive capacity of the economy, shift to the right the productive capacity of the economy, shift to the right

The major shortcoming of a barter economy is

the requirement of a double coincidence of wants.

Bank reserves include

vault cash and deposits with the Federal Reserve.


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