ECON MACRO CH 13 & 14
Distinguish among money, income, and wealth.
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.
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 Ignore any actions the bank may take as a result of your having withdrawn the $100.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?
M2 is the best definition of money as a medium of exchange.
Which of the following is included in M2 but not M1?
Money market deposit accounts in banks
Which one of the following is not one of the policy tools the Fed uses to control the money supply?
Moral suasion
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
Suppose a bank has $100 million in checking account deposits with no excess reserves and the required reserve ratio is 10 percent. If the Federal Reserve reduces the required reserve ratio to 8 percent, then the bank can make a maximum loan of
$2 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, 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
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
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
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.
Stagflation is a
combination of inflation and recession
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
The most important role of the Federal Reserve in today's U.S. economy is
controlling the money supply to pursue economic objectives.
Which of the following is not counted in M1?
credit card balances
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
Banks can make additional loans when required reserves are
less than total reserves
The seven members of the Board of Governors of the Federal Reserve are appointed by
The President
Which aggregate supply curve has a positive slope?
the short run only
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
If the reserve requirement ratio (RR) is 0.20, the simple deposit multiplier is
5
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.
Which of the following best describes how banks create money?
Banks create checking account deposits when making loans from excess reserves.
How does a decrease 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.
Which of the following is not a policy tool the Federal Reserve uses to manage the money supply?
Changing Income tax rates
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.
The most liquid measure of money supply is
M1
The Federal Reserve uses two definitions of the money supply, M1 and M2, because
M1 is a narrow definition focusing more on liquidity, whereas M2 is a broader definition of the money supply.
The formula for the simple deposit multiplier is
Simple Deposit Multiplier = 1/RR
Which tool is the most important?
The Fed conducts monetary policy principally through open market operations.
The student explained the graph as follows: "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.
The recession of 2007−2009 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.
Open market operations refer to the purchase or sale of ________ to control the money supply.
U.S. Treasury securities by the Federal Reserve
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.
Which of the following would cause a decrease in aggregate demand?
a decrease in government spending
If the economy adjusts through the automatic mechanism, then a decline in aggregate demand causes
a recession in the short run and a decline in the price level in the long run.
A change in any other factor causes ________ the SRAS curve. In the figure, this is shown by moving from point ______
a shift ; B to C
An increase in the expected future price level causes
a shift from B to A
An increase in the expected price of an important natural resource is indicated by
a sift from B to A
A supply shock is
a sudden increase in the price of an important natural resource, resulting in a leftward shift of the SRAS curve.
Which of the following is usually the cause of stagflation?
a supply shock as a result of an unexpected increase in the price of a natural resource
Stagflation occurs when
a supply shock shifts the SRAS to the left, increasing the price level and decreasing actual GDP
Consider each of the following events and then figure out how each of these events will affect the aggregate demand curve.
a. An increase in the price level will cause a movement up along the aggregate demand curve. b. An increase in government purchases will cause a rightward shift of the aggregate demand curve. c. An increase in state income taxes will cause a leftward shift of the aggregate demand curve. d. An increase in interest rates will cause a leftward shift of the aggregate demand curve. e. A faster income growth in other countries will cause a rightward shift of the U.S. aggregate demand curve.
Explain whether each of the following will cause a shift of the AD curve or a movement along the AD curve.
a. Firms become more optimistic and increase their spending on machinery and equipment. Because this is a change in investment, it will cause a shift to the right in the aggregate demand curve. b. The federal government increases taxes in an attempt to reduce a budget deficit. Because this is a change in consumption, it will cause a shift to the left in the aggregate demand curve. c. The U.S. economy experiences 4 percent inflation. Because this is a change in the price level, it will cause a movement along the aggregate demand curve.
Which of the following will shift the aggregate demand curve to the right, ceteris paribus?
an increase in net exports
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.
an increase; an increase
Which of the following is considered a negative supply shock?
an unexpected decrease in the refining capacity for oil
In economics, money is defined as
any asset people generally accept in exchange for goods and services
Higher personal income taxes
decrease aggregate demand
The sale of Treasury securities by the Federal Reserve will, in general,
decrease the quantity of reserves held by banks
The required reserves of a bank equal its ________ the required reserve ratio.
deposits multiped 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
end the instability created by bank panics by acting as a lender of last resort.
Aggregate demand (AD) is comprised of expenditure components that include:
government spending, consumption, investment, and net exports.
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
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
Money is an imperfect standard of deferred payment because ______ causes the value of money to decrease over time.
inflation
Stagflation occurs when
inflation rises and GDP falls.
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
Which of the following about fiat money is false? Fiat money
is backed by gold
the long run aggregate supply curve
is vertical
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
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.
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
movement along the AD curve
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 ______
movement along; A to B
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 four primary tools the Federal Reserve uses to conduct monetary policy, the tool used most often is
open market operations
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
When the price of oil rises unexpectedly, the equilibrium price level ________ and the unemployment rate ________ in the short run
rises; rises
An improvement in technology is shown as a
shift from A to B
An increase in the labor force or capital stock is illustrated as a
shift from A to B
Moving from point A to point C is referred to as a
shift in the AD curve
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.
An increase in the working population will cause the long-run aggregate supply curve to
shift to the right
Which of the following functions of money would be violated if inflation were high?
store of value
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.
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.
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 central bank of a country controls the money supply, which equals the currency held by
the public plus their checking account balances
The major shortcoming of a barter economy is
the requirement of a double coincidence of wants
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
transfer dollars, and therefore purchasing power, into the future
In the long run,
unemployment is at its natural rate
Bank reserves include
vault cash and deposits with the Federal Reserve.
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.