Econ Midterm 3 Study Guide
Money supply and price level is a
Nominal variable
If the dollar buys fewer bananas in Guatemala than in Honduras, then traders could make a profit by
buying bananas in Honduras and selling them in Guatemala, which would raise the price of bananas in Honduras
When taxes decrease, consumption
increases as shown by a shift of the aggregate demand curve to the right.
A depreciation of the U.S. real exchange rate induces U.S. consumers to buy
more domestic goods and fewer foreign goods
When the Federal Reserve decreases the Federal Funds target rate, the lower rate is achieved through
purchases of government bonds, which reduces interest rates and causes people to hold more money.
If aggregate demand shifts left, then in the short run
the price and real GDP both fall.
The quantity of goods and services the economy can produce is a
Real variable
In the short run, an increase in the money supply causes interest rates to
decrease, and aggregate demand to shift right.
Assuming a multiplier effect, but no crowding-out or investment-accelerator effects, a $100 billion increase in government expenditures shifts aggregate
demand rightward by more than $100 billion
An increase in the MPC
increases the multiplier, so that changes in government expenditures have a larger effect on aggregate demand.
Net Exports =
net capital outflow
Monetary policy is determined by
the Federal Reserve and involves changing the money supply.
If you are vacationing in France and the dollar depreciates relative to the euro, then
the dollar buys fewer euros. It will take more dollars to buy a good that costs 50 euros
Fiscal policy is determined by
the president and Congress and involves changing government spending and taxation.
If the multiplier is 3, then the MPC is
2/3
Which of the following policy actions shifts the aggregate-demand curve?
an increase in the money supply an increase in taxes an increase in government spending
If you go to the bank and notice that a dollar buys more Japanese yen than it used to, then the dollar has
appreciated, making Americans more likely to travel to Japan
If Chileans buy more U.S. stocks and bonds and U.S. residents buy more Chilean wine, then
both US net exports and net capital outflows fall
According to liquidity preference theory, the money supply curve would shift if the Fed
engaged in open-market operations
If the U.S. real exchange rate appreciates, U.S. exports to Europe
fall, and European exports to the US rise
An Italian company builds and operates a pasta factory in the United States. This is an example of Italian
foreign direct investment that increases Italian net capital outflow
Suppose an increase in interest rates causes rising unemployment and falling output. to counter this, the federal reserve would
increase the money supply
When the Fed buys government bonds, the reserves of the banking system
increase, so the money supply increases
When the money supply decreases
interest rates rise and so aggregate demand shifts left.
If the Fed conducts open-market sales, which of the following quantities increases?
interest rates, but not investment or prices
A Chinese company exchanges yuan (Chinese currency) for dollars. It uses these dollars to purchase scrap metal from a U.S. company. As a result of these transactions, Chinese
net exports decrease, and US net capital outflow decreases
If the interest rate decreases
or if the price level increases, then people will want to hold more money.
Which of the following is not a determinant of the long-run level of real GDP?
price level
The nominal exchange rate is the
rate at which a person can trade the currency of one country for another
Which of the following Fed actions would both decrease the money supply?
sell bonds and raise the reserve requirement
People choose to hold a larger quantity of money if
the interest rate falls, which causes the opportunity cost of holding money to fall
The logic of the multiplier effect applies
to any change in spending on any component of GDP
If a country had a trade surplus of $50 billion and then its exports rose by $30 billion and its imports rose by $20 billion, its net exports would now be
$60 million
Real exchange rate=
(e x P)/P*
Which do the following shifts aggregate demand to the left?
A decrease in the money supply
An increase in the amount of capital firms wish to purchase would initially shift
Aggregate demand right
When government spends less, the initial effect is that
Aggregate demand shifts left
Suppose a stock market boom makes people feel wealthier. The increase in wealth would cause people to desire
Increased consumption, which shifts the aggregate demand curve right
The classical dichotomy is
The distinction between real and nominal variables
If speculators gained greater confidence in foreign economies so that they wanted to buy more assets of foreign countries and fewer U.S. bonds,
the dollar would depreciate which would cause aggregate demand to shift right.
A reduction in personal income taxes increases Aggregate Demand through
an increase in personal consumption
