Final exam study guide

When a bank or banklike institution borrows from individuals or firms with excess funds and lends to those who need​ funds, it is

acting as a financial intermediary.

The figure to the right gives an​ economy's initial aggregate demand​ (AD) curve. Using the line drawing​ tool, show an increase in aggregate demand. Properly label

ADshifts up Increased government expenditures for war.

Suppose the economy depicted in the figure to the right experiences a surge in energy pricesenergy prices. Using the t​hree-point curved line drawing tool or the line drawing​ tool, show the​ price/output consequences of this event. Properly label this curve. If the​ economy's policymakers seek to reverse the output loss via the implementation of expansionary​ policies, the result will be

AS shifts up on the AD curve moves left even higher prices.

The equation for a consumption function in a simple​ economy, where there are no​ taxes, is given by C​ =200 ​+ 0.67​Y, where Y denotes aggregate income.

Autonomous consumption is 200. ​(Enter your response as an​ integer.) MPC is .67. ​(Enter your response rounded to two decimal​ places.)

A higher wage that is paid to compensate a worker for unpleasant aspects of a job is known as​ a: Graphically show the impact of a union restricting membership on wages. ​1.) Using the line drawing​ tool, show the impact of a union restricting membership on wages. Properly label your curves. ​2.) Using the point drawing tool​, show the new equilibrium. Label your point ​'E2​'.

compensating differential. S shifts up qualintiy shifts left on old D curve

Expansionary fiscal policy is used by the government to

create new jobs in the economy

You are laid off from your job because of a general downturn in economic activity. This is an example of

cyclical unemployment

Some economists argue that the​ "animal spirits" of investors are so important in determining the level of investment in the economy that the interest rates do not matter at all and planned investment is insensitive to changes in interest rate. In such a​ situation, an increase in government purchases an increase in government purchases

increases GDP by a large amount

According to the real wealth effect ​(or real balance​ effect), a decrease in the price level

increases ​consumers' expenditures due to an increasean increase in the purchasing power of household wealth.

The multiplier

is equal to the ratio of change in equilibrium income to a change in autonomous expenditure

The opportunity cost of holding money

is the forgone interest from holding bonds.

Since the​ 1970's changes in expected inflation and the price of oil and other imports have shown the Phillips Curve to be unstable. This has led economists to conclude that

policy involves more than choosing a point along a nice smooth Phillips Curve.

If the economy is operating on the vertical part of the AS curve and the Fed pursues a policy of stabilizing interest rates in the face of expansionary fiscal​ policy, the result will most likely be

sustained inflation.

When the interest rate decreases

the cost of borrowing decreases and the consumption function shifts up

When the interest rate decreases,

the cost of borrowing decreases and the consumption function shifts up.

When there is an excess supply of​ money,

there is an excess demand for​ bonds, so those looking to borrow by selling bonds can do so at a lower interest rate.

The cumulative sum of several years of budget deficits is known as​ the:

total debt

If the economy is operating above potential​ GDP, then

unemployment is below the natural rate and wages will rise.

Marginal Propensity to consume (MPC)

Change in C divided by change in Y or the slope (C=a+bY) (Y=C+I+G) That fraction of a change in income that is consumed, or spent.

Which of the following statements is​ true?

Each year the budget deficit of the federal government adds to the federal debt.

Sherman Peabody earns a monthly salary of ​$1,200​, which he receives at the beginning of each month. He spends the entire amount each month at the rate of ​$40 per day.​ (Assume 30 days in a​ month.) The interest rate paid on bonds is 6 percent per month. It costs ​$8 every time Peabody sells a bond. The optimal average level of money holdings is the amount that

The optimal average level of money holdings is the amount that A. maximizes the profits from money management.

In an economy where taxes and government spending do not depend on​ income, the government spending multiplier is calculated to be 5. The value of the tax multiplier is

The value of the tax multiplier is -4

Automatic stabilizers are mechanisms built into the economy that tend to reduce the multiplier effect. Which of the following items act as automatic​ stabilizers?

Unemployment compensation

Government interest payments as a percentage of GDP have fallen dramatically since 1995. This can be attributed to

a decrease in government debt until​ 2001, and lower interest rates thereafter.

On June​ 5, 2003, the European Central Bank acted to decrease the​ short-term interest rate by half a percentage point to 2 percent. The​ bank's president at the​ time, Willem​ Duisenberg, suggested that the bank could reduce rates further in the future. The likely impacts of such a rate cut were

an increase in planned aggregate​ expenditure, an increase in aggregate income and​ output, and an increase in consumption.

The two equivalent formulas for the Investment Multiplier​ are:

1/1-MPC and 1/MPS

What are the two equivalent formulas for investment​ multiplier?

1/MPS and 1/1-MPC

c. Unemployment has been caused by a recently enacted minimum wage law. Consider the labor market in the figure 3 to the right. If the minimum wage is ​$12​, then the number unemployed will be 20 million. ​(Enter your response as an​ integer.)

60- 40= 20 S-D= unemploy

During the last half of the​ 1990's the federal government budget went from deficit to surplus. Since​ 2001, though, the reverse is true. What has significantly contributed to recent budget deficits ​?

A. Increased Medicare payments B. The war in Iraq C. Lower tax rates D. ALL OF THE ABOVE

Given the information in the​ table, how many people are in the labor​ force?

Military dont count 166.5 million

Suppose all tax collections are fixed and independent of income and all spending and transfer programs are also fixed and do not depend on the state of the economy. In such a situation what is the relationship between the full employment deficit and actual budget​ deficit?

Actual budget deficit is the same as the full employment budget deficit.

In Japan during the first half of​ 2000, the Bank of Japan kept interest rates at a near zero level in an attempt to stimulate demand. In​ addition, the government passed a substantial increase in government expenditure and cut taxes.​ Slowly, Japanese GDP began to grow with absolutely no sign of an increase in the price level. ​1.) Using the line drawing​ tool, show the monetary and fiscal policy affects on the AD curve described above. Properly label the new curve. ​2.) Using the point drawing​ tool, plot the new equilibrium point. Label the new point​ 'B'. ​Note: Carefully follow the instructions above and only draw the required objects.

AD SHIFT right still on flat part of AS equillibrium is on this line

You are appointed secretary of treasury of a recently independent country called Rugaria. The currency of Rugaria is the lav. The new nation began fiscal operations this year and the budget situation is that the government will spend 88 million lavs and taxes will be 77 million lavs. The difference will be borrowed from the public by selling​ 10-year government bonds paying 33 percent interest. The interest on the outstanding bonds must be added to spending each​ year, and we assume that additional taxes are raised to cover that interest. Assume that the budget stays the same except for interest on the debt for 10 years.

After one​ year, government expenditure is 8.03 million lavs ​(enter your response rounded to two decimal​ places) and debt is 1 million lavs ​(enter your response as an ​integer). After five​ years, government expenditure is 8.15 million lavs ​(enter your response rounded to two decimal​ places) and debt is 5 million lavs ​(enter your response as an ​integer). After ten​ years, government expenditure is 8.30 million lavs ​(enter your response rounded to two decimal​ places) and debt is 10 million lavs ​(enter your response as an ​integer).

During the 1960s there seemed to be an obvious​ trade-off between inflation and unemployment​ (lower inflation implies higher​ unemployment). ​ However, from the 1970s​ onward, that relationship appeared to breakdown. Which of the following are possible causes of this apparent​ breakdown? . The AS shifts but the AD does not. B. The AD curve shifts but AS does not. C. Both the AD and AS supply curve shift. D. Both A and C

Both A and C

The Federal Reserve tends to forecast that GDP will​ be: A. stable. B. lower than it turns out to be. C. higher than it turns out to be. Your answer is correct.D. consistently growing. The European Central Bank has the best track record of​ forecasting: A. inflation. B. economic growth. Your answer is correct.C. interest rates. D. None of the above.

C. higher than it turns out to be. interest rates.

Before​ 1995, proponents of the NAIRU theory argued that the value of the NAIRU in the U.S. was around 6 percent. After​ 1995, the unemployment rate steadily​ declined, and by the year 2000 it was 3.9 percent. ​ Further, the 1995 to 2000 period saw slightly declining inflation. This evidence would suggest that increased worker productivity led to a leftward shift of the PP curve. B. increased worker productivity led to a rightward shift of the PP curve. C. the NAIRU theory is vacuous​ (without meaning). D. Both A and C are correct.

D. Both A and C are correct.

Before​ 1995, proponents of the NAIRU theory argued that the value of the NAIRU in the U.S. was around 6 percent. After​ 1995, the unemployment rate steadily​ declined, and by the year 2000 it was 3.9 percent. ​ Further, the 1995 to 2000 period saw slightly declining inflation. This evidence would suggest that A increased worker productivity led to a leftward shift of the PP curve. B. increased worker productivity led to a rightward shift of the PP curve. C. the NAIRU theory is vacuous​ (without meaning). D. Both A and C are correct.

D. Both A and C are correct.

Consider the following information for​ Freedonia, a legendary​ country: Saving​ Function: S​ = −400 ​+ 0.25Y Investment​ Function: I​ =200 ​1.) Using the line drawing​ tool, draw the Saving Function and label it​ 'S'. ​2.) Using the line drawing​ tool, draw the Investment Function and label it ​'IA​'. ​3.) Using the point drawing​ tool, identify the initial equilibrium. Label this point​ 'A'. ​4.) Using the line drawing​ tool, draw a new Investment Function when investment increases by 200. Label the new investment function ​'IB​'. ​5.) Using the point drawing​ tool, plot the new equilibrium point. Label this point​ 'B'.

Check screenshot graph savings and investment

​China's Selling Tons of U.S. Debt. Americans​ Couldn't Care Less ​Source: Kruger, Daniel​ "China's Selling Tons of U.S. Debt. Americans​ Couldn't Care​ Less" ​Bloomberg.com, posted​ 10/18/2015. Carefully read the article​, and then answer the following questions. China currently holds​ _________ of U.S. Treasury securities. Domestic funds now hold approximately​ _________ of U.S. Treasury securities. What happens to Treasury yields if there is a decrease in demand for​ Treasuries? A decrease in demand pushes price ___________ . A ____________ priced Treasury means that investors buying that security now will earn a __________ yield.

China currently holds​ _________ of U.S. Treasury securities. 1.4 trillion Domestic funds now hold approximately​ _________ of U.S. Treasury securities. 1.6 trillion What happens to Treasury yields if there is a decrease in demand for​ Treasuries? A decrease in demand pushes price LOWER A LOWER priced Treasury means that investors buying that security now will earn a HIGHER yield.

What is the coupon payment of a bond with a face value of ​$10,000 and an annual interest rate of 8​%?

Coupon payment is equal to ​$800.​ (Enter your response as an​ integer.)

For each of the​ following, determine whether it is an asset or a liability on the accounting books of a bank and indicate why for each case. Demand deposits are a _____________ because it is something the bank OWES Savings deposits areSavings deposits are a _____________ because it is something the bank OWES . Reserves areReserves are an _______________ because it is something the bank OWNS

Demand deposits are a liability because it is something the bank OWES . Savings deposits areSavings deposits are a liability because it is something the bank OWES . Reserves areReserves are an asset because it is something the bank OWNS

Expansionary policies are designed to stimulate the economy by increasing aggregate output. Expansionary fiscal policy and expansionary monetary policy have opposite effects on the interest rate despite having the same goal of increasing aggregate output because expansionary fiscal policy _____________ the demand for money and interest​ rates, whereas expansionary monetary policy ______________ interest rates. ​1.) Using the line drawing tool​, draw and label a new line on the diagram that shows expansionary fiscal policy. ​2.) Using the point drawing tool​, plot and label the new equilibrium interest rate.

Expansionary fiscal policy and expansionary monetary policy have opposite effects on the interest rate despite having the same goal of increasing aggregate output because expansionary fiscal policy INCREASES the demand for money and interest​ rates, whereas expansionary monetary policy DECREASES interest rates. Md shifts up right and intrest rate is increased on the MS line where both intersect

Many workers commit to employment contracts with 1 to 3 year terms. These contracts stipulate​ workers' wages for each year of the contract. Given the uncertainty of future economic​ conditions, why do workers and firms bind themselves in this​ way?

Negotiating wages is costly.

Assume the NAIRU inflation rate is 3 percent. Further assume that the unemployment rate is 2 percent below the NAIRU and stays there for many periods. Using the NAIRU diagram on the​ right, after 3 periods the inflation rate is 6

Start at 3 and move 3 times to find

What institution has formal responsibility for setting U.S. monetary​ policy?

The FOMC federal open market committee

Related to Economics in Practice​: The Simple "Keynesian" Aggregate Supply Curve LOADING... This example describes the simple Keynesian aggregate supply curve as one in which there is a maximum level of output given the constraints of a fixed capital stock and a fixed supply of labor. The presumption is that increases in demand when firms are operating below capacity will result in output increases and no input price or output price changes but that at levels of output above full​ capacity, firms have no choice but to raise prices if demand increases. The aggregate demand​ (AD) and aggregate supply​ (AS) equilibrium may occur at a very flat portion of AS​ curve, when

The aggregate demand​ (AD) and aggregate supply​ (AS) equilibrium may occur at a very flat portion of AS​ curve, when =there exists considerable excess capacity and high unemployment in the economy. The aggregate demand​ (AD) and aggregate supply​ (AS) equilibrium may occur at a very steep portion of AS​ curve, when =the economy is operating at or near full employment and output level is above full capacity. In​ reality, however, the​ short-run aggregate supply curve​ isn't flat and then vertical.​ Rather, it becomes steeper as we move from left to right. This somewhat unique shape of the​ short-run aggregate supply curve is based in part on the fact that =when the economy has excess​ capacity, input prices are slow to adjust whereas output adjusts quickly to increases in aggregate​ demand; as the economy approaches full capacity prices increase at a faster rate than does output.

Glacialand​, the largest country in central​ Antarctica, receives word of an imminent fur seal attack. The news causes expectations about the future to be shaken. As a​ consequence, there is a sharp decline in investment spending plans a. What will be the effects of such an event on the economy of Glacialand assuming no response on the part of the central bank or the​ Treasury, so that the money​ supply, taxes, and government spending all remain​ constant? b. To counter the fall in​ investment, the leader of GlacialandGlacialand calls for a proposal to increase government spending. To finance the​ program, the head of the Exchequer has proposed three alternative​ options: ​(1) Keep taxes constant and finance the expenditures by printing new moneyKeep taxes constant and finance the expenditures by printing new money ​(2) Keep tax revenues constant and borrow the money from the public by issuing new government bondsKeep tax revenues constant and borrow the money from the public by issuing new government bonds ​(3) Finance the expenditures with an equal increase in taxesFinance the expenditures with an equal increase in taxes Consider the three financing options and rank them from most expansionary to least expansionary. The most expansionary policy is option​ __, followed by​ __, and option​ __ would be the least expansionary.

The decrease in investment will reduce aggregate expenditure causing equilibrium​ output/income to decrease in the goods market. A. 1​; 2​; 3

The figure to the right shows an economy resting in equilibrium at its ________________ . Using either the line drawing tool or the​ 3-point curved line drawing tool​, show the short run impact of an increase in planned aggregate expenditures. Properly label this line or curve. Which of the following is likely to occur at the new short run equilibrium​ you've indicated?

The figure to the right shows an economy resting in equilibrium at its potential output AD shifts right . Using either the line drawing tool or the​ 3-point curved line drawing tool​, show the short run impact of an increase in planned aggregate expenditures. Properly label this line or curve. Which of the following is likely to occur at the new short run equilibrium​ you've indicated? =Upward pressure on costs

Federal Reserve policy that involves increasing interest rates is known​ as: Graphically show the impact on interest rates when the Fed sells bonds.

contractionary monetary policy. Federal Reserve policy that involves increasing interest rates is known as contractionary monetary policy. The Fed raises interest rates to slow the economy down or bring inflation in check. Lowering interest rates is expansionary policy since lower interest rates stimulate consumption and investment. Fiscal policy is the​ government's use of taxation and spending to achieve an economic objective. Ms moves left no new Md line needed

Banks borrow not only from the Fed but also from each other. What is the interest rate in this market​ called?

federal funds rate

Economists who hold the classical view of the labor market believe that

fiscal and monetary policy have little or no effect on employment and real GDP.

When considerable overlap occurred between inflation and recession in the last half of the 1970s and early​ 1980s, the Fed responded by

keeping interest rates high.

During​ 2005, the Federal Reserve was tightening monetary policy in an attempt to slow the economy. The Congress passed a substantial cut in the individual income tax at the same time. As a result of these policy changes During the summer of​ 2003, the Congress passed and President George W. Bush signed the third tax cut in three years. Many of the tax cuts took effect in 2005. Suppose that the initial planned aggregate expenditure and interest rate were illustrated by AE 1AE1 with r equals 5 percentr=5 percent. Assuming that the Federal Reserve held the money supply​ constant, in figure​ 1, which aggregate expenditure line and interest rate combination can illustrate the effect on aggregate​ expenditure, GDP and interest rate in​ 2005? In​ 1993, the Congress and the President raised taxes. At the same time the Fed was pursuing an expansionary monetary policy. Suppose that the initial planned aggregate expenditure and interest rate were illustrated by AE 1AE1 with r equals =5 percent. The aggregate expenditure line and interest rate combination in 2005 in figure 1 that could result from this combination of these fiscal and monetary policies would be In 2005, conditions in Iraq led to a sharp drop in consumer confidence and consumption. Suppose that the initial planned aggregate expenditure and interest rate were illustrated by AE 1AE1 with r =5 percent. Suppose that the Fed kept the money supply​ unchanged, then the aggregate expenditure line and interest rate combination that shows the effect on aggregate​ expenditure, GDP and the interest rate in 2005 in figure 1 would be

the rate of interest was expected to increase and the effect on GDP was likely to be ambiguous. . AE 2 with r =6 percent. . AE 3with r =4 percent. AE 5with r=4 percent.

What​ if, at a low level of interest​ rates, the money demand curve became nearly​ horizontal, as in the graph at right. That​ is, with interest rates so​ low, the public would not find it attractive to hold​ bonds; thus, money demand would be very high. Many argue that this was the position of the U.S. economy in 2003. If the Fed decided to expand the money supply in the graph shown at​ right, interest rates

would not change. Horizontal money ​ demand: When the demand for money is virtually horizontal​ (insensitive to interest rate​ changes), changes in the money supply will not influence the interest rate.

It can be argued that minimum wage laws raises the unemployment rate for teenagers as a group. In response to this​ problem, Congress established a​ sub-minimum wage for teenagers. It allows employers to hire teenagers at an opportunity wage of

​$4.25 for up to 90 days.

Since 1970 the Fed has faced a​ "binding situation" during the

​2008-2012 period.

Many workers commit to employment contracts with 1 to 3 year terms. These contracts stipulate​ workers' wages for each year of the contract. Given the uncertainty of future economic​ conditions, why do workers and firms bind themselves in this​ way?

. Negotiating wages is costly.

Federal government consumption expenditures make up about​ ___ of total government expenditures.

28 percent

In an economy where taxes and government spending do not depend on​ income, the tax multiplier is calculated to be −4. The value of the government spending multiplier is

5

Which of the following changes will unambiguously increase consumption expenditure at every level of income and shift the consumption function​ upward?

A reduction in interest rate and expectations of higher income in the future

​Attansio, Guiso, and Jappelli found that Which of the following statements is​ true?

A. people carried more cash once ATMs were introducedpeople carried more cash once ATMs were introduced. B. the higher the interest rate comma the smaller checking account balances people keptthe higher the interest rate, the smaller checking account balances people kept. C. the higher the interest rate comma the less often people visited ATM machinesthe higher the interest rate, the less often people visited ATM machines. D. NONE OF THE ABOVE Which of the following statements is​ true? With a large ATM​ network, people carry less​ cash, since cash does not earn interest.

During 1999 and​ 2000, a debate raged over whether the United States was at or above potential GDP. Some economists feared the economy was operating at a level of output above potential GDP and inflationary pressures were building. They urged the Fed to tighten monetary policy and increase interest rates to slow the economy. Others argued that a worldwide glut of cheap products was causing input prices to be​ lower, keeping prices from rising. a. Those pushing the Fed to act were​ right, and prices start to rise more rapidly in 2000. Figure A on the right shows an economy in an initial​ short-run equilibrium at point A. ​1.) Using the line drawing​ tool, illustrate the impact of the contractionary monetary policy. Properly label this line. ​2.) Using the point drawing​ tool, identify the new equilibrium point and label it​ 'B'. ​Note: Carefully follow the instructions above and only draw the required objects. b. The worldwide glut gets​ worse, and the result is a falling price level​ (deflation) in the United States. Figure B on the right shows an economy in an initial​ short-run equilibrium at point A. ​1.) Using the t​hree-point curved line drawing​ tool, illustrate the impact of the decrease in input prices due to the worldwide glut. Properly label this curve. ​2.) Using the point drawing​ tool, identify the new equilibrium point and label it​ 'B'. ​Note: Carefully follow the instructions above and only draw the required objects.

AD curve shifts down and equillibrium is on new curve b. The worldwide glut gets​ worse, and the result is a falling price level​ (deflation) in the United States. Figure B on the right shows an economy in an initial​ short-run equilibrium at point A. ​1.) Using the t​hree-point curved line drawing​ tool, illustrate the impact of the decrease in input prices due to the worldwide glut. Properly label this curve. ​2.) Using the point drawing​ tool, identify the new equilibrium point and label it​ 'B'. ​Note: Carefully follow the instructions above and only draw the required objects. AS Curve moves left on the AD cruve no new one needed new equilibrium is on in on new AS curve and old AD curve

Use the figure on the right to determine what happens to the equilibrium values of the price level and aggregate output when there is aa decrease in Upper GG with no change in the money supply the money supply. ​1.) Use the line drawing tool to illustrate the impact of the decrease in Upper G. Label the new curve either AD2 or AS2. ​2.) Use the point drawing tool to identify the​ economy's new equilibrium point. According to the​ graph, the​ economy's equilibrium price level will decrease and its equilibrium output level will decrease Use the figure on the right to determine what happens to the equilibrium values of the price level and aggregate output when there is anan increaseincrease in Upper GG with no change in the money supplythe money supply. ​1.) Use the lineline drawing tool to illustrate the impact of the increaseincrease in Upper GG. Label the new curve either AD 2AD2 or AS 2AS2. ​2.) Use the point drawing tool to identify the​ economy's new equilibrium point. .

AD shift left According to the​ graph, the​ economy's equilibrium price level will DECREASE and its equilibrium output level will DECREASE AD shift right According to the​ graph, the​ economy's equilibrium price level will increase and its equilibrium output level will increase .

The figure to the right gives an​ economy's initial aggregate demand​ (AD) curve. Using the line drawing​ tool, show a decrease in aggregate demand. Properly label this line. ​Note: Carefully follow the instructions above and only draw the required object. Which of the following will generate a decrease in aggregate​ demand?

AD shifts down to left A tax increase.

The figure to the right shows an economy experiencing a short run equilibrium at point A. Using the line drawing​ tool, illustrate​ demand-pull inflation. Properly label this line. The magnitude of the inflation initiated by the change in aggregate demand depends upon

AD shifts far right on the AS curve B. the slope of the AS curve.

The figure to the right shows an economy in an initial short run equilibrium. Using the line drawing​ tool, indicate the​ demand-side impact of expansionary fiscal policy. Properly label your new line. ​Note: Carefully follow the instructions above and only draw the required object. Which of the following best describes your​ diagram's depiction of the relative changes in aggregate output and the price​ level?

AD shifts right along AS Aggregate output increased more than the level of prices.

b. ​Figure: 2 on the right shows an economy in an initial​ short-run equilibrium at point A. ​1.) Using the line drawing​ tool, illustrate the impact of an increase in the money supply during a period of high unemployment and excess industrial capacity. Properly label this line. ​2.) Using the point drawing​ tool, identify the new equilibrium point and label it​ 'B'.

AD shifts rights on AS curve still on lower side of AS curve

a. ​Figure: 1 on the right shows an economy in an initial​ short-run equilibrium at point A. ​1.) Using the line drawing​ tool, illustrate the impact of a tax cut holding government purchases constant with the economy operating at near full capacity. Properly label this line. ​2.) Using the point drawing​ tool, identify the new equilibrium point and label it​ 'B'. ​Note: Carefully follow the instructions above and only draw the required objects.

AD shifts up and equilibrium is on this line where intersects AS

Given the following​ event: Consumer and business optimism sharply increases. Using the line drawing tool or three point curved line drawing​ tool, draw the appropriate object in the figure to the right to show the impact on the​ economy's short-run equilibrium price level and equilibrium aggregate output​ (income). Properly label this new line or curve. According to your​ graph, the short run result is that

AD shifts up and right both the price level and aggregate output​ (income) increase.

The figure to the right shows the economy initially in equilibrium at output Y0. Suppose that the price level in the economy increases. Using the line drawing​ tool, show the impact this increase has on the AE curve. Properly label this line AE1. According to your​ graph, the relationship between the price level and the level of aggregate output​ (income) is ______________ .

AE shifts down According to your​ graph, the relationship between the price level and the level of aggregate output​ (income) is NEGATIVE .

The relationship between the price level and aggregate output​ (income) depicted in the figure to the right is known as the aggregate supply curve . The somewhat unique shape of the short run aggregate supply curve is based in part on how firms respond to an increase in aggregate demand. As firms and the economy move closer to full​ capacity, the response of firms is likely to change from

AGGREGATE SUPPLY CURVE . mainly increasing output to mainly increasing prices.

The figure to the right shows the determination of the​ economy's short run equilibrium price level and aggregate output​ (income). Draw a single line or curve​ (either AD or​ AS) such that a new equilibrium occurs with a lower price level and a higher output​ (income). ​NOTE: Shifts in AD require the line drawing tool while the t​hree-point curved line drawing tool is used to shift AS. Properly label your new line or curve. Which of the following events could have caused this particular​ change?

AS shifts below old AS Which of the following events could have caused this particular​ change? A sharp increase in immigration.

c. ​Figure: 3 on the right shows an economy in an initial​ short-run equilibrium at point A. ​1.) Using the three point curved line drawing​ tool, illustrate the impact of an increase in the price of oil caused by a war in the Middle East. Properly label this curve. ​2.) Using the point drawing​ tool, identify the new equilibrium point and label it​ 'B'.

AS shifts left on the old AD curve

Using the th​ree-point curved line drawing​ tool, show how the following event will impact the​ economy's short-run aggregate supply​ (AS) curve. Properly label this curve. ​Event: A substantial increase occurs in the wages paid to workers.

AS shifts to the left up

The figure to the right shows an economy in a​ short-run equilibrium at point A. Using the t​hree-point curved line drawing​ tool, illustrate​ cost-push inflation. Properly label this curve. Which of the following is most likely to cause the cost shock that shifts the AS curve consistent with​ cost-push inflation?

AS shifts up A surge in the price of crude oil.

The figure to the right shows an economy in a​ short-run equilibrium at point A. Using the t​hree-point curved line drawing​ tool, illustrate​ cost-push inflation. Properly label this curve. Which of the following is most likely to cause the cost shock that shifts the AS curve consistent with​ cost-push inflation?

AS shifts up on the AD line moveing left C. A surge in the price of crude oil.

The figure to the right shows the result of an increase in aggregate demand from AD 0AD0 to AD 1AD1. In its new short run equilibrium the economy is resting above its potential output. Because the economy is producing beyond its potential output​ level, input prices and hence production costs are being pushed upward. Using either the line drawing tool or the​ 3-point curved line drawing tool​, illustrate the impact of rising production costs. Properly label your new line or curve. ​Note: Carefully follow the instructions above and only draw the required object. According to your​ figure, the eventual​ long-run impact of the increase in aggregate demand is

AS shifts up over old AS is above potential output higher​ prices, unchanged output.

What End of U.S. Tax Credits Mean for Solar Business ​Source: Werner, Tom​ (interviewed in​ video) "What End of U.S. Tax Credits Mean for Solar​ Business" ​Bloomberg.com, posted​ 11/18/2015. Carefully watch the video​, and then answer the following questions. The expiration of tax credits for solar power will likely result in SLOWER growth for the solar panel industry. Approximately​ _________ of​ California's electricity comes from solar power. Solar panels have fallen in price as more units are produced. This price decline can be attributed​ to:

Approximately​ 30% of​ California's electricity comes from solar power. Solar panels have fallen in price as more units are produced. This price decline can be attributed​ to:Economies of scale

d. Suppose the government increases taxes and cuts government​ spending, and the Fed tries to keep output from falling. As a​ result,

B. the effect on both GDP and prices will be ambiguous.

The Republic of Yuck is a simple economy with no​ government, no​ taxes, and no imports and exports. Yuckers​ (citizens of​ Yuck) are creatures of habit. They have a rule that everyone saves exactly 24 percent of income. Assume that planned investment is fixed and remains at 72 billion Yuck dollars. Expert economists of the Republic of Yuck have estimated the​ following: Real GDP​ (Y): 197 billion Yuck dollars Planned Investment Spending ​(I)​: 72 billion Yuck dollars You are asked by the business editor of the Weird Herald​, the local​ newspaper, to predict the economic events of the next few months. Based on the information given above you predict that the inventories will decrease and output will increase .

Based on the information given above you predict that the inventories will decrease and output will increase .

At the beginning of the year​ 2013, we have the following information for the Republic of​ Nurd: Government​ Spending, G​ = $0 Net​ Taxes, T​ = $0 Planned​ Investment, I​ = ​$25 billion. The citizens of Nurd consume 75 percent of their income and save 25 percent. In other words their MPC​ = 0.75 and MPS​ = 0.25. Thus the consumption and saving function of Nurd are given to​ be: C​ = 0.75Yd and S​ = 0.25Yd​, where disposable​ income, Yd ​= Y−T. Currently the economy of Nurd is in equilibrium. As the leading econometrician of​ Nurd, you have estimated the full employment level of income for the economy to be ​$250 billion. Calculate the adjustment in government​ spending, if​ any, to achieve full employment in Nurd.

Change in G ​= ​$ 37.5 billion. ​

Carefully watch the video​, and then answer the following questions. The​ government's use of taxation and spending policies to achieve a desired economic objective is known as fiscal policy . Changes in taxation or spending that result from deliberate changes in government policy are known as​ _________ fiscal policy. The primary source of government funding​ is:

Changes in taxation or spending that result from deliberate changes in government policy are known as​ discretionary fiscal policy. The primary source of government funding​ is: Tax reciepts

During the 1960s there seemed to be an obvious​ trade-off between inflation and unemployment​ (lower inflation implies higher​ unemployment). ​ However, from the 1970s​ onward, that relationship appeared to breakdown. Which of the following are possible causes of this apparent​ breakdown? A. The AS shifts but the AD does not. B. The AD curve shifts but AS does not. C. Both the AD and AS supply curve shift. D. Both A and C

D. Both A and C

Study the table on the right. Which of the following could explain why the​ long-term rate was higher than the​ short-term rate in 1993 but lower in 1980. A. In​ 1980, most debt holders believed that the inflation rate would decrease in the future. In​ contrast, in​ 1993, inflation was unusually low and debt holders were wary of higher inflation in the future. B. 1980 was an anomaly referred to as an inverted yield curve. It was an anomaly because​ long-term rates are always higher than​ short-term rates. Many economists believe it was the cause of the rather severe 1981 recession. C. Expected future​ short-term rates were falling in 1980 so that the average of the current and expected future​ short-term rates was lower. In​ 1993, the current​ short-term rate was low and expected future​ short-term rates were rising so that the average of these rates was higher. D. Both A and C are correct

D. Both A and C are correct 1980 1993 ​Three-month U.S. government bills 11.39​ % 2.92​ % ​Long-term U.S. government bonds 10.81​ % 6.85​ % Prime rate 15.26​ % 6.00​ %

Some economists argue that the​ "animal spirits" of investors are so important in determining the level of investment in the economy that the interest rates do not matter at all and planned investment is insensitive to changes in interest rate. Using the line drawing​ tool, draw such an investment function. Label this line ​'ID​'.

DRAW Id straight up on 50 in planned investment

Assume that in​ 2013, the following prevails in the Republic of​ Nurd: Government​ Spending, G​ = $0 Net​ Taxes, T​ = $0 Planned​ Investment, I​ = 25. Furthermore it is known that the citizens of Nurd consume 80 percent of their income and save 20 percent. Thus the consumption and saving function of Nurd are given to​ be: C​ = 0.80Yd and S​ =0.20Yd​, where disposable​ income, Yd ​= Y−T. Determine the equilibrium level of income.

Equilibrium Income​ = 125. ​(Enter your response as an​ integer.)

According to sticky wage​ theory, wages are just as likely to be stuck in the upward direction as they are in the downward direction. False One explanation for downwardly sticky wages is that firms enter into​ social, or implicit contracts with workers not to cut wages. True Workers in one industry may be unwilling to accept a pay decrease because they are concerned that their wage will fall relative to workers in other industries. True

FAlse true true

​Fed's Big Three Expected to Reinforce December as Liftoff Option ​Source: Condon, Christopher​ "Fed's Big Three Expected to Reinforce December as Liftoff​ Option" ​Bloomberg.com, posted​ 11/03/2015. Carefully read the article​, and then answer the following questions. The branch of the Fed charged with setting interest rate policy is​ the: The Fed has two​ often-conflicting goals which​ are: The​ Fed's primary tool for stimulating the economy​ is:

Federal Open Market Committee​ (FOMC). price level stability and economic growth. open market operations to lower interest rates.

For each of the​ following, say whether it is an asset on the accounting books of the Federal Reserve or a liability . Federal Reserve notes​ (outstanding)_______ Bank reserves​ (from depository​ institutions)__________ Gold_______ Loans to banks________ Deposits made by the U.S. Treasury_______ U.S. Treasury securities ___________

Federal Reserve notes​ (outstanding) liability Bank reserves​ (from depository​ institutions) liability Gold asset Loans to banks asset Deposits made by the U.S. Treasury liability U.S. Treasury securities assest

When the average income tax rates increase as a result of economic​ expansion, it is known as

Fiscal drag

Can Obama and Congress Agree on a​ Budget? ​Source: Olorinnipa, Toluse​ (commentator in​ video) "Can Obama and Congress Agree on a​ Budget?" ​Bloomberg.com, posted​ 09/08/2015. Carefully watch the video​, and then answer the following questions. Governments typically provide which of these​ services? A. Social safety nets. B. Roads and bridges. C. Military protection. D. All of the above.

Governments typically provide which of these​ services? ALL OF THE ABOVE

In​ 2012, the country of Ruba was suffering from a period of high unemployment. The new​ president, Clang, appointed Laurel Tiedye as his chief economist. Ms. Tiedye and her staff estimated these supply and demand curves for labor from data obtained from the secretary of​ labor, Robert​ Small: QD=100−55W QS=25W−2020 where Q is the quantity of labor​ supplied/demanded in millions of workers and W is the wage rate in​ slugs, the currency of Ruba. ​Currently, the law in Ruba says that no worker shall be paid less than 9 slugs per hour. Estimate the quantity​ supplied, the number​ unemployed, and the unemployment rate. The quantity supplied is 205 million. ​(Enter your response as an​ integer.) The number unemployed is 150 million. ​(Enter your response as an​ integer.) The unemployment rate is 73.17 percent. ​(Enter your response as an​ integer.) President​ Clang, over the objection of Secretary​ Small, has recommended to congress that the law be changed to allow the wage rate to be determined in the market. If such a law was passed and the market adjusted​ quickly, what would happen to total​ employment, the size of the labor​ force, and the unemployment​ rate? The employment would be 80 million. ​(Enter your response as an​ integer.) The size of the labor force would be 80 ​million, and the unemployment rate would be 0 percent. ​(Enter your responses as​ integers.) ​1.) Using the point drawing​ tool, plot the wage and employment level with the minimum wage. Attach the corresponding label. ​2.) Using the point drawing​ tool, plot the wage and employment level when the market is in equilibrium. Attach the corresponding label. Will the Rubanese labor market adjust quickly to such a change in the​ law? Why or why not. The Rubanese economy

Graph will not adjust quickly due toocial contracts.

The relationship between aggregate expenditure and real GDP is best described by

If aggregate expenditure falls short of real​ GDP, inventories will accumulate and real GDP and aggregate income will fall in future.

Which of the following best describes the relationship between aggregate expenditure and real GDP ​?

If aggregate expenditure falls short of real​ GDP, inventories will accumulate and real GDP and aggregate income will fall in future.

​[Related to the Economics in Practice LOADING... in this​ section] The Economics in Practice states that the capital value of Professor​ Serebryakov's estate is not the value for which he could sell the estate if the interest rate on​ "suitable" securities is higher than the average yield from the estate. If the interest rate on​ "suitable" securities rose​, the value of the estate would_______ If investment in the estate was suddenly viewed as being more risky than investment in the​ securities, the value of the estate would ___________ If the securities were suddenly viewed as being less risky than was previously​ thought, the yield on the securities would_____________

If the interest rate on​ "suitable" securities rose​, the value of the estate would fall . If investment in the estate was suddenly viewed as being more risky than investment in the​ securities, the value of the estate would fall . If the securities were suddenly viewed as being less risky than was previously​ thought, the yield on the securities would decrease .

Suppose that in an​ economy, net taxes and government spending are independent of income. It is determined that when government spending decreases by ​$200 ​billion, income falls by ​$1000 billion. In this economy the value of the MPS​ = In this economy the value of the MPC​ =

In this economy the value of the MPS​ =.2 -> to find 200/1000=.2 In this economy the value of the MPC​ = .8

​Normally, people both in the U.S. and from around the world think of​ highly-rated corporate or government bonds as a safe place to put their savings relative to common stocks. Because the stock market had performed so poorly during the​ recession, and because many foreigners turned to the U.S. as a safe place to​ invest, bond sales boomed. If you were a holder of​ high-grade fixed-rate bonds that you purchased a few years earlier when rates were much​ higher, you found yourself with big capital gains. That​ is, as rates went​ lower, the value of previously issued bonds increased. Many investment advisors in late 2010 were telling their clients to avoid bonds because inflation was going to come back. Suppose you bought a​ $10,000 ten-year​ fixed-rate bond issued by the U.S. Treasury in July of 2007 that paid​ 5% interest. In July of​ 2010, new​ seven-year fixed-rate bonds were being sold by the Treasury that paid​ 2.43%. In this​ case, the flow of interest

In this​ case, the flow of interest has​ changed, making the bond worth more if you sell it today. Bond prices fall if people fear inflation is coming because the Fed can be expected to react by raising rates to reduce aggregate demand.

If planned investment is greater than actual investment then,

Inventories decrease and production increases

The relationship between interest rate​ (r) and planned investment​ (I) is given by the following investment function. I​ = 1200minus−40r Determine the value of planned investment when the interest rate is 5 percent​ (r = 5​).

I​ = 1000. ​(Enter your response as an​ integer.)

currency held outside banks ​$440 savings accounts ​$2,100 other near monies ​$1000 ​traveler's checks/ other checkable deposits ​$60 money market accounts ​$1,100 demand deposits ​$700 The table on the right contains an approximate breakdown of the U.S. money supply in September 2001. Use this data to calculate M1 and M2. The main advantage of looking at M2 instead of M1 is that M2 is generally more stable. To​ illustrate, suppose banks raised the interest rate paid on checking​ accounts, while the rate paid on savings accounts remained​ unchanged, resulting in consumers transferring ​$125 billion from savings into their checking accounts. How would the money supply be​ affected?

M1 was ​$ 1200 billion. ​(Enter your response as an​ integer.) M2 was ​$ 5400 billion. ​(Enter your response as an​ integer.) M1 would increase by ​$125 ​billion, but M2 would remain unchanged.

As a measure of the money​ supply, M1 differs from M2 in that

M2 includes M1 plus savings​ accounts, money market​ accounts, and other near monies.

As a measure of the money​ supply, M1 differs from M2 in thatA.

M2 includes M1 plus savings​ accounts, money market​ accounts, and other near monies.

You are given the following data concerning​ Freedonia, a legendary​ country: Consumption​ Function: C​ = 200200 ​+ 0.600.60Y ​Investment: I​ = 300300 Aggregate Expenditure​ Function: AE​ = C​ + I ​Equilibrium: AE​ = Y Find the​ following:

MPC​ = .60. ​(Enter your response rounded to two decimal places.​) MPS​ = .4. ​(Enter your response rounded to two decimal places.​) The level of equilibrium​ income, Y​ = ​$1250. ​(Enter your response as an integer.​) The value of the investment multiplier​ = 2.5. ​(Enter your response rounded to two decimal places.​) The change in the level of equilibrium income if investment increases by ​$10. ΔY ​= ​$25. ​(Enter your response rounded to two decimal places.​) SEE notebook for work

You are given the following data concerning​ Freedonia, a legendary​ country: Consumption​ Function: C​ = 100 ​+ .90Y ​Investment: I​ = 300 Aggregate Expenditure​ Function: AE​ = C​ + I ​Equilibrium: AE​ = Y Find the​ following:

MPC​ = .90. ​(Enter your response rounded to two decimal places.​) MPS​ = .10. ​(Enter your response rounded to two decimal places.​) The level of equilibrium​ income, Y​ = ​$4000. ​(Enter your response as an integer.​) The value of the investment multiplier​ = 10. ​(Enter your response rounded to two decimal places.​) The change in the level of equilibrium income if investment increases by ​$10. ΔY ​= ​$100. ​(Enter your response rounded to two decimal places.​)

Graphically show how a central bank uses a change in the money supply to lower interest rates. ​1.) Using the line drawing​ tool, show how a central bank uses a change in the money supply to lower interest rates. Properly label your curve. ​2.) Using the point drawing tool​, show the new equilibrium. Label your point ​'E2​'. Carefully follow the instructions​ above, and only draw the required objects. Which of these is a common goal of central​ banks? A. Full employment. B. Economic growth. C. Price level stability. D. All of the above.

MS shifts right D ALL OF THE ABOVE

In an economy taxes are​ lump-sum. If MPS​ = 0.40​, calculate the value of the Government Spending Multiplier and the Tax Multiplier. Government Spending Multiplier​ = Tax Multiplier​ =

Multiplier​ = 2.5. ​(Enter your response rounded to one decimal​ place.) Tax Multiplier​ =−1.5. ​(Enter your response rounded to one decimal place and include a minus sign if​ appropria

Sherman Peabody earns a monthly salary of​ $2000, which he receives at the beginning of each month. He spends the entire amount each​ month, at the rate of​ $67 per day.​ (Assume 30 days in a​ month.) The interest rate paid on bonds is 10 percent per month. It costs​ $4 every time Peabody sells a bond. Using the information above compute the​ following: Peabody should sell​ (switch) bonds ___times per​ month, because he can _______________ his net profit by doing so. ​(Enter your response as an​ integer.) The maximum net profit would be ​$ _______. ​(Enter your response as an​ integer.) The optimal average of money holdings is ​$ __________. ​(Enter your response as an​ integer.)

Peabody should sell​ (switch) bonds 4 times per​ month, because he can maximize his net profit by doing so. ​(Enter your response as an​ integer.) The maximum net profit would be ​$ 64. ​(Enter your response as an​ integer.) The optimal average of money holdings is ​$ 200. ​(Enter your response as an​ integer.)

Draw a graph to illustrate the following. a. A Phillips Curve based on the assumption of a vertical​ long-run aggregate supply curve Using the line drawing​ tool, graph a Phillips Curve based on a vertical​ long-run aggregate supply curve in figure 1. Assume​ long-run output corresponds to an unemployment rate of U​ (marked on the​ x-axis). Properly label this curve.

Phil curve is vertical line stright up in middle

b. The effect of a change in inflationary expectations on a recently stable Phillips Curve Using the line drawing​ tool, graph a new Phillips Curve in figure 2 assuming inflationary expectations decreasedecrease. Properly label this curve.

Phil curve shifts below curve

Aggregate saving(S)

S=Y-C

In the Republic of​ Ragu, the currency is the rag. During​ 2012, the Treasury of Ragu sold bonds to finance the Ragu budget deficit. In​ all, the Treasury sold​ 50,000 10-year bonds with a face value of 100 rags each. The total deficit was 5 million rags.​ Further, assume that the Ragu Central Bank reserve requirement was 20 percent and that in the same​ year, the bank bought​ 500,000 rags' worth of outstanding bonds on the open market.​ Finally, assume that all of the Ragu debt is held by either the private sector​ (the public) or the central bank. a. The combined effect of the Treasury sale and the central bank purchase on the total Ragu debt outstanding is a change in overall debt of 5,000,000 rags​ and, in​ particular, the debt held by the private sector increases by 4,500,000 rags. b. The Treasury sale will change the money supply in Ragu by 0 rags. c. Assuming no leakage of reserves out of the banking​ system, the effect of the central bank purchase of bonds on the money supply is a change of 2,500,000 rags.

SEE notes- in notebook

The following consumption function incorporates wealth​ (W) as a determinant of consumption. We have the following information on consumption​ (C) and investment​ (I): C​ = 10​ +0.70Y ​+ 0.03W I​ = 100

See notebook for worked out problem

We have the following information for a country. Consumption​ Function: C​ = 200​ + ​0.8(Yminus−​T) Net​ Taxes: T​ = 125 Planned​ Investment: I​ = 100 Government​ Spending: G​ = 200 The graph of the consumption function is shown as C. ​1.) Using the line drawing​ tool, draw the Aggregate Expenditure line. Label it AE1. ​2.) Using the line drawing tool​, draw the Aggregate Expenditure line after net taxes increase by 125. Label it as AE2.

See screen shot AE1 and AE2 and consumption

Assume there are no taxes. The equation for the consumption function is given to​ be: C​ = 100​+ 0.78​Y, where Y represents aggregate income. Determine the equation for the saving​ function:

S​ = −100 ​+ .22Y. ​(Enter your response for the​ y-intercept as an integer and round your response for the slope to two decimal​ places.)

The FOMC​ (Federal Open Market​ Committee) consists of _____voting members. Seven of the members are ____________________ . _____of the 12 presidents of the Federal Reserve district banks vote on a rotating basis. The president of the NY Federal Reserve Bank _________ gets a vote.

The FOMC​ (Federal Open Market​ Committee) consists of 12voting members. Seven of the members are the Board of Governors . 4 of the 12 presidents of the Federal Reserve district banks vote on a rotating basis. The president of the NY Federal Reserve Bank always gets a vote.

​China's Selling Tons of U.S. Debt. Americans​ Couldn't Care Less ​Source: Kruger, Daniel​ "China's Selling Tons of U.S. Debt. Americans​ Couldn't Care​ Less" ​Bloomberg.com, posted​ 10/18/2015. Carefully read the article​, and then answer the following questions. The U.S funds government deficits​ by: U.S. Treasury securities​ include: The current total debt​ (October 2015) of the U.S. is​ approximately:

The U.S funds government deficits​ by: selling U.S. Treasury U.S. Treasury securities​ include: Treasury bills The current total debt​ (October 2015) of the U.S. is​ approximately:18 trillion

Jane wins ​$150,000 playing the​ lottery, and instead of spending​ it, she deposits it into her checking account at the First Bank of Anywhere. Her bank makes a loan ​(equal to its excess​ reserves) to​ Mary, who uses the money to remodel her home. The remodeling company deposits the money into the Second Bank of Anywhere. The required reserve ratio is 5 percent and each bank initially has no excess reserves . The amount of the loan made by the First Bank equals ​_______ The amount of the remodeling​ company's deposit that Second Bank is required to keep as reserves equals______

The amount of the loan made by the First Bank equals ​142500-> (150000*.05=7500, 150000-7500=142500) The amount of the remodeling​ company's deposit that Second Bank is required to keep as reserves equals 7125 (142500*.05=7125)

Can Obama and Congress Agree on a​ Budget? ​Source: Olorinnipa, Toluse​ (commentator in​ video) "Can Obama and Congress Agree on a​ Budget?" ​Bloomberg.com, posted​ 09/08/2015. Carefully watch the video​, and then answer the following questions. The deadline for passing a new budget for the United States government​ is: Congress will only be in session for______ Several members of Congress are taking uncompromising stances on budget issues since they​ are:

The deadline for passing a new budget for the United States government​ is: sept 30,2015 Congress will only be in session for 10 DAYS Several members of Congress are taking uncompromising stances on budget issues since they​ are: running for president.

Consider the following information for a​ country: Consumption​ Function:C​ = 85 ​+ 0.5Yd Investment​ Function: I​ = 85 Government Spending​: G​ = 150 NetTaxes: T​ =−50 ​+0.25Y Disposable​Income: Yd ​= Y−T ​Equilibrium: Y​ = C​ + I​ + G The level of equilibrium​ income, Y, ​ = ​ The amount of taxes collected by the government at​ equilibrium, T,​ = Consider the following information for a​ country: Consumption​ Function: C​ = 85 ​+0.5Yd Investment​ Function: I​ =85 Government Spending​: G​ = 150 Net​ Taxes: T​ =−50+0.25Y Disposable​ Income: Yd ​= Y−T ​Equilibrium: Y​ = C​ + I​ + G The level of equilibrium​ income, Y, ​ = ​$552. ​(Enter your response rounded to two decimal​ places.) The amount of taxes collected by the government at​ equilibrium, T,​ = ​$88. ​(Enter your response rounded to two decimal​ places.) The budget deficit at​ equilibrium, ​(G−​T), ​= ​62

The level of equilibrium​ income, Y, ​ = ​552 The amount of taxes collected by the government at​ equilibrium, T,​ = ​$88. ​(Enter your response rounded to two decimal​ places.) The budget deficit at​ equilibrium, ​(G−​T), ​= ​62

When the interest rate is very low—well below what would be considered normal—households and firms will expect the rate to rise in the long run. How does this affect the demand for holding money in the​ present?

The money demand curve will be nearly flat but downward sloping on the expectation that bond prices are going to fall

Suppose in the Republic of Madison that the regulation of banking rested with the Madison​ Congress, including the determination of the reserve ratio. The Central Bank of Madison is charged with regulating the money supply by using open market operations. In April​ 2013, the money supply was estimated to be 80 million hurls. At the same​ time, bank reserves were 8.0 million hurls and the reserve requirement was 10 percent. The banking​ industry, being​ "loaned up," lobbied the Congress to cut the reserve ratio. The Congress yielded and cut the reserve requirement to 8 percent. The money supply could potentially _____________ by ________ million hurls. ​(Enter your response rounded to one decimal​ place.) If the central bank decided that the money supply should not be​ increased, it could

The money supply could potentially increase by 20 million hurls. ​(Enter your response rounded to one decimal​ place.) sell government securities to prevent the expansion of the money supply. To increase the money supply the central bank creates additional reserves by lowering the discount​ rate, buying government​ securities, or lowering the required reserve ratio. Change in money supply=(8.4-(0.10*70))*(1/0.10) To increase the money supply​, the central bank creates additional reserves by lowering the discount​ rate, buying government​ securities, or lowering the required reserve ratio. To decrease the money supply​, the central bank creates additional reserves by raising the discount​ rate, selling government​ securities, or raising the required reserve ratio.

Suppose the Treasury of the United States issues bonds and sells them to the public to finance the deficit. What happens to the money supply and​ why?

The money supply remains unchanged because every dollar taken in by the Treasury goes right back into circulation through government spending.

The U.S. money supply (M1) at the beginning of 2000 was​ $1,148 billion broken down as​ follows: $523 billion in​ currency, $8 billion in​ traveler's checks, and​ $616 billion in checking deposits. Suppose the Fed decided to increase the money supply by decreasing the reserve requirement from 11 percent to 10 percent. Assume all banks were initially loaned up​ (had no excess​ reserves) and the quantity of currency and​ traveler's checks held outside of banks did not change. How large a change in the money supply would have resulted from the change in the reserve​ requirement? The money supply will change by ________

The money supply will change by ​$ 61.6 billion. ​(Enter your response rounded to two decimal places and include a minus sign if​ necessary.)

Controlling money supply

To increase the money supply​, the central bank creates additional reserves by lowering the discount​ rate, buying government​ securities, or lowering the required reserve ratio. To decrease the money supply​, the central bank creates additional reserves by raising the discount​ rate, selling government​ securities, or raising the required reserve ratio.

When a government spends more money than it receives in revenues it is said to run a budget ________

When a government spends more money than it receives in revenues it is said to run a budget DEFICIT

Consider the following information on the levels of​ income, consumption and planned investment for a​ country:- Gives aggregate output, consumption expenditute

Y=C+I+G S=Y-C

The Republic of Yuck is a simple economy with no​ government, no​ taxes, and no imports and exports. Yuckers​ (citizens of​ Yuck) are creatures of habit. They have a rule that everyone saves exactly 20 percent of income. Assume that planned investment is fixed and remains at 175 billion Yuck dollars. Further assume that autonomous consumption​ (independent of​ Y) is zero such that consumption​ (C) is MPC ×Y. Expert economists of the Republic of Yuck have estimated the​ following: RealGNP(Y) 656 billion Yuck dollars Planned Investment Spending​ (I)​ :175 billion Yuck dollars

You are asked by the business editor of the Weird Herald​, the local​ newspaper, to predict the economic events of the next few months. Based on the information given above you predict that the inventories will DECREASE and real GNP will INCREASE . Things will stop changing when SAVINGS EQUALS INVESTMENT . The Republic of​ Yuck's economy will reach equilibrium when its Real GNP​ = 875 billion Yuck dollars. ​(Enter your response as an​ integer.)

The government of Lumpland is enjoying a fat budget surplus with government expenditure G​ = 150 and taxes T​ =200. Both G and T are independent of income. The consumption function of Lumpland has been estimated to be C​ = 150 ​+ 0.90​(Y−​T). Suppose further that investment spending is fixed at I​ = 100. Calculate the equilibrium level of GDP in Lumpland. Solve for equilibrium levels of​ Y, C, and S. ​Now, suppose that the Republican Congress of Lumpland succeeds in reducing taxes by 30 billion to a new fixed level of 170. Determine the value of the tax multiplier.

Y​ = 2200. ​(Enter your response rounded to two decimal​ places.) C​ = 1950. ​(Enter your response rounded to two decimal​ places.) S​ = 50. ​(Enter your response rounded to two decimal​ places.) Tax Multiplier​ = negative −9. ​(Enter your response rounded to two decimal places and include a minus sign if​ appropriate.) -(MPC/MPS) is the Tax multiplier equation Solve for equilibrium levels of​ Y, C, and S after the tax cut and check to ensure that the multiplier worked. Y​ = 2470. ​(Enter your response rounded to two decimal​ places.) C​ = 2220. ​(Enter your response rounded to two decimal​ places.) S​ = 80. ​(Enter your response rounded to two decimal​ places.)

Consider the following model of a very simple​ economy: Household saving and investment behavior depend in part on wealth​ (accumulated savings and​ inheritance). In the late​ 1990's many were concerned with very large increases in stock values​ (a form of​ wealth) and its possible effect on saving and investment. The following consumption function incorporates wealth​ (W) as a determinant of consumption. We have the following information on Consumption​ (C) and Investment​ (I): C​ = 15 ​+ 0.60Y ​+ 0.04W I​ =200 W​ = 1,000​, We are ignoring the fact that saving adds to the stock of wealth. Calculate the values of equilibrium​ Y, C and S. ​(Enter your responses as​ integers.) Suppose that wealth increases by 50​%. Calculate the values of equilibrium​ Y, C and S. ​(Enter your responses as​ integers.)

Y​ = ​$638​; C​ = ​$438​; S​ = ​$200. New Y​ = ​$688​; New C​ = ​$488​; New S​ = ​$200. As a result of the wealth​ accumulation, GDP INCREASES .

Suppose the economy is initially operating well below capacity. In this​ case, an expansionary macroeconomic policy will result in

a small price increase relative to the output increase.

An organization of workers with a legal right to bargain with employers with regard to wages and working conditions is known​ as:

a union

You are given the following data concerning​ Freedonia, a legendary​ country: Consumption​ Function: C​ = 200 ​+ 0.6Y ​Investment: I​ = 200 Aggregate Expenditure​ Function: AE​ = C​ + I ​Equilibrium: AE​ = Y Calculate the​ following:

a. The level of equilibrium​ income, Y​ = 1000. ​(Enter your response as an​ integer.) b. The value of the investment multiplier​ = 2.5. ​(Enter your response rounded to one decimal​ place.) c. The change in the level of equilibrium income if investment increases by 10. Upper Delta Upper ΔY​= 25. ​(Enter your response as an​ integer.)(10*2.5=25)

If the government increases purchases to stimulate the economy

aggregate demand increases

a tax increase

always decreases equilibrium outcome

Aggregate output is

always equal to aggregate income

Which of the following is the best explanation of the shape of the AD​ curve? The aggregate demand curve slopes downward because

an increase in the price level causes the demand for money to​ rise, driving up the interest rate and discouraging​ investment, which causes aggregate demand to fall.

In the short​ run, an increase in AD can sometimes cause output to rise without raising prices because

at low levels of​ output, firms can have excess capacities which do not raise marginal costs as they begin to be utilized.

Using money as a medium of exchange is more efficient than barter because

barter requires a double coincidence of wants.

Two​ countries, A and B have the same MPC out of disposable income (Y-T) . In each country the tax obligations are based on fixed tax​ rates, so that T​ = t times ×​Y, where t is the proportional tax rate. The tax rate is lower in country A than in country B. The graph shows two consumption​ functions, C1 and C2. Based on the information given​ above, country​ B's consumption function must be C1 .

because B will be lower in consumption than A taxes cause decrease in consuptions because portion of income is taken from consumption and saving so lower line is B

Expansionary monetary policy has people concerned about future​ inflation, which is causes an increase in expected inflation. This will

cause the Phillips Curve to shift right.

You are given the following data concerning​ Freedonia, a legendary​ country: Consumption​ Function: C​ = 250 ​+0.75Y ​Investment: I​ = 150 Aggregate Expenditure​ Function: AE​ = C​ + I ​Equilibrium: AE​ = Y Complete the​ following: ​1.) Using the line drawing​ tool, draw the Consumption Function. Label this line​ 'C'. ​2.) Using the line drawing​ tool, draw the Aggregate Expenditure Function. Label this line​ 'AE'. ​3.) Using the point drawing​ tool, identify the equilibrium level of income.

check screen shot Graph Consumption and AE add investment amount to the number in C in this case 250=250+150->C shifts to 400 is parallel to C function

The following information is available for a small​ country: Saving Function​ : S​ = minus−200 ​+ 0.5Y Investment​ Function: I​ = 200 ​1.) Using the line drawing​ tool, draw the Saving Function and label it S. ​2.) Using the line drawing​ tool, draw the Investment Function and label it IA. ​3.) Using the point drawing​ tool, identify the initial equilibrium. Label this point A. ​4.) Using the line drawing​ tool, draw a new Investment Function when Investment increases by 100. Label the new investment function IB. ​5.) Using the point drawing​ tool, plot the new equilibrium point. Label this point B.

check screen shot labeled savings function Remember investment looks like X=200 a straight line across where Y equals all values at X=200

Which of the following best describe the functions of the Federal Reserve ​?

clearing interbank​ payments, regulating the banking​ system, and managing the​ nation's foreign exchange reserves

Assume the classical view of the labor market. An auto worker is laid off. After looking for a job for some time he is offered a lower paying​ job, but does not take it because he believes he can do better. The worker is

considered​ unemployed, but the labor market is working properly.

During the third quarter of​ 1997, Japanese GDP was falling at an annual rate of over 11 percent. Many blame the big increase in​ Japan's taxes in the spring of​ 1997, which was designed to balance the budget. ​Usually, if taxes are​ increased,

disposable income​ declines, consumption​ falls, planned aggregate expenditure​ falls, and aggregate income​ (output) declines.

During an expansion​, interest rates may riserise even if the Fed takes no action to cut the money supply. Using the line drawing​ tool, draw and label a new line that illustrates this situation. ​Note: Carefully follow the instructions​ above, and only draw the

draw md line only supply does not change

Empirical studies of labor markets have identified several benefits firms receive from paying workers more than the​ market-clearing wage. These studies tend to support the

efficiency wage theory.

The problem of solving global warming and the problem of attaining adequate household saving are​ similar, because both

emphasize the​ trade-off between present and future.

Suppose government spending and lump sum taxes are both reduced by ​$3030 billion. As a​ result, GDP will

fall by ​$30 billion.

They have also estimated that Yukkers consume 7575 percent of their income and save 2525 percent. You are asked by the business editor of the Yuk Gazette to predict the events of the next few months by using the above estimates. Based on the above​ estimates, you predict that if the government of Yuk makes no​ changes, income will If no changes were​ made, the economy of Yuk will settle at

fall since aggregate expenditure is less than output/income 700 billion yukks

During periods of budget surpluses​ (when Gless than<​T), government debt

falls

During the late 1970s and early 1980s the Fed used monetary policy primarily to

fight inflation.

The multiplier is

finite because a portion of income is saved.

According to advocates of the​ long-run vertical Phillips​ curve, the natural rate of unemployment is determined by

frictional and structural unemployment.

If planned investment increases by ​$200​, the change in equilibrium output will be greater than ​$200.

greater than ​$200.

As shown in the diagram to the​ right, the​ short-run aggregate supply curve​ (AS) is​ upward-sloping. This positive slope is explained in part by the fact that

in the​ short-run, input priceslong dash—particularly wage rateslong dash—are slower to adjust to increasing aggregate demand than are output prices.

What action could the central bank take to counteract the affects of the increase in​ taxes? The central bank could​ _______ the money​ supply, which would​ _______ interest rates and​ _______ investment.

increase; decrease; stimulate

If MPC increases​, the value of the investment multiplier

increases

An increase in planned investment will increase equilibrium income of those working on that investment​ project, thereby

increasing their​ consumption, and creating more income and more spending multiple times over and over.

The Phillips Curve models the relationship between​ __________________________. It asserts that these variables are​ ________________ correlated.

inflation and​ unemployment; negatively

During a recession ​,

investment may not respond positively to lower interest rates since low demand for goods leads to low capital utilization and low investment. Your answer is correct.B.

In the first few chapters of this​ book, we introduced the notion of supply and demand. One of the first things we did was to derive the relationship between the price of a product and the quantity demanded per time period by an individual household. Now we have derived what is called the aggregate demand curve. The two look the same and both seem to have a negative​ slope, but the logic is completely different. The negative slope of the aggregate demand curve

is due to a higher price level raising interest rates comma reducing investment and aggregate output

Assume the classical view of the labor market. During a​ recession,

labor demand will​ decrease, the real wage will​ fall, and there will be no unemployment.

The figure to the right contains a point indicating the​ economy's initial price and aggregate output ​(P 0,Y0​) combination. Suppose that the price level rises such that P1​ > P0. ​1.) Using the point drawing​ tool, identify a potential location for the​ economy's new price and aggregate output ​(Upper P 1P1​,Upper Y 1Y1​) combination. Label this point B. ​2.) Using the line drawing​ tool, connect these points and properly label this line.

new point is on demand curve b IS to the left of and above A

The Republic of Yuck is a simple country with no​ government, no taxes and no imports or exports. Everyone saves exactly 22 percent of income. Economists have estimated that the Real GDP​ (Y) for Yuck is 192 billion Yuck dollars. Planned investment is 67 billion Yuck dollars. Based on the data you determine that in Yuck the level of real GDP is

not in equilibrium

The economy of Mayberry is currently in equilibrium at point Upper AA on the graph at right. Prince Barney of Mayberry has decided that he wants the economy to​ grow, and has ordered the Royal Central Bank of Mayberry to print more currency so banks can expand their loans to stimulate growth. Move the cursor on the graph at right to the new short minus runshort−run equilibrium point.

point A moves along AD to point B

The economy is beginning to slip into a recession.​ Further, data indicate that inflation is low. The Fed will most likely respond to this state of the economy by

purchasing government securities to lower the interest rate.

The demand for money in a country is given by Upper M Superscript dMd ​= ​10,000minus−​10,000r ​+ P times •Y where Upper M Superscript dMd is money demand in​ dollars, r is the interest rate​ (a 10 percent interest rate means r​ = 0.1), and P times •Y is national income. Assume P•Y is initially​ 7,500, and the money supply ​(Ms​) is set by the central bank at​ $15,000. Suppose you are asked to find the equilibrium interest rate. How would you find​ it? First you need to know what determines the interest rate. It is the point at which the quantity of money demanded equals the quantity of money supplied. This can be solved for algebraically by setting the equation for money demand equal to money​ supply: Upper M Superscript dMd ​= ​10,000minus−​10,000r ​+ P times •Y​ = Upper M Superscript sMs Now substitute in for any known values and solve for the interest rate​ (r): ​10,000minus−​10,000r ​+ 7,500​ = 15,000 minus−​10,000r ​= minus−​2,500 r​ = 2,500/10,000

r=.25 or 25%

Suppose planned investment is completely insensitive to changes in the interest rate and also consumption does not depend on the interest rate. If the interest rate is​ reduced, planned aggregate expenditure

remains unchanged

The derivation of an​ economy's aggregate demand (AD) curve

requires knowledge regarding the interaction between the goods market and the money market.

According to the classical view of the labor​ market, if there is an excess supply of​ labor,

some workers will work for a lower wage and others will exit the labor market.

Suppose that planned investment is fixed in an economy. Now if all individuals attempt to save​ more,

the aggregate saving function shifts​ up, equilibrium income​ decreases, but aggregate saving remains the same.

In order to expand the supply of money in Japan in​ 2009, the head of the Central Bank of Japan should This action

the head of the Central Bank of Japan should lower the discount rate This action increases credit availability and raises the money supply

if there is excess demand in the money​ market,

the interest rate will increase until the quantity of money demanded is equal to the quantity of money supplied.

During​ 2003, we began to stop worrying that inflation was a problem. Instead we began to worry about​ deflation, a decline in the price level. Assume that the Fed decided to hold the money supply constant. What impact would deflation have on interest​ rates?

the money demand curve would shift down and to the left​ (decrease in​ demand) and interest rates would decline.

If the FOMC orders the open market desk to sell government​ securities,

the money supply will decrease​, and the interest rate will increase.

If the FOMC orders the open market desk to purchase government​ securities,

the money supply will increase​, and the interest rate will decrease

As the interest rate​ rises, the

the optimal amount of bond holdings increase

The term​ "privately held federal​ debt" refers to

the part of the federal debt that is held by private individuals and organizations.

Two​ countries, A and B​, both are currently in recession. The values of the MPS for A and B are 0.1 and 0.5 respectively. The governments of both countries are planning to boost income through an expansionary policy of a tax cut of​ $1 billion. The policy of tax cut

will be less effective in country B than in country A since the value of the tax multiplier is lower in country B.

Use the figure on the right to determine what happens to the equilibrium values of the interest rate and output when there is an increase in P with no change in government spending government spending. ​1.) Use either the​ 3-point curve to shift the IS curve or the line drawing tool to shift the FR​ curve, as​ appropriate, to illustrate the impact of the increase in P. Properly label your curve. ​2.) Use the point drawing tool to identify the​ economy's new equilibrium point. Carefully follow the instructions above and only draw the required objects. According to the​ graph, the equilibrium interest rate will __________ and the equilibrium output level will __________ .

​1.) Use either the​ 3-point curve to shift the IS curve or the line drawing tool to shift the FR​ curve, as​ appropriate, to illustrate the impact of the increase in P. Properly label your curve. fed rule cure shift up on the IS curve no new IS curve needed ​2.) Use the point drawing tool to identify the​ economy's new equilibrium point. Carefully follow the instructions above and only draw the required objects. According to the​ graph, the equilibrium interest rate will INCREASE and the equilibrium output level will DECREASE .

Given the information in the​ table, what is the unemployment​ rate? Catagory Number of people​ (millions) Less than 16 years old 40 ​Full-time workers 135 ​Full-time military 1.2 ​Part-time workers 20 Institutionalized 14.8 Looking for work 11.5 Retired 41.5

​6.9%

Assume that in​ 2013, the following prevails in the Republic of​ Nurd: Government​ Spending, G​ = $0 Net​ Taxes, T​ = $0 Planned​ Investment, I​ = 25 ​Income, Y​ = 200 It is also known that the households of Nurd consume 75 percent of their income and save 25 percent of their​ income, i.e., MPC​ = 0.75 and MPS​ = 0.25. Thus the consumption and saving function are given​ by: C​ = 0.75Yd and S​ = 0.25Yd where disposable​ income, Yd ​= Y−T. At the current level of​ income, Y​ =200​,

​Leakages, S​ + T exceed​ injections, I​ + G and income will fall in coming months.

During the third quarter of​ 1997, Japanese GDP was falling at an annual rate of over 11 percent. Many blamed the big increase in​ Japan's taxes in the spring of​ 1997, which was designed to balance the budget. How could an increase in taxes with the economy growing slowly precipitate a​ recession? When taxes​ increase, disposable income will​ _______. As disposable income​ _______, it causes consumption to​ ______ which​ _______ output/income.

​fall; decreases;​ decline; reduces

The curve displayed in the figure to the right is known as the​ economy's The level of aggregate output ​(Upper Y 0Y0​) where the curve at right is drawn is called

​long-run aggregate supply. potential output or potential GDP.

In an​ economy, when net taxes decrease by​ $200 billion, real GDP increases by ​$600600 billion. The value of the MPC in this economy is

.75

The structural deficit

remains the same at full employment

and aggregate income equals the

total income received by all the factors of production during a time period

Aggregate output is equal to the

total quantity of goods and services produced in an economy during a time period

In an​ economy, government spending​ (G) and taxes​ (T) are independent of income. The value of MPC is known to be 0.80. If government spending increases by ​$20 ​billion, the amount by which taxes must be adjusted so that income or output​ (Y) does not​ change, to curb possible inflationary​ pressure, is:

ΔT ​= 25