Macro exam 2

Which group is responsible for the policy decision of changing the money supply?

Federal Open Market Committee

recognition lag

When a recession starts we don't know it immediately

Unemployment compensation is

an automatic stabilizer because it falls as income increases, slowing an economic expansion.

If government finances fiscal policy through additional borrowing, it could affect the loanable funds market by causing

an increase in the demand and an increase in the quantity supplied for loanable funds.

Marginal Propensity to Consume (MPC)

change in consumption/change in income

Marginal Propensity to Save (MPS)

change in savings/change in income

NX (international trade)

changes in foreign income changes in exchange rates

I (investment)

changes in interest rates changes in investor confidence changes in quantity of money

C (consumption)

changes in wealth changes in consumer confidence changes in taxes

G (government spending)

changes through government

To keep high inflation from eroding the value of money, monetary authorities in the United States

control the supply of money in the economy.

fiscal policy is

countercyclical

In the diagram, Qf is the full-employment output. If the economy's current aggregate demand curve is AD0, it would be appropriate for the government to

increase government purchases or reduce taxes.

3 lags of fiscal policy

recognition lag, legislative lag, implementation lag

The time that elapses between the beginning of a recession or an inflationary episode and the identification of the macroeconomic problem is referred to as a(n)

recognition lag.

implementation lag

the decided-upon policy is not immediately effective

nominal variables

variables measured in monetary units

real variables

variables measured in numerical units

tax multiplier formula

-MPC/(1-MPC)

expenditure multiplier formula

1/(1-MPC)

Luigi is willing to lend Klaus $5,000 for one year at a nominal rate of interest of 7 percent. Both Luigi and Klause expect the rate of inflation to be 2 percent in the next year. If the actual rate of inflation over the year was 1 percent, what is the real return did Luigi receive?

6 percent

MPC+MPS=

=1

You are given the following information about aggregate demand at the existing price level for an economy: (1) consumption = $500 billion, (2) investment = $50 billion, (3) government purchases = $100 billion, and (4) net exports = $20 billion. If the full-employment level of GDP for this economy is $620 billion, then what combination of actions would be most consistent with closing the GDP-gap here?

A decrease in government purchases and an increase in taxes

A decrease in business taxes will tend to

increase aggregate supply.

You are given the following information about aggregate demand at the existing price level for an economy: (1) consumption = $400 billion, (2) investment = $40 billion, (3) government purchases = $90 billion, and (4) net exports = $25 billion. If the full-employment level of GDP for this economy is $600 billion, then what combination of actions would be most consistent with closing the GDP-gap here?

An increase in government purchases and a decrease in taxes

expansionary vs. contractionary fiscal policy

Exp: during recession increases inflation debt increases increase G(overnment spending) decrease T(axes) Con: during boom decreases inflation debt decreases decrease G increase T

The economy experiences an increase in the price level and a decrease in real domestic output. Which of the following is a likely explanation?

Input prices have increased.

Assume that the full-employment level of output is $1,000 and the price level associated with full-employment output is 100. Also assume that the economy's current level of output is $1,100 and at the price level of 100 current aggregate demand is $1,200. If the government moves the economy back to the full-employment level of output by increasing taxes by $50, then the expenditures multiplier equals

Move the economy from point B towards point A.

𝑃𝑟𝑖𝑐𝑒 𝐿𝑒𝑣𝑒𝑙=?

Price Level = Weighted Average Prices

AD Curve

The AD curve shows the relationship between the total amount of goods and services demanded (or aggregate expenditure) and the overall price level At a lower price level, the amount of goods and services demanded increases There is a negative relationship between the price level and aggregate demand

money illusion

The idea that people focus only on the nominal value of their wealth, not the real value(adjusting for inflation)

Real GDP formula

Y = C + I + G + NX

What function is money serving when you deposit it in a savings account?

a store of value

The foreign purchases, interest rate, and real-balances effects explain why the

aggregate demand curve is downward-sloping.

If the dollar appreciates in value relative to foreign currencies, aggregate demand

decreases because net exports decrease.

When national income in other nations decreases, aggregate demand in our economy

decreases because our exports will decrease.

required reserves=

deposits x reserve requirement (rr)

Monetarist View

fluctuations driven by changes in money supply, steady rate of M growth, no need for intervention

real business cycle theory

fluctuations driven by real changes/events (technology)

The lag between the time that the need for fiscal action is recognized and the time action is actually taken is referred to as the

legislative lag.

New Classical

markets are perfectly competitive we adjust to new equilibrium

MV=PY

money supply, velocity of money = price level, real gdp

New Keynesian

monopolistic competition, sticky wages, economy does not adjust quickly

If the market for investment is initially in equilibrium at point A, but then implementation of fiscal policy causes crowding out to occur, the equilibrium in the market will likely

move toward point B.

Contractionary fiscal policy tends to ____________ consumption because it may reduce ____________

reduce; disposable income.

Total Reserves=

required reserves + excess reserves

If, in the market for money, the quantity of money demanded exceeds the money supply, the interest rate will

rise, causing households and businesses to hold less money.

Suppose that oil prices increase sharply while the rate of growth in labor productivity declines. The combination of these two factors should

shift the short-run aggregate supply curve to the left.

When an economy simultaneously experiences both rising unemployment (a stagnating economy) and rising prices (inflation).

stagflation

A decrease in labor costs will cause aggregate

supply to increase.

If the economy falls into a recession, automatic stabilizers will cause

tax receipts to fall and government spending to rise.

Which of the following factors does not explain a movement along the AD curve? the expenditure multiplier effect the real-balances effect the interest-rate effect the foreign purchases effect

the expenditure multiplier effect

legislative lag

the government cannot quickly determine the appropriate policy

Which of the following serves as an automatic stabilizer in the economy?

the progressive income tax