Macro Exam 2
Which shifts FE to the left
A decrease in the capital stock
Which will shift the AD curve up and to the right?
An increase in consumer confidence
Which of the following changes shifts SRAS up
An increase in firms costs
Money supply is $6m, currency held by nonbank public is $2m, reserve-deposit is .1, monetary base is
$2.4m
The money supply is $10m, currency held by the nonbank public is $2m, and the reserve deposit ratio is .2, bank deposits are equal to
$8m
Assume the currency-deposit ratio is .5. The Federal Reserve carries out open-market operations, purchasing $1m worth of bonds from banks. Increasing money supply by $2m, what is the reserve-deposit ratio?
.25
Vault cash is $8m, deposits are $2m, monetary base is $40m, bank deposits are $90m, money multiplier equals
3.0
AD, LRAS, and SRAS show relationship between
Aggregate price level and output
You want to invest in a firm whose profits show small fluctuations throughout the business cycle. What should you incest in?
A corporation that depends heavily on consumer nondurables
In classical IS-LM analysis, the effects of a decline in desired investment include
A decline in the real interest rate
Suppose the intersection of the IS and LM curves is to the right of the FE line. What would most likely eliminate a disequilibrium among the asset, labor, and goods markets?
A rise in the price level, the LM curve up and to the left
An increase in consumer spending caused by an increase consumer confidence would cause
AD curve to shift up and to the right
Three components of AD/AS model
AD, SRAS, LRAS
Friedman-Phelps analysis shows that a negative relationship between inflation and unemployment holds
As long as expected inflation rate and the natural rate of unemployment are approximately constant
The Lucas Critique is an objection to the assumption that
Historical relationships between macroeconomic variables will continue to hold after new policies are in place
A decrease in money supply would cause IS curve to ____ and the LM curve to ____
Be unchanged; shift up and to the left
With fixed interest rates, unanticipated deflation hurt ___ because ___
Borrowers; they repay the loan in more valuable dollars
Classic and Keynesian economists agree that policy makers
Cannot keep unemployment below natural by running high inflation rates
If money is neutral, increase in money supply would
Cause increase in nominal wages
What is not a policy implemented by the Fed
Changing federal government budget deficit
Variable that moves the same as aggregate economy
Coincident Variable
Degree to which country believes central bank
Credibility
People increase labor supply in response to increase in government purchases because
Current or future taxes will increase, making them financially worse off
Most likely to cause recession?
Decrease in money supply
In an economy where most firms are monopolistically competitive, firms would produce ____ products and have a ____ share
Differentiated; large
Increase of effective tax on capital makers IS curve ____ and LM curve ____
Down to the left; unchanged
Which variable could not be used as leading economic indicator
Employment
Difference in monetary and fiscal policy
Expansionary monetary policy would put economy at a lower interest rate than expansionary fiscal policy
Unemployment rises in recession due to an increase in ____ unemployment, not ____ unemployment
Frictional and structural; cyclical
The widespread decline in the volatility of many macroeconomic variables after 1984 led economists to term this period the
Great Moderation
Suppose the government decided to tighten monetary policy and decrease government expenditures. IN SR Keynesian models, the effect of these policies would be to ____ real interest rate and ____ the level of output
Have an ambiguous effect on; decrease
Tight monetary policy and easy fiscal policy lead to
High real interest rates
Decline in oil prices leads to ____ output and ____ interest rate
Higher; lower
What shifts FE to the right?
Increase in capital stock
Which causes SRAS curve to shift up?
Increase in firms costs
The Fed announced that it plans to lower the rate of monetary growth from 10% to 2% per year. You would expect this announcement to directly
Increase money demand, shifting LM curve up and to the left
In the Keynesian model, suppose the Fed sets a target for the money supply. If the IS curve shifts to the left, and the Fed wants to keep output unchanged, what should the Fed do?
Increase money supply
In the Keynesian model, effect of decrease in tax rate on capital would cause ____ in interest rate and ____ in output in SR
Increase; increase
Suppose the Federal Reserve wanted to reduce the money supply without using open-market operations. It could try to get the public to ____ their currency-deposit ratio and ____ banks reserve requirements.
Increase; raise
During bank crisis, money supply would shrink by the greatest amount if the public ____ increased currency-deposit ratio and if banks ____ reserve-deposit ratio
Increased; increased
Firm's high menu cost cause
Price stickiness
A change that increases real money supply relative to real money demand causes
LM curve to shift down and to the right
Because of price stickiness, decline in investment will not cause
LM curve to shift down and to the right in the short run
When plotted with aggregate price level on y-axis and output on x-axis, which curve is vertical
LRAS
The idea that firms retain some workers in a recession, whom they would otherwise lay off, to avoid the costs of hiring and training is called
Labor hoarding
Variable that movies in advance of aggregate economy?
Leading variable
Easy monetary policy and tight fiscal policy leads to
Low real interest rates
What does the Fed rely on as intermediate target?
M2
In the Keynesian model in the long run, an increase in money supply will raise
The price level but not the level of output
Theory that says firms are slow to change price because there are costs of changing price
Menu cost theory
Keynesians believe in the SR
Money neutrality does not exist and prices do not adjust rapidly
Zero lower bounds mean
Nominal interest rate cannot fall below zero
Which of the following is true?
Nominal interest rate is pro cyclical and real interest rate is acyclical
What would the Federal Reserve do to change nations money supply
Open-market operations
Expected inflation is 3% because the Fed is up 3%, the Fed actually goes up 5% what happens to output and price
Output is above full employment Price increase by more than 3%
When Fed alters its assets what is it called?
Quantitative easing
Recession caused by decline in aggregate demand, increase in money supply would
Rase aggregate demand, returning country to FE
Decrease in money supply causes real interest rate to ____ and the price level to ____
Remain unchanged; fall
An increase in money supply causes the real interest rate to ____ and the price level to ____ in general equilibrium
Remain unchanged; rise
What is procyclical and leads the business cycle?
Residential investment
Decrease in taxes causes real interest rate to ____ and price level to ____
Rise; rise
Natural rate of unemployment in the US generally ____ from 1960 to 1980 and ____ from 1980 to 2000
Rose; fell
If producers have imperfect information about the general price level sometimes misinterpret changes in the general price level as changes in relative prices, then
SRAS slopes upwards
If expected inflation rate is unchanged, a rise in nominal unemployment would
Shift SR and LR Phillips curves to the right
Decrease in wealth would cause IS curve to
Shift down and to the left
A decrease in the effective tax rate on capital would cause the IS curve to
Shift up and to the right
According to misperceptions theory, after an unanticipated increase in money supply has occurred, SRAS must ____ to restore general equilibrium, as it does so, price level will ____
Shift upward; rise
A decline in the stock market, which makes consumers, poorer, would cause
The AD curve to shift to the left
What adjusts to restore general equilibrium after a shock to the economy?
The LM curve
Most common supply shock
The Solow Residual
The sacrifice ratio is
The amount of output lost when the inflation rate is reduced by one percentage point
The IS curve will shift down and to the left when
The expected future marginal product of capital declines
Changes in reserve requirements directly and immediately
The money multiplier
Which of the following statements would Milton Friedman agree with concerning the conduct of monetary policy?
There are long and variable lags between monetary policy actions and their results.
According to the efficiency wage model, during a recession, firms will not reduce real wages because
This would reduce worker effort and productivity
Cost of unanticipated inflation
Transfers wealth from lenders to borrowers
Peaks and Troughs in business cycle are known as
Turning points
If money supply falls by 10% output is ____ and price levels ____
Unchanged; falls
A bank run is
a large scale, panicky withdrawal of deposits from a bank
High powered money consists of
bank reserve plus currency held by nonpublic bank
Industries that are extremely sensitive to the business cycle are the
capital goods and durable goods
An economic variable that movies the opposite direction as aggregate economic activity is
countercyclical
Main determinant of how quickly expected inflation adjusts to change in monetary policy is
credibility of central bank
The likely effect of introducing an increased number of automatic teller machines is to
decrease money demand, shifting LM down and to the right
Keynesians say SR Phillips curve ____ represent usable tradeoff for policy makers because ____
does; prices are sticky
Increase in effective tax rate on capital causes interest rate to ____ and price level to ____
fall; fall
Keynesians believe in a recession government should
increase money supply
Keynesians think the short run increase in money supply
increases output, decrease in real interest rate
Classic economists think that supply shocks are ____ than demand shocks and government intervention is ____
more important; usually unwarranted
Friedman would eliminate the destabilizing effect of the Federal Reserve's monetary policy by
requiring that the Federal Reserve choose a monetary aggregate and increase it at a fixed % each year
A decrease in wealth would cause is IS curve to
shift down and to the left
The distinguishing feature that determines whether an analysis is classical or Keynesian is
speed of price adjustment
LR increase of consumer spending would cause output to ____ and price level to ____
stay constant; rise
The AD curve shows the combinations of output and the price level that put the economy on
the IS curve and LM curve
SRAS is greater than LRAS in the misperceptions theory if
the actual price level is greater than the expected price level
A difficulty faced by policymakers who wish to use the unemployment rate as a guide to whether the economy is weak or strong is that
the natural rate of unemployment is hard to measure
Keynesian economists think general equilibrium is not attained quickly because
the price level adjusts slowly
When actual inflation is greater than expected inflation
there are transfers from lenders to borrowers
No stable relationship between inflation and unemployment but should be between
unanticipated inflation and cyclical unemployment
Firms do not lower wage during recession because
would reduce worker effort and productivity
