Macro Final

The national debt _____ when the federal government incurs a _____.

rises; deficit

Suppose that productivity increases as workers' health improves. This increase in productivity will:

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

If government increases income tax rates, the aggregate demand curve is likely to:

shift to the left.

If the economy is operating well below potential output, the cyclically adjusted budget balance deficit is _____ than the actual budget balance.

smaller than

When we keep part of our wealth in a savings account, money is playing the role mainly of:

store of value.

If the Federal Reserve increases the discount rate:

the money supply is likely to decrease.

If the consumption function is plotted on the vertical axis of a graph with disposable income on the horizontal axis:

the slope of the line will be positive and determined by the marginal propensity to consume.

Government spending will NOT crowd out private spending if:

there is a recessionary gap.

When a person makes price comparisons among products, money is being used mainly as a(n):

unit of account.

When you are looking at a car's price to decide whether you can afford it, you are using money primarily as a:

unit of account.

When planned investment is less than actual investment, there must be:

unplanned inventory investment.

When the aggregate price level increases, the purchasing power of many assets falls, causing a decrease in consumer spending. This, the _____ effect, is a reason the _____ curve slopes _____

wealth; aggregate demand; downward

The cyclically adjusted budget balance is an estimate of:

what the budget balance would be if real GDP were exactly equal to potential output.

A country is closed. It has no government sector, and its aggregate price levels and interest rates are fixed. Furthermore, the marginal propensity to consume is constant and the country's consumption function is as follows: C = 200 + 0.75YD, where YD is disposable income and C is consumption. Assume that planned investment equals 75. Look at the scenario A Country's Consumption Function. What is the income-expenditure equilibrium for this country? (Ref 11-24)

$1,100

Look at the table Money Supply. The money supply measured by M2 is (Q. 49):

$1,725 billion.

Look at the scenario Monetary Base and Money Supply. How much are excess reserves? (Q. 57)

$100 billion

The economy is in an inflationary gap. What are the fiscal policy options available to the government?

Decrease government purchases, an increase in taxes, or a decrease in transfer payments

An automatic stabilizer that works when the economy contracts is:

a rise in government transfers as more people receive unemployment insurance benefits.

Which of the following financial assets belongs to M2 but not to M1?

a savings account

In a simple economy with no government and no foreign sector, autonomous consumer spending is $100 and planned investment spending is $300. The marginal propensity to consume is 0.75. a. Solve for the equilibrium level of real GDP. b. If real GDP is $2,000, what is unplanned inventory investment?

a. Given this information, AEplanned= 400 + .75*YD. In equilibrium, AEplanned= GDP = YD. So we can rewrite YD= 400 + .75*YD, or .25*YD= 400, and equilibrium YD=GDP = $1600. b. If GDP = $2000, AEplanned= 400 + .75*(2000) = $1900 so output exceeds spending and so unplanned inventory investment is $100.

A recessionary gap occurs if:

actual real GDP is less than potential output.

A bond is considered:

an asset for the owner of the bond that is not part of the money supply.

The consumption function will shift up if:

households expect an increase in the minimum wage.

f the short-run macroeconomic equilibrium is to the _____ of the economy's potential output, then there is a(n) _____ gap and the aggregate price level is expected to _____.

left; recessionary; fall

Suppose that the public holds 50% of the money supply in currency and the reserve requirement is 20%. Banks hold no excess reserves. A customer deposits $6,000 in her checkable deposit. Look at the scenario Holding Cash. The money multiplier is:

less than 5.

To increase the money supply, the central bank could:

lower the discount rate.

Money used to buy a ticket to a football game is functioning primarily as a:

medium of exchange.

Monetary neutrality implies that in the long run:

monetary policy does not affect the level of economic activity.

Look at the figure Money Market I. If the interest rate is at rL and the central bank neither buys nor sells Treasury bills, then the interest rate will: (Q. 70)

move toward point E.

Planned investment spending is _____ related to the interest rate and _____.

negatively; existing productive capacity

If all prices, including the nominal wage rate, double in the long run, then aggregate output supplied will:

remain unchanged.

Real GDP equals $200 billion, the government collects 20% of any increase in real GDP in the form of taxes, and the marginal propensity to consume is 0.8. If the government increases spending by $10 billion, real GDP will increase by:

$27.8 billion.

Suppose the banking system does NOT hold excess reserves and the reserve ratio is 25%. If Molly deposits $1,000 cash in her checking account, the banking system can increase the money supply by:

$3,000.

Look at the table Balance Sheet. If the reserve ratio is 25%, loans are (Q. 50):

$60,000.

Suppose that initially a bank has excess reserves of $800 and the reserve ratio is 30%. Then Andy deposits $1,000 of cash in his checking account and the bank lends $600 to Molly. That bank can lend an additional:

$900.

The correct formula for the output gap is:

((Actual Aggregate Output - Potential Output) / Potential Output) * 100

In the basic equation of national income accounting, GDP = C + I + G + X - IM, the government directly controls _____ and influences _____ through fiscal policy.

. G; C and I

If the marginal propensity to consume is 0.75, then the marginal propensity to save is:

0.25.

In an economy with no taxes or imports, if disposable income increases by $1,000 and consumption increases by $600, the marginal propensity to save is:

0.40.

If your disposable income increases from $10,000 to $15,000 and your consumption increases from $9,000 to $12,000, your marginal propensity to consume is:

0.6.

If the marginal propensity to save is 0.1, then the government spending multiplier has a value of

10.

How does rising consumer optimism affect the aggregate demand curve? Explain your response

A change in the consumer confidence, by changing consumption expenditures, induces changes in aggregate demand. A boost in consumer confidence increases aggregate demand.

Look at the figure Fiscal Policy II. Suppose that this economy is in equilibrium at E1. If there is a decrease in government purchases, _____ will shift to the _____, causing a(n) _____ in the price level and a(n) _____ in real GDP. (Q. 26)

AD1; left; decrease; decrease

In an economy without government purchases, government transfers, or taxes, aggregate autonomous consumer spending is $750 billion, planned investment spending is $300 billion, and the marginal propensity to consume is 0.75. What is the expression for planned aggregate spending?

AE(Planned) = $1,050 + 0.75 × YD

Suppose that the aggregate consumption function is given by the equation C = 200 + 0.8YD, where C represents consumption and YD represents disposable income. If housing prices throughout the United States decrease rapidly because of an increase in mortgage foreclosures, which of the following equations could represent the new aggregate consumption function? (Ref 11-9)

C = 100 + 0.8YD

If a bank has deposits of $10,000 and reserves of $5,000 and if the reserve requirement is 20%, it can make loans of $5,000.

False

If debt increases faster than GDP, the ratio of debt to GDP will fall.

False

If it costs Betsy $10 to bake a cake and she sells the cake for $25, her profit per unit (per cake) is $35.

False

If planned investment is $50 billion and unplanned inventory investment is $10 billion, then actual investment is $40 billion.

False

If policy makers want to increase real GDP by $100 billion and the marginal propensity to consume is 0.75, they should increase government purchases of goods and services by $75 billion.

False

What is the goal of contractionary monetary policy, and how does it work in the short run?

Goal of contractionary monetary policy is to reduce money supply in the economy. In the short run it works as Central Bank engages in an open market sale of government securities, and/or raises discount rate,and/or raises required reserves ratio. Each of these measures will lower money supply in short run.

Suppose the economy is initially in long-run equilibrium and there is a positive demand shock. Describe the short-run effects of this demand shock and how the economy will adjust in the long run.

In the short run, both the price level and output increases as the new ADC meets the short-run ASC. As the economy adjusts, the short-run ASC shifts again until it is in long-run equilibrium at a higher price level with output unchanged.

Suppose that the marginal propensity to consume is 0.80 and the government spends $10 million to repair a bridge. Assuming no taxes and no international trade, explain how the $10 million of government spending will increase GDP by $50 million.

Increase in the government spending will have a multiplier effect on the economy as it will lead to increase in consumption which will lead to increase in income and this will lead to further increase in consumption and the cycle will go on until equilibrium level is reached. The total increase in income = 1 / 1 - MPC * Increase in government spending = 1 / 1-0.80 * $10 million = 5 * $10 million =$ 50 million. Thus, GDP of the economy or national income of the economy will increase by $50 million.

Suppose Ronny decides to withdraw all of the cash from his checking account and open a single time deposit account at the same bank. As a result of this transaction:

M1 falls but M2 remains unchanged.

A country is closed. It has no government sector, and its aggregate price levels and interest rates are fixed. Furthermore, the marginal propensity to consume is constant and the country's consumption function is as follows: C = 200 + 0.75YD, where YD is disposable income and C is consumption. Assume that planned investment equals 75. Look at the scenario A Country's Consumption Function. Holding everything else constant, what will happen if aggregate wealth decreases by $100? (Ref 11-24)

The aggregate expenditures curve will shift downward.

What will happen to the money supply if Jamie withdraws $400 from her checking account and the required reserve ratio is 5%?

The bank's reserves will decrease by $400, bu the checkable deposits will also reduce by $400 so the money supply remains unaffected.

Which of the following is TRUE with respect to short-run and long-run aggregate supply?

The economy can be on both curves simultaneously.

Which of the following would be the IMMEDIATE effect if an individual made a $9,000 cash deposit in a bank?

The money supply would not be affected.

As the opportunity cost of holding money changes from 5% to 3%, the quantity of money demanded increases.

True

If the marginal propensity to save is 0.25 and investment spending increases by $50 billion, the change in real GDP will be $200 billion.

True

Quantitative easing occurs when instead of purchasing only short-term government debt, the Fed buys longterm government debt as well.

True

Why does a $1,000 tax cut generate a smaller multiplier effect than a $1,000 increase in government purchases?

When a household receives $1000 of additional disposable income, the household will save a portion of it and consume the rest. The upward shift in the AE function is something less than $1000. However, the $1000 of new government purchases is a direct injection of money into the economy. The AE function shifts upward by the full amount of $1000. From there, the spending multiplier will increase total spending throughout the economy, but because households save part of the tax cut, the eventual increase in total spending will be smaller.

A decrease in aggregate demand will generate _____ in real GDP and _____ in the price level in the short run.

a decrease; a decrease

Which of the following is an expansionary fiscal policy?

an increase in unemployment benefits

President Johnson's use of a temporary 10% surcharge on income taxes is a classic example of _____ policy.

contractionary fiscal

Look at the figure Short-Run Equilibrium. If the economy is at equilibrium at Y1 and P1, the government should use _____ fiscal policy to shift the aggregate demand curve to the _____. (Q. 23)

contractionary; left

The Federal Reserve's main liabilities are:

currency and bank reserves.

Which of the following is a component of BOTH the monetary base and the money supply?

currency in circulation

The reserve requirement is 10% and Jack withdraws $5,000 travel money from his checkable deposit. Assume that banks do not hold any excess reserves and that the public holds no currency, only checkable bank deposits. Look at the scenario Money Supply Changes. After the withdrawal reserves _____, and checkable deposits _____ by $5,000. (Ref. 14-6)

decrease by $5,000; decrease

If interest rates rise, there will be a(n):

decrease in aggregate demand.

According to the interest rate effect, a decrease in the price level causes people to _____ their money holdings, which _____ interest rates and _____ investment spending.

decrease; decreases; increases

In response to a negative supply shock, the government decreases taxes. The most likely result of the government's tax decrease is a(n) _____ in unemployment and a(n) _____ in the aggregate price level.

decrease; increase

A reduction in government transfers _____, therefore shifting the aggregate demand curve to the _____.

decreases disposable income and consumption; left

Now that fast food places such as McDonald's are accepting credit card payments, the:

demand for money has decreased.

Look at the figure Equilibrium in the Money Market. If the rate of interest is below equilibrium, there will be an excess _____ money and the interest rate will _____. (Q. 69)

demand for; rise

A recessionary gap can be closed with:

expansionary fiscal policy.

Monetary policy that lowers the interest rate is called _____ because it _____.

expansionary; increases aggregate demand

The three consequences of the decline in demand during the Great Depression were _____ prices, _____ output, and a surge in unemployment.

falling; declining

When the short-term interest rate _____, the opportunity cost of holding money _____, and the quantity of money individuals want to hold _____.

falls; falls; rises

Loans of reserves from one bank to another are made in the _____ market.

federal funds

Money that the government has ordered to be accepted as money is:

fiat money.

Look at the figure Inflationary and Recessionary Gaps. A movement from AD3 to AD1 could be caused by (Q. 25):

higher tax rates.

The short-run aggregate supply curve slopes upward because a _____ aggregate price level leads to _____.

higher; higher output, since most production costs are fixed in the short run.

Suppose the Federal Reserve were to buy $100 million of U.S. Treasury bills. The money supply would:

increase by more than $100 million.

If the actual output lies below potential output, then an appropriate fiscal policy would be to _____, which will shift the _____ curve to the _____.

increase government purchases; AD; right

Suppose the economy is in a recessionary gap. A $100 billion _____ is likely to increase real GDP by the largest amount.

increase in government purchases

An increase in the demand for money would result from a(n):

increase in the price level.

Given a recessionary gap, the Federal Reserve will use monetary policy to _____ real GDP and _____ aggregate demand.

increase; increase

An increase in aggregate wealth:

increases the aggregate consumption function

According to the liquidity preference model, if the interest rate rises above its equilibrium value, the quantity demanded of nonmonetary interest-bearing financial assets _____, and this leads to a _____ in the interest rate.

increases; fall

An unplanned fall in inventories leads to:

production increasing.

Look at the figure AD-AS Model I. If the economy is at point X, there is a(n) _____ gap with _____ unemployment. (Q.89)

recessionary; high

Look at the figure An Increase in Aggregate Demand. Because of the pressures at the short-run equilibrium at Y2 and P2: (Q. 16)

the SRAS curve will shift to the left.