Macro Final Test Questions
Refer to above graph. If the interest rate was 3 percent and the money supply decreased by $50 billion, the new interest rate would be
4 percent
The federal reserve could increase the money supply by
buying government bonds in the open market
The Philips Curve presents the argument that full employment can not be achieved without
causing inflation
Tastes (exchange rates)
change in preference for a product can impact exchange rates
An increase in nominal GDP will
increase the transactions demand and total demand for money
Monetary and fiscal policy aimed at lowering unemployment will cause
inflation
The Philips Curve
presents an inverse relationship between inflation and unemployment
Exchange rate
rate at which national currencies trade for one another
The primary responsibility of the Federal Open Market Committee (FOMC) is
setting the Fed's monetary policy and directing the buying and selling of government securities
Aggregate supply shocks
sudden unexpected changes in resource costs that shift the economy's AS curve
determinants of exchange rates
tastes, relative inflation rate change, relative interest rates, change in relative expected returns on stocks, real estate, and production facilities, relative income, speculation
The money multiplier can be calculated by dividing?
the change in real GDP by the initial change in spending
When the U.S has comparative advantage in soy producation
the competition for trade becomes very tight because the opportunity cost increases
A major concern with the social security trust fund is that
the fund will be insufficient to cover obligations in one or two decades
The Council of Economic Advisers gives economic advice to?
the president
A major reason a public debt cannot bankrupt the federal government is because
the public debt can be easily refinanced
If the Fed buys government securities from the public in the open market
the public gives the securities to the Fed; the Fed pays for the securities by check, which when deposited at commercial banks will increase their reserves at the Fed
Terms of trade are
the rate at which units of one product are exchanged for units of another product
As real GDP increases unemployment decreases thus
there is a trade off between lowering unemployment and rising inflation
To say that the federal reserve banks are quasi-public banks means that
they privately owned but managed in the public interest
The public debt is the
total of all past deficits minus all past surpluses
Comparative advantage and specialization promotes an increase in
total output for each individual nation
A consumer holds money to meet spending needs, this is an example of the
transactions demand for money
The Misery Index
unemployment rate + inflation rate
A graph of the short-term aggregate supply is
upsloping
A graph of the long-run aggregate supply curve is
verticle
The foreign exchange market
where foreign currencies are exchanged and exchange prices are set
A commercial bank has actual reserves of $1 million and checkable-deposit liabilities of $9 million, while the required reserve ratio is 10 percent. The excess reserves of the bank are
$100,000 (0.10*$9,000,000=9000,000. 1,000,000-900,000=100,000)
Assume that there is a 25 percent reserve ratio and that the Federal Reserve buys $4 billion worth of government securities. If the securities are purchased from the public, this action has the potential to increase bank lending by a maximum of
$12 billion, and also by $16 billion if the securities are purchased directly from the commercial banks (Money multiplier=1/Required reserve ratio=1/0.25=4. If the fed buys $4 of securities from the public, required serves are 0.25*$4=$1. Excess reserves=multiplier = $3*4=$12 billion. If the Fed buys securities directly from the commercial banks $4*4=$16
A bank has excess reserves of $5000 and deposit liabilities of $50,000 when the required reserve ratio is 20 percent. If the reserve ratio is raised to 25 percent, this bank can lend a maximum of
$2500.
Suppose that an economy produces 500 units of output. It takes 10 units of labor at $15 a unit and 4 units of capital at $50 a unit to produce this output. What is the per unit cost of production?
0.70
The value of the monetary multiplier is
1/Required reserve ratio
Suppose that real domestic output in an economy is 300 units, the quantity of inputs is 50, and the price of each input is $9. What is the level of productivity?
6
The major problem facing the economy is high unemployment and weak economic growth. The inflation rate is low and stable. Therefore, the Federal Reserve decided to pursue a policy to increase the rate of economic growth. Which policy changes by the Fed would reinforce each other to achieve that objective?
Buying government securities and lowering the discount rate
Which one of the following is a tool of monetary policy for altering the reserves of commercial banks?
Discount Rate
The conduct of monetary policy in the US is the main responsibility of the
Federal Reserve
Relative Interest Rate
If U.S. real interest rate increases and England's real interest rate is constant, the British will loan in U.S. or buy bonds , increases supply of pounds, pound depriciates
Which is the only state that has two Federal Reserve banks?
Missouri
A Federal Reserve official notes, "A restrictive monetary policy can force a contraction of the money supply, but an expansionary monetary policy may not achieve an expansion of the economy." The official has described the problem of the
The official has described the problem of the: cyclical asymmetry of monetary policy
A bank has $2 million in checkable deposits. In the bank's balance sheet, this would be an example of
a liability
Relative Income
U.S income increases and England's stays constant, U.S. consumers buy more domestic and foreign goods, increase demand for pounds, pound appreciates
Built-in stablity
When tax revenues change automatically and in countercyclical direction over the course of the business cycle
A contractionary fiscal policy can be illustrated by?
a decrease in aggregate demand
What would shift aggregate supply to the right?
a decrease in business taxes
A expanstionary fiscal policy can best be represented by
a shift in the aggregate demand curve from AD1 to AD2 (up from middle to bottom)
Staglfation
a simultaneous increase in the price level and unemployment
When a consumer wants to compare the price of one product with another, money is primarily functioning as
a unit of account
The fundamental objective of monetary policy is to assist the economy is
achieving a full-employment, noninflationary level of total output
Low marginal taxes induce work because
after tax income is higher and workers choose to substitute labor for leisure at the higher wage it encourages savings and investing
If the dollar appreciates in value relative to foreign currencies
aggregate demand increases
The major purpose of the Federal Reserve buying government securities in open-market operations is to
allow banks to increase their lending
An increase in consumer wealth and a decrease in interest rates would cause
an increase in aggregate demand
When does an operational lag occur
between the time fiscal action is taken and the time that the action has its effect on the economy
Discretionary fiscal policy refers to
changes in taxes and government expenditures made by congress to stabilize the economy
The money supply is composed of
checkable deposits and currency
An open economy goes hand in hand with
comparative advantage and specialization
A strict balanced budget amendment that would require the federal government to balance its budget during a recession would be
contractionary and worsen the effects of a recession
The federal backing for the money in the US comes from
control over the money supply designed to keep the value of money relatively stable over time
If the U.S. dollar deprecates in value relative to foreign currencies, then this will
decrease aggregate supply
A decrease in consumer wealth and an increase in interest rates would cause a
decrease in aggregate demand
An increase in personal income tax rates will cause a
decrease in aggregate demand
If the interest rates rise, there will be a
decrease in the total amount of money demanded
If the Board of Governors of the Federal Reserve System increases the legal reserve ratio, this change will
decrease the excess reserves of member banks and thus decrease the money supply
Crowding out is the notion that
deficit financing will increase the demand for money, increase the interest rate, and reduce the level of investment spending in the economy
High unemployment and inflation indicate
economic and social instability
Supply-side economics
emphasizes the importance of marginal tax rates and other factors that affect long-run AS
Low marginal taxes promotes
employment, price stability, and economic growth
Long run equilibrium in aggregate demand and supply model
equilibrium price and real GDP determined by aggregate demand curve and vertical aggregate supply curve, no cyclical unemployment (downturn in business cycle)
Trade surplus
exports > imports
If the transactions demand for money is $400 billion, and increase in the money supply from $800 billion to $900 billion would cause the equilibrium interest rate to
fall to 4 percent (the total demand for money would increase to $900, so the asset demand would now be $500 because $900-$400. This occurs at an interest rate of 4%)
When the federal government uses taxation and spending actions to stimulate the economy it is conducting?
fiscal policy
Goals of monetary and fiscal policy are
full employment, price stability, and economic growth
A government budget deficit occurs when government expenditures are
greater than government revenues
Relative Inflation rate changes (exchange rates)
high inflation and high price levels depreciate domestic currency, demand for pounds increases, British consumers purchase fewer U.S. goods at a higher price, supply of pounds decreases, pound appreciates, dollar deprecaiates
Laffer Curve suggests that
higher taxes give higher revenues to a point (goes up then goes quickly down)
Trade deficit
imports > exports
Economic Growth
improved technology leads to increased production possibilities which leads to long run aggregate supply and real GDP
Assume the required reserve ratio is 20 percent. If the Federal Reserve buys $80 million in government securities from the public, then the money supply will immediately
increase by $80 million and the max money-lending potential of the commercial banking system will increase by $400 million (money multiplier=1/Reserve Ration = 1/0.20 = 5. Max money-lending potential = $80 *5 = $400
Changes in Relative Expected Returns on Stocks, Real Estate, and Production Facilities
increase demand for pounds and pound appreciates
An increase in government spending will cause an
increase in aggregate demand
If US goods are in high demand in England
increase supply of pounds in exchange market, shift supply curve right, pounds depricate and dollars apprecate
Assume that Johnson deposits $350 of currency in his account in the XYZ Bank. Later the same day Swanson negotiates a loan for $2000 at the same bank. In what direction and by what amounts has the supply of money changed?
increased by 2,000
As one moves closer to the "natural" rate of unemployment
inflation rises more quickly
Long run aggregate supply
input and output prices flexible, verticle
Short run aggregate damand
input prices are fixed (wages and salaries), output prices flexible
Short run aggregate supply
input prices fixed and output prices flexible, slopes upward
Long-run aggregate demand
input prices flexible, output prices flexible
Aggregate demand curve shows the
inverse relationship between price level and real GDP
Speculation
investors speculate that the pound will appreciate and the dollar will depreciate, increase demand for pound, speculation of the change causes anticipated change, pound appreciates
An aggregate supply curve shows the
level of real domestic output that will be produced at each possible price level
Long-run vertical Phillips curve
lowering the unemployment rate by increasing aggregate demand beyond the full-employment level out output temporarily increases profits, employment and output (wage increase in nominal)
