Macro Unit 4-5 Vocab

In the short run, government deficit spending will most likely

C) raise nominal interest rates

If investors feel that business conditions will deteriorate in the future, the demand for loans and real interest rate in the loanable funds market will change in which of the following ways in the short run?

Demand for loans: decrease Real interest rate: decrease

An increase in which of the following will lead to lower inflation and lower unemployment?

c) labor productivity

Stagflation

A situation where the economy experiences both high inflation and high unemployment, which is a rare occurrence. It can be caused by a supply shock that leads to cost-push inflation and reduced economic growth

Fractional reserve lending

A system in which banks hold only a fraction of their deposits as reserves and lend out the rest. This system allows banks to create money through the process of lending

The table gives the value of selected assets and liabilities of a commercial bank's T-account. What is the maximum amount of new loans the bank could lend with the given amounts of reserves?

A) $10,000

According to the short-run Philips curve, lower inflation rates are associated with

A) Higher unemployment rates

An increase in aggregate demand will cause which of the following?

A) a movement along a given short-run Phillips curve

The loanable funds market is best described as bringing together

A) savers and borrowers

An expansionary fiscal policy financed by government borrowing will most likely lead to which of the following changes in the real interest rate and the value of the country's currency?

A) the real interest rate will increase, and the currency will appreciate

Fisher effect

An economic theory that suggests that nominal interest rates are equal to the real interest rate plus the expected rate of inflation

Which of the following is most likely to increase the real interest rate in Country Z?

C) country z is viewed as having increased political and economic risk

Which of the following accurately describes the difference between how open market operations are used in a banking system with limited reserves compared to a baking system with ample reserves?

B) In a banking system with limited reserves, open market operations are used to indirectly influence the nominal interest rate by changing the money supply, whereas in a banking system with ample reserves, open market operations are used to maintain sufficient reserves.

Which of the following will most likely result in a lower real interest rate in a nation?

B) The citizens of the nation increase their savings for retirement

According to the short-run Philips curve, a contractionary fiscal policy will result in

B) a decrease in inflation and an increase in unemployment

Which of the following could cause a movement along a country's short-run Phillips curve toward higher unemployment and lower inflation?

B) a recession in th economies of the nation's major trading partners

According to the short-run Philips curve, a decrease in unemployment is expected to be accompanied by

B) an increase in inflation

Assuming a banking system with limited reserves, which of the following is a monetary policy action a central bank would implement to control inflation?

B) sell government bonds to the public

The diagram above shows the short-run Phillips curve (SRPC) and the long-run Phillips (LRPC) for an economy. If the inflation rate is currently 6 percent, which of the following is true about the current unemployment rate?

B) the current unemployment rate is 2%

The amount of money that the public wants to hold is $10 billion. With a monetary base of $2 billion and a money multiplier of 4, which of the following will most likely occur?

B) the nominal interest rate will increase.

Which of the following relationships is illustrated by a short-run Phillips curve?

B. A decrease in the rate of inflation is accompanied by an increase in the rate of unemployment.

Which of the following is considered the most liquid asset?

C) currency

An increase in the demand for loanable funds could be best explained by which of the following?

C) firms are optimistic about the future performance of the country's economy

Which of the following is true of the long-run Phillips curve?

C) it is vertical at the natural rate of unemployment

Based on the table above, what is the value of the monetary base?

C) $110 million

An increase in the equilibrium nominal interest rate could be caused by which of the following changes?

C) An increase in real income

Which of the following best describes the nominal interest rate on a mortgage loan that a bank offers to a costumer?

C) It is the interest rate charged by the bank

Sam pays monthly installments on a five-year fixed interest rate auto loan. If the expected inflation rate increases, which of the following will happen?

C) Sam will pay a lower real interest rate.

Which of the following is illustrated by the relationship in the graph above? (Inflation rate, unemployment rate graph)

C) Short-run Phillips curve

The diagram shows the effect of a monetary policy action on aggregate demand. Which of the following will shift the aggregate demand curve in the direction shown in the diagram above? (The right)

C) a decrease in the policy rate

Which of the following will cause a movement from point X to point Y along the short-run Phillips curve (SRPC) that is shown in the graph above?

C) an increase in government spending

All of the following changes will shift the investment demand curve to the right EXCEPT

C) an increase in the real interest rate

The table gives the value of selected assets and liabilities of a commercial bank's T-account. What is the money multiplier?

D) 5

Which of the following is true for bonds but not for stocks?

D) Bonds are interest-bearing assets

An increase in government spending with no change in taxes leads to a

D) Higher interest rate

On the island of Mabera, the local money is called "favoli." The price of every good in Mabera is expressed as the number of favolis needed to buy the good. The use of favolis to express the price of goods describes which function of money?

D) Unit of account

Suppose that, from 1985 to 1986, unemployment fell from 7.2 to 7.0 percent and inflation fell from 3.8 to 1.1 percent. An explanation of these changes might be that the

D) aggregate supply curve shifted to the right

Which of following changes in the loanable funds market will decrease the equilibrium real interest rate?

D) an increase in foreign financial capital inflows

Which of the following changes would most likely cause an increase in interest rates in the short run?

D) an increase in government spending financed by borrowing

Which of the following could cause simultaneous increases in inflation and unemployment?

D) an increase in inflationary expectations

A rightward shift of the short-run Philips curve is most likely due to

D) an increase in the expected rate of inflation

If the loanable funds market is in equilibrium, then which of the following must be true?

D) borrowing equals lending

An increase in investment demand for capital goods accompanied by an increase in household savings will result in which of the following in the market for loanable funds?

D) the equilibrium quantity of loanable funds will increase, but the impact on the real interest rate is indeterminate

ABC Bank is a commercial bank in Country X. Assume the required reserve ratio is 25% and banks in Country X keep no excess reserves. If Maria deposits $1000 in cash at ABC BAnk, what will happen to the money supply after all adjustments are made in the banking system?

D) the money supply will increase by a maximum $3000

Based on the table above, what is the value of M1, a measure of the money supply?

E) $1,120 million

Which of the following will happen when interest rates increase in an economy?

E) The opportunity cost of holding money will increase.

If the interest rate on loans before adjusting for inflation is 9%, and the expected inflation rate is 4%, then which of the following must be true?

E) the nominal interest rate is 9%

Which of the following changes will necessarily occur as a result of an increase in the nominal interest rate?

E) the quantity of money demanded will decrease

Demand pull inflation

Occurs when aggregate demand in the economy exceeds aggregate supply, leading to upward pressure on prices

Budget deficit

Occurs when government spending exceeds government revenue in a given period of time, usually a year. The deficit is typically financed by borrowing money through the sale of government bonds

Cost push inflation

Occurs when input costs (such as wages or raw materials) increase, leading to upward pressure on prices

Assume that the government finances its spending by borrowing from the public. If the government increases deficit spending, the price of previously issued bonds and the real interest rate will change in which of the following ways.

Price of Bonds= Decrease, Real Interest Rate= increase

Philips curve

Shows the relationship between unemployment and inflection in the economy. It suggests that there is a trade-off between inflation and unemployment in the short run, but not in the long run

Discount rate

The interest rate at which banks can borrow money from the central bank. By adjusting the discount rate, the central bank can influence the cost of borrowing and lending in the economy

Equilibrium interest rate

The interest rate at which the quantity of money demanded equals the quantity of money supplied. It is determined by the intersection of the money demand and money supply curves

Reserve ratio

The percentage of deposits that banks are required to hold in reserve. The reserve ratio is set by the central bank