MACROECONOMICS CHAPTER 9-13 TOPHAT
You have $10,000 in your pocket today. If the currency is deposited into a bank account paying 4 percent interest, what is the future value of that deposit in one year?
$10,400
Currently, bank reserves are equal to $2,000, the required reserve ratio is 10 percent, banks make as many loans as they can, and no borrower withdraws currency and leaves the loan balance in the bank after a loan is created. A news report has made people want to carry currency, and this causes the reserves to fall to $1,500. Assume the change is permanent. How much has the money supply decreased?
$5,000
suppose the banks keep no excess reserves and individuals and firms hold on to no currency, if someone finds $7.5 million in currency and deposits all of it into a checking account, what is the upper limit or maximum amount of the money supply when the requires reserve ration is 10%.
$75 million
An increase in investment spending can ultimately cause ______________ in the aggregate demand curve, ______________ in the aggregate supply curve, and ______________ in the potential level of GDP.
An increase, an increase, an increase
an increase in investment spending can ultimately causes ___ in the agreste demand curve, ____ in the aggregate supply curve and ___ in the potential level of GDP
An increase, an increase, an increase
Match the following types of unemployment with the main cause explaining their occurrences:
Cyclical Unemployment --> Unemployment causes by business cycle Structural unemployment --> unemployment causes by mismatch of skills and job opportunities Frictional unemployment ---> Unemployment causes by the normal process of leaving jobs, getting fired, graduating from school and searching for new jobs
Which of the following changes would cause a shift in the aggregate demand curve? I. Increase in investment II. Decrease in productivity III. Increase in consumption
I and III only
A given amount of Fed bond purchases will be less effective if which of the following is true?
If individuals increase the amount of currency they wish to hold instead of deposits in checking accounts.
An economy which is producing at its potential level of GDP has just experienced a quadrupling of oil prices. What will happen as a result?
Inflation will increase and unemployment will increase. Eventually prices will come back down and employment will rise.
compare two economies, A and B. Everything is the same except economy A is in recession and economy B is at full employment. Assume that consumptions spending increase. Economy A's price level will change by ____ than economy B price level, Economy A real GDP will change by ___ than economy b real GDP level
Less more
As spending increases, there will be upward pressure on the price of inputs including wages. As the marginal cost of production rises, businesses start to increase prices as they attempt to produce more. This scenario best describes _____________.
Movement along the aggregate supply curve
Sort the following events in the order of occurrence, explaining the process of natural adjustment to full-employment level of output in response to an increase in aggregate demand.
Output rises above full-employment level very low Unemployment puts upward pressure on wages Higher wages lower aggregate supply Output is back at full employment level
Use our models to recommend policy if we are facing a recession.
Raise government spending, lower taxes, increase transfer payments
Assume that the economy is currently producing a level of real GDP above the full employment level of real GDP, and the government lowers taxes as part of a new economic policy. Which of the following monetary policies should the Federal Reserve undertake if it wants to encourage the economy to go to a full employment level of output?
Raise the federal funds rate target
The Federal Reserve believes that inflation is or will be too high given the current stance of monetary policy. Which of the following would help the Fed achieve its goal of lower inflation?
Raise the interest rate on excess reserves Open market sales Increase the target for the federal funds rate
What happens to real GDP, employment, and prices if income taxes increase? Assume we start in a long-run equilibrium and go to a new short-run equilibrium. Choose one of the following:
Real GDP falls, employment falls, and prices fall
What happens to real GDP, employment, and prices if transfer payments decrease? Assume we start in a long-run equilibrium and go to a new short-run equilibrium. Choose one of the following.
Real GDP falls, employment falls, and prices fall
What happens to real GDP, employment, and prices if transfer payments decrease? Assume we start in a long-run equilibrium and go to a new short-run equilibrium. Choose one of the following:
Real GDP falls, employment falls, and prices fall
What happens to real GDP, employment, and prices if government spending increases? Assume we start in a long-run equilibrium for the economy and go to a new short-run equilibrium. Choose one of the following:
Real GDP rises, employment rises, and price rise
Assume we are currently at full employment. A new administration decides to use fiscal policy to lower unemployment even further and to keep unemployment at the lower level. How does the policy affect the economy in the short and long run?
Short run: Decreased unemployment and increased inflation. Long Run: No effect on unemployment and even higher inflation.
Categorize each of the following scenarios as likely to cause immediate shifts in AD, AS, or both.
Sudden drop in the stock market¸ reducing household wealth → AD Increase in the payroll tax (tax businesses pay on wages paid) → BOTH A flood damages factory equipment → AS A sudden increase in the world price of oil (assume we are net importers of oil) → BOTH A wave of consumer and business optimism → AD
In our aggregate demand and supply model, an increase in wages (and nothing else changes) will cause ______________ prices and ______________ unemployment.
higher; higher
Imagine you are running a bank and you are deciding how much of your funds to deposit with the Fed. Your alternative to depositing funds with the Fed is to lend them to businesses and individuals. What are you likely to do if the Federal Reserve increases the interest rate that it pays on your deposits with them?
increase reserves at the fed and reduce loans
If real GDP is equal to the full-employment level of real GDP, an increase in investment spending will mean that either private or public saving will have to ______________ or net exports will have to ______________.
increase, decrease
When consumers become optimistic and plans to spend more: Real GDP
increases
When government increases spending? price level
increases
inflation can result from a change in aggregate demand or a change in aggregate supply, how can one tell which of the two has cause the inflation?
inflation cause by demand is accompanied by rising real GDP, while fixation cause by aggregate supply comes with realatively low real GDP
if the economy is currently at full employment, what will be the short run effect of an increase in foreign demand for U.S. exports?
real GDP --> Increase Price level --> increase
the immediate of short-run effect of an increase in government spending on good and services will be a ___ movement of the aggregate demand curve and _____ movement of the aggregate supply curve
rightward; no
what happens to aggregate demand and aggregate supply if the price of an important input increases?
there is no change in aggregate demand bu aggregate supply decreases
It is useful to express the government deficit as a percentage of GDP because this provides a potential indication of the extent of crowding out.
true
You have $5,000 in your pocket today. If the currency is deposited into a bank account paying 4 percent interest, what is the future value of that deposit in one year?
$5,200
The interest rate is 6 percent; in one year from today, what is the future value of $500?
$530
Currently, bank reserves are equal to $2,000, the required reserve ratio is 10 percent, banks make as many loans as they can, and no borrower withdraws currency and leaves the loan balance in the bank after a loan is created. But now banks decide to increase their reserves and start to hold 15 percent of their reserves. Assume this change is permanent. How much will the money supply change?
$6,667
If the money supply is $3.6 trillion and nominal GDP is $19 Trillion, what is the velocity of money (round your answer to the nearest tenth)?
5.3
Which of the following is an example of bartering?
A cabinet maker gives the plumber a desk since the plumber fixed the cabinet maker's plugged bathtub.
If the economy is currently at full employment, what will be the short-run effect of an increase in saving?
A decrease in real GDP, a decrease in the price level
The quantity theory of money supports which of the following conclusions?
A decrease in the money supply will cause prices to fall in the long run.
Which of the following groups serve on the Federal Open Market Committee (select all that apply)?
All members of the board of governors Five of the regional federal reserve banks presidents
People tend to like higher incomes and lower prices. What kind of change in our model results in higher incomes and lower prices?
An increase in AS
Which of the following will likely cause an increase in the supply of money?
An increase in bank reserves
A booming stock market may affect consumption spending and be most likely to cause which of the following?
An increase in employment and perhaps an increase in inflation
Assuming we are producing near full capacity, an increase in demand (a shift to the right in AD) will result in which of the following?
An increase in real GDP An increase in the price level Movement along the AS curve
Suppose the federal government reduces taxes on the profits earned from investment in physical capital. According to our model, this policy will eventually result in:
An increase in real GDP and an ambiguous effect on prices
Assume the economy is at full employment. An increase in government spending will have which of the following effects over time?
An increase in real GDP and prices, followed in the long run by a period of decreasing real GDP and increasing prices
What are the three main components of the Federal Reserve System?
Board of governors Regional federal reserve banks Federal open market committee
Which of the following spending components of GDP will be affected by a change in the average price level?
Consumption Investment Net export
The Federal Reserve System was set up to be a ______________ and politically ______________ institution.
Decentralized; Independent
Match the following types of inflation with the main cause explaining their occurrences.
Demand pull inflation ---> When the cause of inflation is aggregate demand increasing more rapidly than aggregate supply Cost push inflation ---> when inflation is caused by changes in higher prices of inputs or higher costs of production.
Assume that we are currently producing less than the potential level of GDP. Which of the following is a valid argument for active use of monetary policy instead of fiscal policy?
Fiscal policy may cause crowding out of investment
what happens to the price level and GDP when we experience a technological improvement that allows workers and capital to produce more?
GDP rises, price falls
If the Federal Reserve wishes to minimize the fluctuations of interest rates, what will be the resulting effects on business cycles?
In response to an increase in spending, the money supply will be increased
Use the AS AD model to predict how a fall in interest rates is likely to change investment, real GDP, prices, and employment in the short run.
Increase investment, real GDP, prices, and employment
An increase in the labor force will have which of the following results? Aggregate supply will ______________. Potential Real Gross Domestic Product will ______________.
Increase; increase
The U.S. $20 dollar bill is a commodity:
Is an incorrect statement
Match the following views of economic growth with the main cause explaining their occurrences.
Journalist view of growth --> aggregate demand increase Economist view of growth --> aggregate demand and aggregate supply increase
In economy A, we are in the middle of a recession. In economy B, we are experiencing a demand-pull inflation. Assume that total spending increases in both economies. Economy A's price level will change by ______________ economy B's price level. Economy A's real GDP will change by ______________ economy B's real GDP.
Less than; more than
Compare two economies, A and B. Everything is the same except economy A is in recession and economy B is at full employment. Assume that consumption spending increases. Economy A's price level will change by _____ than economy B's price level. Economy A's real GDP will change by _____ than economy B's real GDP level.
Less, more
A temporary income tax cut will be ______________ effective as a fiscal policy than a permanent change because ______________.
Less; because future income is not affected
Which of the following is not included in bartering?
Money
The Phillips Curve shows the ______________ short-run relationship between inflation and unemployment.
Negative
Which of the following expressions does not describe the full employment level of output?
Non-accelerating inflation rate of real GDP
Which of the following are expansionary?
Open market purchases Lowering the IQER
Which of the following represents movement along the aggregate demand curve? Select all that apply.
People from around the world want to buy more Teslas as the price level in the U.S. falls. Falling prices decreases the demand for money¸ decreasing interest rates¸ and investment spending rises As the average price level falls¸ consumers have more financial wealth and decide to increase spending.
For each tax cut below, indicate whether it would primarily have an effect on aggregate demand, aggregate supply, or both.
Per child tax credit--> aggregate demand Education Tax incentives --> both Capital gains tax cuts --> both Estate tax cuts --> both
What happens to the price level as a result of an increase in spending?
Price increases
What happens to real GDP, employment, and prices if government spending increases? Assume we start in a long-run equilibrium for the economy and go to a new short-run equilibrium.
Real GDP rises, employment rises, and prices rise
When the Federal Reserve announces that is increasing the federal funds rate, we would expect to see banks do which of the following?
Reduce their loans because they have fewer reserves due to the Fed's open market sales
The long-run effect of an increase in investment spending will be a shift of the aggregate demand curve to the ______________ and ______________ shift of the aggregate supply curve.
Right; a rightward
Stagflation is characterized by which of the following?
Rising inflation and rising unemployment
If the economy is in a recession, which of the following is true?
Short-run equilibrium output is less than the full employment level of output.
A friend has won a lottery and comes to you and asks which choice he should take. Either $185 million spread out over 5 annual payments or $165 million paid now. If the average interest rate is six percent, what would you tell him to do?
Take $165 million since it's worth more.
Why were the temporary tax changes, discussed above in section 13.2.5, not successful?
Temporary tax changes affect only current but not future income
How would the money market change if there was an increase in bank reserves?
The money supply will increase
Which of the following statements comparing the lags of monetary and fiscal policy is accurate?
The policy-making lag for fiscal policy is longer than monetary policy.
If everything else remains the same, a rise in the GDP deflator (a measure of the average price level) should cause _______________.
The real value of currency and deposits to fall The demand for money to rise Interest rates to rise Consumption spending to fall
Which of the following is a store of value?
U.S. dollars and coins Gold bars A picasso painting
If the economy were at a level of real GDP below the potential level of GDP, what are the forces that might bring the economy to full employment without any active fiscal policy?
With high unemployment, there will be a tendency for wages to fall, stimulating production, lowering prices, and increasing consumer spending
Which of the following will result in a decrease in the supply of money in the economy?
a customer repaying a loan
An increase in the tax on wages will cause which of the following?
a decrease in aggregate demand a decrease in aggregate supply (less output at each price)
What will be the effect on the economy if the fiscal policy of reducing transfer payments is selected?
a decrease in disposable income and total spending
If an economy appears to be growing rapidly and inflation appears to be becoming a serious problem, which of the following fiscal policies would be appropriate?
a decrease in government spending
If prisoners did not have dollars to use to purchase goods and services in prison but they had access to Top Ramen noodles that is then used as money by the prisoners, then Top Ramen becomes:
a medium of exchange and a unit of account
according to the Phillips curve, there is ____ relationship between inflation and the employment rate/
a negative
Expansionary fiscal policy will cause which of the following?
a rise in interest rates
If unemployment falls below the full-employment level of GDP, inflation will begin to ______________ because wages begin to ______________.
accelerate; increase
An increase in wages will cause a shift in the __________.
aggregate supply
capital gains tax cuts
aggregate supply
if regulations make it more costly for businesses to produce, what happens to aggregate supply?
aggregate supply shifts left (less output at any given price)
In the long run, expansionary fiscal policy only leads to inflation, and has no other effects on the economy
false
liquidity means
how quickly something can be converted to currency
If the average price of US items (measured by the GDP deflator) rises, what will happen to US imports?
increase
Assuming banks keep nearly zero excess reserves, what would happen to the money supply if the Fed increased the required reserve ratio?
it falls
You receive dollars for payment when you mow your neighbor's lawn. Which function of money does this best demonstrate?
medium of exchange
What is the opportunity cost of $1.00 when the interest rate is 60 percent?
the opportunity cost is $0.60
When interest rates rise, what happens to bond prices?
they fall
You have $10,000 in your pocket today. If you deposit $5,000 into bank A and $5,000 into bank B with both accounts earning 4 percent interest, what is the future value of this deposit in one year?
$10,400
Today you have $10. If the interest rate is 3.25 percent, what is the future value of that $10 one year from now?
$10.33
The figure below shows the effect of an increase in total national spending. What is the level of output after the increase in spending?
$17 trillion
You have $4,000 in your pocket today. If you deposit this into a bank account paying 4 percent interest, what is the future value of that money in one year?
$4,610
The money supply is $10T and nominal GDP is $5T. What is velocity?
1/2
Assume the economy is in long-run equilibrium and that the Government decreases taxes to fulfill campaign promises. What happens in the economy in the short run? in the long run?
An increase in real GDP and prices, followed in the long run by decreasing real GDP and increasing prices
Bitcoins are used to purchase goods and services from certain vendors. This is evidence that Bitcoin fulfills which of the following functions of money?
Bitcoins are a medium of exchange (for those store that accept it)
What determines how much the money supply can expand?
How much money people deposit into their bank accounts How much excess reveres the bank holds The requires reverse ratio
A decrease in Aggregate Demand results in a _____________.
Lower GDP deflator and lower real GDP
Why would Alan Greenspan care about fiscal policy?
Monetary and Fiscal Policy interact
What would happen to the money market if there was an increase in economic growth?
Money demand will increase
The broader definition of the money supply M(2) includes
Small time certifications of deposit checkable deposits
Aggregate demand slopes down because ______________.
The price level affects imports and exports The price level affects interest rates The price level affects the real value of currency and deposits
Compare two possible situations: I. Current real GDP is above the full employment level of real GDP. II. Current real GDP is below the full employment level of real GDP. Which of the following is most likely?
Wages will rise in situation I and fall in situation II.
Explain why the economy may naturally return to the full employment level of real GDP if we are currently producing more than the potential level of real GDP in the short run.
With low unemployment, there will be a tendency for wages to rise, lowering production, increasing prices, and lowering consumer spending.
Suppose the economy has unemployment levels close to 15%. A proper fiscal policy might be which of the following:
a decrease in income taxes
Per-Child Tax Credit
aggregate demand
Assume the economy is currently at full employment. Now suppose there is an increase in U.S. exports. The price-level in the short run will ______________; the price-level in the long run will ______________.
increase; increase again
What likely happens to investment spending if the Fed does open market purchases?
it rises
Banks will hold substantial excess reserves when which of the following is true?
loans to customers look unusually risky or if interest rates are low
Which of the following expressions does not describe the natural rate of unemployment?
potential unemployment
2002 tax change to investment
supply side
When bond prices rise, what happens to the interest rate (yield to maturity) on those bonds?
they fall
Greece experienced a large drop in total spending. How would we model this change in our models of aggregate supply and aggregate demand?
with a shift to the left of aggregate demand
When consumers become optimistic and plans to spend more: Aggregate demand changes?
yes
When government increases spending? aggregate demand changes?
yes
When labor force participation increases: aggregate supply changes?
yes
Which of the following is true, if nothing else changes?
if the federal reserve decreases the money supply, the federal budget deficit will likely get larger
If the President's goals are to increase the size of government and to solve unemployment problems after a fall in aggregate demand, the President should:
increase government spending
The simple money multiplier will ______________ as the required reserve ratio ______________
increase, decrease
An increase in government spending will cause the demand for money to ______________, then interest rates to ______________, which in turn causes investment spending to ______________.
increase, increase, decrease
If total spending increases, tax receipts will ______________. If income tax rates increase, tax receipts will ______________, and total spending will ______________.
increase, increase, decrease
When consumers become optimistic and plans to spend more: price level
increases
When government increases spending? real GDP
increases
When labor force participation increases: real GDP
increases
According to the "Phillips Curve" explaining the relationship between inflation and unemployment, what will happen when spending decreases?
inflation decreases
according to the "Phillips curve" explaining the relationship between inflation and unemployment what will happen when spending decreases?
inflation decreases
What likely happens to the money supply when the Fed lowers the interest rate on excess reserves?
it rises
compare two economies A and B. Everything is the same except economy A is in recession, and economy B is at full employment. Assume that consumption spending increases. Economy A's price level will change by ______________ than economy B's price level. Economy A's real GDP will change by ______________ than economy B's real GDP level.
less, more
You have a choice of either $1,000 today or $1,500 in 5 years. If the interest rate is 8 percent, which choice gives you the highest amount of money?
$1,500 in 5 years
Three years ago, you put $1,500 into an account paying 3 percent interest. How much is the account worth today?
$1.639.09
Assume that bank reserves are equal to $2,000, and the required reserve ratio is changed from 10 percent to 20 percent. Banks make as many loans as they can. What is the upper limit of the money supply when the required reserve ratio is increased? Also, assume no borrower withdraws currency and leaves the loan balance in the bank after a loan is created.
$10,000
If $800 is deposited into a bank account earning 8% interest, how much will this become if the banks make the most loans they can?
$10,000
If bank reserves are equal to $2,000, the required reserve ratio is 10 percent, and banks make as many loans as they can, what will be the upper limit of the money supply assuming no borrower withdraws currency and leaves the loan balance in the bank after a loan is created?
$20,000
Suppose that banks keep no excess reserves and individuals and firms hold on to no currency. If someone finds $7.5 million in currency and deposits all of it into a checking account, what is the upper limit or maximum amount of the money supply when the required reserve ratio is 10 percent?
$75 million
Today you have $700. If the interest is 9 percent, what is the future value of $700 in one year from now?
$763
which of the following changes will eventually cause a shift in the aggregate supply curve? 1. INCREASE IN INVESTMENT 2. DECREASE IN PRODUCUTIVITY 3. INCREASE IN CONSUMPTION
1 and 2 ONLY
The economy is suffering from too much unemployment. If the Federal Reserve were to use the discount rate to address this problem, what would it do to the discount rate?
lower
If the economy is currently at full employment, what will be the short-run effect of a fall in U.S. exports?
1: DECREASE 2: DECREASE
Match the following curves in the aggregate demand and aggregate supply diagram with their correct shapes.
1: downward sloping 2: upward sloping 3: vertical line
Assume there is only one bank and that all the people deposit all of their money into the bank. The people deposit $10 million and the bank holds 5 percent of the deposits as reserves. What is the simple money multiplier in this economy?
20
If velocity is constant and productivity per worker is expected to grow by about 1.2 percent and the labor force by 1 percent, the money supply must grow at a rate of [numerical answer] percent per year in order to get 2 percent inflation.
4.2
If banks wish to hold 20 percent of deposits in reserve and the Fed buys $100 billion in bonds, the M2 money supply could increase by as much as $______________ billion.
500
When consumers become optimistic and plans to spend more: aggregate supply changes?
no
When foreigners preferences for U.S. goods fall: aggregate supply changes?
no
People really dislike falling income and rising prices. What kind of change in our model will make people really unhappy?
A decrease in AS
In 2007, the price of houses fell dramatically across the country. As a result, the wealth of most households fell substantially. How would we model the effect of this change in terms of AS/AD?
A shift in the AD curve to the left
How would we model an increase in the amount of capital available in an economy?
A shift to the right of the AS curve
The people of MicroIsland use sea shells as a way of exchanging goods and services. The shells are:
not money because the government didn't print it
What is the only way investors can earn an interest rate that is more than 5% on a 1-year bond that pays $1000 in one year?
pay a price lower than $952.38 for the bond
what happens to the price level as a result of an increase in spending?
price increase
the economy is initially in equilibrium. labor laws become more restrictive minimum wage rises, employers required to provide more health care, have more work place regulations to comply with, At the new equilibrium, what has happened to real GDP and price?
price rises, GDP falls
Given a supply shock that moves the economy from a long-run equilibrium to a new short-run equilibrium at less than full-employment GDP, which of the following policies would be appropriate if the goal was to reduce inflation?
raise taxes
as a result of the higher cost of production, what will be the short run effect of price and output level?
real GDP --> decrease Price level --> Increase
At the new level of output, is the economy above, below or at the full employment level of output?
At full-employment
the long run effect of an increase in investment spending will be a shift of the aggregate demand curve to the ___ and ___ shift of aggregate supply curve
right; a rightward
Consider the following quote: "Over one and a half million people were laid off from jobs following the doubling of oil prices in 1979." What was the policy dilemma faced by monetary and fiscal policy makers?
rising prices and rising unemployment
If the FOMC decides to increase the Federal Funds rate, it will:
sell bonds on the open market
If we have just experienced a negative supply shock and one is concerned about the current rate of inflation caused by the negative supply shock, then one:
should recommend a tax increase or a ploy of doing nothing
as we move up the aggregate supple curve, the amount of labor available in the economy _____
stays the same
Assume (1) the deficit would be zero if the economy were at full employment, but (2) the economy currently has a large unemployment rate. Which of the following must be true?
the actual budget must have a deficit
Suppose that you have a bond that originally cost you to $1,000 to purchase. It pays you $50 in interest each year. That interest payment does not change, and the original purchase price will be returned to you far in the distant future. What would happen to the current market price of your bond (yes, there is a market, and you can resell the bond to someone else) if interest rates for all similar bonds in the economy rise to 6 percent?
the price of your bond will fall
what happen to aggregate demand and aggregate supply if the price of an important input increases
there is no change in aggregate demand but aggregate supply decreases
What likely happens to the amount of loans banks make when the Fed raises the interest rate on excess reserves?
they fall
Compare two possible situations: I. Current real GDP is above the full employment level of real GDP. II. Current real GDP is below the full employment level of real GDP. Given the two situations above, in which will the change take place more rapidly?
Faster in situation I
An increase in Aggregate Demand results in a ____________.
Higher GDP deflator and higher real GDP
Which of the following accurately refers to "crowding in"?
Increased investment in response to expansionary fiscal policy.
If individuals hold less currency because it is easy to get currency from automatic teller machines, and everything else is the same, will the money supply be larger or smaller?
Larger, because banks will be able to make more loans given the amount of reserves.
In the following sentences, indicate the direction of the change and whether the demand or the supply curve changes. if people in the U.S. develop an increasing taste for Latin American products, the effect os a (rightward/leftward) movement of the aggregate (demand/supply) curve
Leftward; demand
Store owners in the U.S. accept dollars for the purchase of goods and services. Every day, you have woken up and believed that the exchange of dollars for goods and services could occur. Why?
Money is a medium of exchange
You are keeping $50 in your pocket in case you find your favorite candy for sale. Sadly you've been told that the candy is discontinued, but you still carry the money in case you find the candy. Which function of money does this satisfy?
Money is a store of value
What are the desirable characteristics of the good used as money?
Money is a store of value Money is a medium of exchange Money is a unit of account
If banks were required to keep 100 percent in reserves, and if all the currency in the economy was deposited into a bank, then:
Money supply would not change
credit cards are part of
Neither M(1) nor M(2)
An increase in interest rates causes the:
Quantity demanded of money to decrease
Compare two economies, A and B. Everything is the same except economy A is in recession and economy B is at full employment. Given an increase of $25 billion in exports in each of the two economies, analyze the changes (if any) in price levels and real GDP in economy A in the long-run equilibrium.
Real GDP --> Increase Price Level --> Increase
Analyze the changes (if any) in price levels and real GDP in economy B in the long-run equilibrium.
Real GDP --> No change Price Level --> Increase
as a result of a higher cost of production, what will be the short-run effect on price and output level?
Real GDP --> decrease Price Level --> Increase
What happens to the level of unemployment because of an increased spending?
unemployment falls below the full employment rate of unemployment
Which of the following make(s) the conduct of discretionary policy difficult?
The fed implements policy now that will affect the economy in the future The fed has to make forecasts about the future based on current data The fed in uncertain about how large the effect of a policy change will be
Which of the following could be true?
The federal budget deficit increases while interest rates fall The deficit larger during a recession The deficit gets larger while inflation increases
The most commonly used monetary policy instrument is _________.
The federal funds rate and open market operations
What is the opportunity cost of holding currency?
The opportunity cost is the interest that could have been earned if the currency was in the bank.
What happens to the level of unemployment because of the increased spending?
unemployment falls below the full-employment rate of unemployment
During the Great Depression, unemployment was extraordinarily high for more than twelve years. Prices fell significantly. Which of the following is a possible explanation of the length of the Depression?
Wages must not have fallen. Aggregate demand must have decreased causing a new short-run equilibrium.
compare two possible situations 1. Current real GDP is above the full employment level of real GDP 2. Current real GDP is below the full employment level of real GDP which of the following is most likely
Wages will rise in stations 1 and fall in situations 2
An increase in spending in the economy will cause which of the following changes in interest rates?
an increase in interest rates as the demand for money increases
why does the aggregate supply curve become very steep at high levels of real GDP
at very high level of production, capacity constraints become severe and more spending can only lead to higher prices
If the Federal Reserve System is concerned that the economy is suffering from too much unemployment, will the Federal Reserve buy or sell bonds?
buy
A balanced budget amendment is passed and is made effective in a time when the economy is producing a level of real GDP that is less than the potential. The federal budget is currently in deficit. What should the Federal Reserve do?
buy bonds
A friend has won a lottery and comes to you and asks which choice he should take. Either $185 million paid one year from now or $165 million paid now? What would you tell him to do?
cannot tell with the information given
M(1) includes:
currency demand deposits travelers checks
When the price level rises, what happens to the amount of stuff you can buy with money?
decrease
A decrease in government spending of $100 billion will cause aggregate quantity demanded at each price level to ____
decrease by more than a $100 billion
When foreigners preferences for U.S. goods fall: price level
decreases
When foreigners preferences for U.S. goods fall: real GDP
decreases
When labor force participation increases: price level
decreases
2003 tax change
demand and supply side
2001 change to income tax
demand side
If the short-run equilibrium in the economy results in real GDP being less than potential GDP, which of the following changes will most likely occur?
falling wages will cause falling prices and rising employment
compare two possible situations 1. Current real GDP is above the full employment level of real GDP 2. Current real GDP is below the full employment level of real GDP given the two situations above, in which will the change take place more rapidly
faster in situations 1
if businesses have excess capacity and will produce more without an increase in prices, the slope of the aggregate supply curve is _____
flat
"An increase in the budget deficit can be beneficial for the economy," said a member of Congress during the November budget debates. Could this statement be true?
yes
When foreigners preferences for U.S. goods fall: aggregate demand changes?
yes
Why does the aggregate supply curve become very steep at high levels of real GDP?
At very high levels of production, capacity constraints become severe and more spending can only lead to higher prices.
An decrease in Aggregate Supply results in a __________.
Higher GDP deflator and lower real GDP
Which of the following would cause AD to decrease, that is, shift to the left?
Increase in income taxes
education tax incentives
aggregate demand and aggregate supply
estate tax cuts
aggregate demand and aggregate supply
if the average price of US items (measured by the GDP deflator) rises, what will happen to US exports?
decrease
Once decisions have been made to use monetary policy and fiscal policy to solve a problem, it will take less time for monetary policy to have an effect on real GDP and the price level than would an increase in government spending.
false
In economy A, we are in the middle of a recession. In economy B, we are experiencing a demand-pull inflation. Assume that total spending increases in both economies. The real GDP level in economy A will ______________. The real GDP level in economy B will ______________.
increase, increase
an economy which is producing at its potential level of GDP has just experienced a quadrupling of oil price. what will happen as a result?
inflation will increase and unemployment will increase. eventually prices will Come back down and employment will rise.
Why will an economy return naturally to the potential level of Gross Domestic Product more quickly from an output level greater than the full-employment level than an output level less than the full-employment level?
it takes longer for wages to fall than it does for wages to increase
what would happen to the money market if there was an increase in economic growth
money demand will increase
The tool most relied on by the Federal Reserve in conducting monetary policy is ____________.
open market operations
When the federal reserve announces that it is increasing the federal funds rate, it is actually going to ___________.
sell bonds on the open market until the federal funs rate rises the new target
Currently, bank reserves are equal to $2,000, the required reserve ratio is 10 percent, banks make as many loans as they can, and no borrower withdraws currency and leaves the loan balance in the bank after a loan is created. There is $500 in currency that is found and deposited into the bank. Assume that the currency was not previously in the banking system and is permanent. How much has the money supply increased?
$5,000
currently banks reserves are equal to $2,000, the requires reserve ration is 10%, banks make as many loans as they can and no borrowers withdraws currency and leaves the loan balance in the bank after a loan is created. there is $500 in currency that is found and deposited into the banks, assume that the currency was not previously in the banking system and is permanent. how much has the money supply increase?
$5,000
the total amount of US currency is roughly ___ per US citizens over the age of 19
$6,000
suppose there is $1 billion In currency in circulations and banks have $2 billion in reserves at the fed. The reserve ration is 30%. and there are no travelers checks, what is the M1 money supply
$7.67 billion
Suppose an increasing number of consumers become worried about job security. This may affect consumption spending and be most likely to subsequently cause which of the following?
A decrease in employment and perhaps a decrease in inflation
Inflation can result from a change in aggregate demand or a change in aggregate supply. How can one tell which of the two has caused the inflation?
Inflation caused by demand is accompanied by rising real GDP, while inflation caused by aggregate supply comes with relatively low real GDP.
Sort the following events in the order of occurrence explaining the process of natural adjustment to full-employment level of output in response to a decrease in aggregate demand.
Output falls below full employment level High unemployment puts downward pressure on wages Lower wages increase aggregate supply Output is back at full-employment level
Businesses become more optimistic about the future and decide to invest more. what will this do to aggregate demand?
aggregate demand shifts right (more spending at any given price)
If the required reserve ratio is 5 percent and banks always try to remain fully loaned out, what will be the effect of a Federal Reserve purchase of $10 billion of bonds?
an increase in the money supply of $200 billion
Refer to the diagram in the previous question. At the new level of output, is the economy above, below or at full employment?
below full employment
when interest rate rises, how does business investment spending respond?
decrease
When government increases spending? aggregate supply changes?
no
An economy is initially in equilibrium. Suppose that the government decides to increase spending and that simultaneously, consumers become more optimistic. Sort the statements in order so that they describe what happens.
1: the aggregate demand curve shifts to the right 2: at the old price level, desired spending exceeds production 3: business inventory begins to fall 4: business respond by increasing output 5:marginal costs begin to rise as production increase 6:businesses start to increase price 7: spending on consumption, investment, and net exports decrease as the price level rises 8: a new equilibrium is reached at a higher price and higher level of real GDP
An economy is initially in equilibrium. Suppose that a natural disaster destroys some of the physical capital in the economy. Sort the statements in order so that they describe what happens.
1: with less capital, businesses cannot produces as much as before the disaster. Output initially falls and the aggregate supply curve shifts left 2: at the old price level, desire spending exceeds production 3: business inventory begins to fall 4: businesses respond by increasing output 5: marginal costs begin to rise as production increases 6:business start to increase prices 7:spending on consumption, investment and net exports slows down as the price level rises 8:a new equilibrium is reached at a higher price and lower level of real GDP
How would we model the effect of a new costly regulation on businesses?
A shift left of the AS curve
Compare two situations:Year 1. Real GDP increases, and at the same time, interest rates increase.Year 2. Real GDP increases, and at the same time, interest rates decrease. What is a possible explanation of the difference?
An increase in spending may have caused the increase in GDP in year 1; an increase in the money supply may have caused the increase in GDP in year 2.
Consider an individual who has secure employment but who is concerned about inflation. Suppose that oil prices rise. Which of the following policies would this person be likely to favor?
An increase in taxes and a decrease in government spending
In our model of aggregate supply and aggregate demand, how does expansionary monetary policy work to increase real GDP and the price level? Sort the following in the order in which they occur.
The federal reserve buy bonds The federal funs rate falls Banks have excess reserves and lend more, causing the money supply to increase Planned investment spending rises as interest rate falls aggregate demand increases The aggregate quantity demanded excess aggregate quantity supplied inventories begin to fall Firms begin to increase production and some raise prices A new equilibrium is reached, GDP is higher and the price level is higher
Which of the following would weaken the argument for the use of discretionary monetary policy and strengthen the argument for rules?
The term length for Fed board members is shortened from 14 years to 2 years.
Which of the following groups would prefer monetary policy to ameliorate a recession, as opposed to fiscal policy?
borrowers
If the economy is currently at full employment, what will be the short run effect of an increase in saving
a decrease in real GDP, a decrease in the price level
If the economy is currently at full employment, what will be the short run effect of an increase in saving?
a decrease in real GDP, a decrease in the price level
Which of the following will cause a $100 million purchase of bonds by the Federal Reserve to have the larger effect on real GDP?
an increase in the sensitivity of interest rates to changes in the money supply
The economy is suffering from too much unemployment. If the Federal Reserve were to use the required reserve ratio to address this problem, what would it do to the required reserve ratio?
lower
Compare the following two situations. Both have rapidly rising aggregate spending. However, economy A is experiencing rapidly rising productivity; economy B is experiencing no or little change in productivity. In economy A, we would expect ______________ inflationary pressures and ______________ output than in economy B.
lower; more
When labor force participation increases: aggregate demand changes?
no
which of the following expressions does not describe the full employment level of output
non-accelerating inflation rate of real GDP
