Macroeconomics Exam 3
An adverse supply shock causes inflation to
rise and the short-run Phillips curve to shift right
In a fractional-reserve banking system, a bank
keeps only a fraction of its deposits in reserve
If the reserve ratio is 15 percent, the money multiplier is
6.7 (divide the reserve ratio by 1)
Which of the following is not correct?
A recession is a period of declining real incomes and declining unemployment
Reserves are
deposits that banks have received but have not yet loaned out
Other things the same, when the price level falls, interest rates
fall, so firms increase investment
If the reserve ratio is 10 percent, the money multiplier is
10
John and Jane decide to go on a vacation. As a result, they withdraw $2,500 from their savings account to purchase $2,500 worth of traveler's checks. As a result of these changes
M1 increases by $2,500 and M2 stays the same
An increase in the money supply will
Reduce interest rates and increase aggregate demand
Suppose Congress decides to reduce government expenditures by reducing its purchases of weapons systems. Which of the following would you expect to occur as a result of this change?
The economy will move down and to the right along the short-run Phillips Curve
All U.S. paper dollars read "This note is legal tender for all debts, public and private." This statement represents which characteristic of US currency?
U.S. paper money is fiat money
Which of the following is correct?
When real GDP falls, the rate of unemployment rises
Economists who are skeptical about the relevance of "liquidity traps" argue that
a central bank continues to have tools to stimulate the economy, even after its interest rate target hits its lower bound of zero
An increase in government spending initially and primarily shifts
aggregate demand to the right
The equation: quantity of output supplied = natural rate of output + a(actual price level - expected price level), where a is a positive number, represents
an upward-sloping short-run aggregate supply curve
The federal funds rate is the interest rate
banks charge each other for short-term loans of reserves
In a system of 100-percent-reserve banking
banks do not make loans
In the long run, policy that changes aggregate demand changes
both unemployment and the price level
Which of the following is a store of value?
cash and stocks
When the price level falls the quantity of
consumption goods demanded and the quantity of net exports demanded both rise
Proponents of rational expectations argued that the sacrifice ratio
could be low because people might adjust their expectations quickly if they found anti-inflation policy credible
An increase in government purchases is likely to
crowd out investment spending by business firms
When taxes increase, consumption
decreases, so aggregate demand shifts left
Assume the money market is initially in equilibrium. If the price level increases, then according to liquidity preference theory there is an excess
demand for money until the interest rate increases
Aggregate demand shifts right if
government purchases increase and shifts left if stock prices fall
According to liquidity preference theory, the money-supply curve would shift rightward
if the Federal Reserve chose to increase the money supply
According to liquidity preference theory, if the quantity of money demanded is greater than the quantity supplied, then the interest rate will
increase and the quantity of money demanded will decrease
If the Fed wants to reverse the effects of an adverse supply shock on unemployment, it should
increase the money supply growth rate, which raises the inflation rate
An increase in the MPC
increases the multiplier, so that changes in government expenditures have a larger effect on aggregate demand
If the economy is initially at long-run equilibrium and aggregate demand declines, then in the long run the price level
is lower and output is the same as the original long-run equilibrium
Real GDP
measures economic activity and income
If people decide to hold less money, then
money demand decreases, there is an excess supply of money, and interest rates fall
Other things the same, a decrease in the price level makes consumers feel
more wealthy, so the quantity of goods and services demanded rises
The short-run effects of the housing and financial crisis are shown by
moving to the right along the short-run Phillips curve
A decrease in the expected price level shifts
only the short-run aggregate supply curve right
Monetary policy and fiscal policy influence
output in the short run only
Assume the multiplier is 5 and that the crowding-out effect is $30 billion. An increase in government purchases of $20 billion will shift the aggregate-demand curve to the
right by $70 billion (multiply government purchases by 5, then subtract the crowding-out effect)
If banks and speculators in the U.S. decided to exchange U.S. dollars for the foreign currencies of other countries, but foreigners do not desire to increase their holdings of U.S. dollars, then U.S. net exports would
rise and aggregate demand would shift right
The short-run effects of rising world commodity prices are shown by
shifting the short-run Phillips curve right
The aggregate demand curve shifts left if either
speculators gain confidence in U.S. assets or foreign countries enter into recession
Liquidity refers to
the ease with which an asset is converted to the medium of exchange
The discount rate is
the interest rate the Fed charges banks
According to liquidity preference theory, a decrease in money demand for some reason other than a change in the price level causes
the interest rate to fall, so aggregate demand shifts right
Milton Friedman argued that the Fed's control over the money supply could be used to peg
the level or growth rate of a nominal variable, but not the level or growth rate of a real variable
An improved functioning of the labor markets will shift
the long-run Phillips curve to the left and the long-run aggregate supply curve to the right
If the actual price level is 165, but people had been expecting it to be 160, then
the quantity of output supplied rises, but only in the short run
When the Fed buys bonds
the supply of money increases and so aggregate demand shifts right
Milton Friedman and Edmund Phelps argued in the late 1960s that in the long run the Phillips curve is
vertical, which implies that monetary and fiscal policies cannot influence the level of unemployment in the long run