Principles of Macroeconomics (Ch. 12, 13, 14, 15)

Which of the following best explains the difference between commodity money and fiat money?

Fiat money has no value except as money, whereas commodity money has value independent of its use as money.

A supply shock is

a sudden increase in the price of an important natural resource, resulting in a leftward shift of the short-run aggregate supply curve.

Stagflation occurs when

a supply shock shifts the SRAS to the left, increasing the price level and decreasing actual GDP.

The most important determinant of consumption spending is

current personal disposable income.

When aggregate expenditure is greater than GDP, inventories will ______ and GDP and total employment will ______.

fall; increase

A change in the price level will cause a _________ the aggregate demand curve.

movement along

An increase in the price level will cause a ________ the aggregate demand curve.

movement up along

The price level increases, so the long-run aggregate supply curve will

not change.

Money serves as a standard of deferred payment when

payments agreed to today but made in the future are in terms of money.

Money serves as a unit of account when

prices of goods and services are stored in terms of money.

The use of money

reduces the transaction costs of exchange, allows for greater specialization, and eliminates the double coincidence of wants.

An increase in gov't purchases and a faster income growth in other countries will cause a ________ the aggregate demand curve.

rightward shift of

Usually at the beginning of a recession, inventories _____, but at the beginning of an expansion, inventories _____.

rise; fall

A change in consumption will cause a _________ the aggregate demand curve.

shift to the left in

A change in investment will cause a _________ the aggregate demand curve.

shift to the right in

Technological change occurs, so the long-run aggregate supply curve will

shift to the right.

The labor force increases, so the long-run aggregate supply curve will

shift to the right.

There is an increase in the quantity of capital goods, so the long-run aggregate supply curve will

shift to the right.

The _______________ is considered the most relevant interest rate when conducting monetary policy.

short-term nominal interest rate

Congress broadened the Fed's responsibility since

the 1930s as a result of the Great Depression.

Additionally, the federal funds rate is

very imp. for the Fed's monetary policy because the Fed uses the federal funds rate as a monetary policy target since it can control the rate through open market operations.

Governments sometimes allow hyperinflation to occur because

when govt's want to spend more than they collect in taxes, central banks increase the money supply at a rate higher than GDP growth, often resulting in hyperinflation.

The wealth effect refers to the fact that

when the price level falls, the real value of household wealth rises, and so will consumption.

What was Apple's actual investment spending?

2.1 million iPhones

Suppose Apple plans to produce 16.5 million iPhones. It expects to sell 14.0 million and add 2.5 million to the inventories in its stores. At the end of the year, Apple has sold 14.4 million iPhones. What was Apple's planned investment spending?

2.5 million iPhones

Which one of the following is not one of the monetary policy goals of the Federal Reserve?

A high foreign exchange rate of the U.S. dollar relative to other countries.

The aggregate demand curve slopes downward for all of the following reasons except:

A lower price level makes imports from other countries less expensive, and U.S. citizens but more imports.

What is a banking panic?

A situation in which many banks experience runs at the same time.

The economic definition of money is:

Any asset that people are generally willing to accept in exchange for goods and services.

Which if the following is not a function of money?

Commodity.

Which of the following is not a main determinant of net exports?

Expectations of future profitability in the United States.

What are the four main determinants of investment?

Expectations of future profitability, interest rates, taxes and cash flow.

Which if the following is a monetary policy target used by the Fed?

Interest rate.

What is the effect on inventories, GDP, and employment when aggregate expenditure (total spending) exceeds GDP?

Inventories decrease, GDP increases, and employment increases.

What do economists mean by the demand for money?

It is the amount of money-currency and checking account deposits-the individuals hold.

What is the formula for the quantity theory of money?

M x Y = P x V

What is the advantage of holding money?

Money can be used to buy goods, services, or financial assets.

Which of the following is included in M2 but not M1?

Money market deposit accounts in banks

What is fiat money?

Money that is authorized by a central bank and that does not have to be exchanged for gold or some other commodity money.

What is the disadvantage of holding money?

Money, in the form of currency or checking account deposits, earns either no interest or a very low rate of interest.

Which one of the following is not one of the policy tools the Fed uses to control the money supply?

Moral suasion.

How would an increase in interest rates affect investment?

Real investment spending declines.

Which one of the following is not one of the monetary policy goals of the Fed?

Reduce income inequality.

Which of the following policy tools is the Federal Reserve least likely to use in order to actively change the money supply?

Reserve requirements.

The formula for the simple deposit multiplier is

Simple Deposit Multiplier= 1/RR

Which one of the following best explains how the Federal Reserve acts to help prevent banking panics?

The Fed acts as a lender of last resort, making loans to banks so that they can pay off depositors.

Which tool is the most important?

The Fed conducts monetary policy principally through open market operations.

Which one of the following is not a determinant of consumption spending?

The growth rate in the United States relative to the growth rates in other countries.

Monetary policy is defined as:

The actions the Federal Reserve takes to manage the money supply and interest rates.

What is not included in the M1 definition of the money supply?

The funds in your savings account and your Citibank Platinum MasterCard.

Which of the following conditions make a good suitable for use as a medium of exchange?

The good must be: -durable -relative to its weight -divisible -acceptable -standardized quality

What are the Fed's main monetary policy targets?

The money supply and interest rates

What relationship is shown by the aggregate demand curve?

The price level and the quantity of real GDP demanded by households, firms, and the government.

What relationship is shown by the aggregate supply curve?

The price level and the quantity of real GDP supplied by firms.

How does the quantity theory provide an explanation about the cause of the inflation?

The quantity equation shows that if the money supply grows at a faster rate than real GDP, then there will be inflation.

How do the banks "create money"?

When there is an increase in checking account deposits, banks gain reserves and make new loans, and the money supply expands.

In the aggregate expenditure model, when is planned investment greater than actual investment?

When there is an unplanned decrease in inventories.

The international-trade effect refers to the fact that an increase in price level will result in

a decrease in exports and an increase in imports.

Reserve requirements are changed infrequently because

banks set long-term policy decisions, loan decisions, and deposit decisions based on the reserve requirement.

To increase the money supply, the FOMC directs the trading desk, located at the Federal Reserve Bank of New York, to

buy U.S. Treasury securities from the public.

When the Fed conducts an open market purchase, the Fed ____________ and the money supply __________.

buys securities from banks; increases

A movement from point A to point C (movement to right from line AD1 to AD2) could be the result of a

change in the expectations of households.

A movement from point A to point B (movement down along) on AD1 could be the result of a

change in the price level.

The long-run aggregate supply curve is vertical because in the long run,

changes in the price level do not affect potential GDP, as potential GDP depends in the size of the labor force, capital stock, and technology.

Stagflation is a

combination of inflation and recession.

When the Fed conducts an open market purchase, the interest rate should _________.

decrease

By raising the discount rate, the Fed leads banks to make _______ loans to households and firms, which will _______ checking account deposits and the money supply.

fewer; decrease

The U.S. dollar can best be described as

fiat money.

Inventories refer to

goods that have been produced but have not yet been sold.

The interest rate effect refers to the fact that a higher price level results in

higher interest rates and lower investment.

Very high rates of inflation are called

hyperinflation.

An increase in the growth rate of GDP in the BRIC nations (Brazil, Russia, India, and China) will

increase U.S. net exports by increasing exports to these countries.

A rise in stock prices and housing prices

increases household wealth which in turn increases consumption and leads to an upward shift of the consumption function.

Money is an imperfect standard of deferred payment because _______ causes the value of money to decrease over time.

inflation

The real-world money multiplier

is smaller than the simple deposit multiplier because banks keep excess reserves and households hold excess cash

A countercyclical policy is one that

is used to attempt to stabilize the economy.

The Fed uses targets of interest rate and/or money supply because

it can affect the interest rate and the money supply directly and these in turn can affect unemployment, GDP growth, and the price level.

An increase in state income taxes or interest rates will cause a ________ the aggregate demand curve.

leftward shift of

When interest rates on Treasury bills and other financial assets are low, the opportunity cost of holding money is __________, so the quantity of money demanded will be __________.

low; high

Which of the following does the aggregate expenditure macroeconomic model seek to explain?

the business cycle

When the Federal Reserve sells Treasury securities in the open market,

the buyers of these securities pay for then with checks and bank reserves fall.

A double coincidence of wants refers to

the fact that for a barter trade to take place between two people, each person must want what the other one has.

The federal funds rate is

the interest rate that banks charge each other for overnight loans.

If the price level increases,

the money demand curve shifts to the left.

If real GDP increases,

the money demand curve shifts to the right.

When the Federal Reserve decreases the discount rate,

the money supply will increase.

The position of the long-run aggregate supply curve is determined by

the number of workers, the amount of capital, and the available technology.

When the Federal Reserve purchases Treasury securities in the open market,

the sellers of such securities deposit the funds in their banks and bank reserves increase.

When Congress established the Federal Reserve in 1913, its main responsibility was

to make discount loans to banks suffering from large withdrawals by depositors.

Macroeconomic equilibrium occurs where

total spending, or aggregate expenditure, equals total production, or GDP.

When money is acting as a store of value, it allows an individual to

transfer dollars, and therefore purchasing power, into the future.

If the Fed believes the inflation rate is about to increase, it should

use a contractionary monetary policy to increase the interest rate and shift AD to the left.

If the Fed believes the economy is about to fall into recession, it should

use an expansionary monetary policy to lower the interest rate and shift AD to the right.