Section 6 Economics - Watson
Assume the velocity of money is 3 and the LRAS curve is vertical at $100 million. What impact will a 10% increase in the money supply have on real output?
There will be no impact on real output
In which of the following scenarios is the Fed most likely to buy bonds?
The unemployment rate is higher than the natural rate.
In which of the following scenarios is the Federal Reserve most likely to sell bonds?
The unemployment rate is lower than the natural rate.
Which of the following is true if the economy is producing at the full employment level of output?
There is still frictional unemployment.
Expansionary monetary policy results in which of the following in the short run? - I. The money supply increases - II. The nominal interest rate decreases - III. The real interest rate decreases - IV Bond prices decrease
I, II, and III only
If the Fed sought to drastically reduce the money supply one would expect:
GDP to fall unless velocity increased
In the short run, when the Fed decreases the quantity of money:
bond prices fall and the interest rate rises.
In the short run, when the Fed increases the quantity of money:
bond prices rise and the interest rate falls
Nominal interest rates are determined in the money market, and real interest rates in the:
loanable funds market.
Bob is a college student who is not working or looking for a job. The Bureau of Labor Statistics counts Bob as
neither in the labor force nor unemployed
Given a marginal propensity to save (MPS of 0.25, a government tax increase of $500 million would be expected to provide a
$1.5 billion contractionary effect
Suppose the Reserve Ratio is 10% and a bank with no excess reserves had $100,000 deposited into a checking account. What would the potential increase in the money supply be?
$900,000 because excess reserves impact will be 10 to 1 impact
Which of the following arguments is typically associated with classical economists?
A market economy is self-correcting and thus will not remain in a recession indefinitely.
Which of the following people would be considered unemployed?
A person who stayed home to raise his children and now starts looking for a job
Of the following, which is the best example of structural unemployment?
A steel worker who is replaced by a robot
Rising input price will shift which curve and create which type of inflation?
AS Cost-push
If a data point on the Short Run Phillips Curve moved from the lower right of the Phillips Curve to the upper left then:
Aggregate Demand Increased
Which of the following statements best describes the impact of a decrease in Japanese income on aggregate demand in the United States?
Aggregate demand will decrease because demand for U.S. exports decreases.
Which of the following would cause the long-run Phillips curve to shift to the right?
An increase in structural unemployment
Which of the following will lead to an increase in the demand for loanable funds in the United States?
An increase in the U.S. government's deficit
In considering whether aggregate supply (AS) is upward sloping or vertical, which of the following statements about Keynesians and Classical economists is most accurate?
An upward sloping AS is Keynesian because it reflects less wage and price flexibility.
What is the relationship between real interest rates and investment?
As real interest rates fall, investment spending rises.
Which of the following occur when a short-run Phillips curve shifts to the right?
At each unemployment rate, the inflation rate is higher and at each inflation rate, the unemployment rate is higher.
Which of the following is most likely when the Federal Reserve increases the reserve requirement? HINT: When the reserve requirement is increased, banks must hold a larger percentage of their deposits on reserve
Bank lending is reduced
If market interest rates fall, what will likely occur?
Bond prices will rise
Which of the following actions by the Federal Reserve will result in an increase in backs' excess reserves?
Buying bonds on the open market
Which of the following does the Federal Reserve use most often to combat a recession?
Buying securities
The M1 definition of money includes which of the following?
Currency in circulation and demand deposits
An increase in personal income taxes will most likely result in which of the following changes in real GDP and the price level in the short run?
Decrease Decrease
Which of the following combined policies would be most effective in decreasing unemployment?
Decrease Decrease Decrease
In order to be called an automatic, or built-in, stabilizer, which of the following must taxes automatically do in a recessionary period and in an inflationary period?
Decrease Increase
"Too much money chasing too few goods'' describes which of the following?
Demand-pull inflation
Which of the following best explains how an economy could simultaneously experience high inflation and high unemployment?
Negative supply shocks cause factor prices to increase
How is economic growth affected when financial markets do not function well?
Economic growth is slowed because less savings are redirected toward investment in new capital.
Expansionary fiscal policy and expansionary monetary policy both cause GDP to increase in the short run. How does each policy affect economic growth in the long run?
Expansionary fiscal policy results in higher interest rates and does not generally promote economic growth; in contrast expansionary monetary policy which lowers interest rates is likely to promote economic growth
Suppose the economy of a country is currently in a recessionary gap. A classical economist would argue that which of the following will occur?
Falling wages will shift the short-run aggregate supply curve to the right, producing full employment
The economy of a country is currently in equilibrium at point A in the diagram above. If the government does nothing and wages are flexible, which of the following will most likely occur in the long run?
Falling wages will shift the short-run aggregate supply curve to the right, producing full employment.
In a mild recession, which of the following is the mostly likely monetary policy solution?
Federal Reserve Purchase of secondary Securities
If the economy is in a severe recession, a Keynesian would argue that which of the following is the most effective in stimulating production?
Government spending increases.
The graph above shows the macroeconomic conditions of Wattsonia. Many economists estimate that the natural rate of unemployment is 6 percent. If this is true, and the current rate of unemployment is 5.1 percent, in what range of real gross domestic product is the economy currently producing?
Greater than Y2
If the Demand Curve for money shifts to the right, which of the following has most likely occurred?
Households or individuals reduced their holdings of money.
If a one year, a $1000 bond pays 5% APR then which of the following is true? - I. The bond will pay $50 at maturity. - II. Maturity occurs after one year. - III. Deficit spending has occurred.
I and II
According to the Classical model, an increase in the money supply causes an increase in which of the following? - I. the price level - II. nominal gross domestic product - III. nominal wages
I, II, and III
Which of the following are true statements about the federal funds rate? - I. It is the same thing as the discount rate. - II. It is the interest rate that banks charge each other for short-term loans. - III. It is influenced by open market operations.
II and III only
Which of the following are formal and legitimate criticisms of Fiscal Policy? - I. Re-election lag - II. Administrative Lag - III. Recognition Lag - IV. Operational Lag
II, III, IV
In a closed economy with no taxes in which the marginal propensity to consume (MPC) is 0.75, which of the following is true?
If income is $100, then saving is $25
What will happen to the supply of loanable funds and the equilibrium interest rate if the Federal Reserve buys government securities?
Increase Decrease
Which of the following fiscal actions will have the best impact on correcting an economy in mild recession?
Increase Government purchases of goods and services.
Which of the following fiscal policy actions would have the greatest positive potential impact on a recession?
Increase government expenditure with no additional tax revenues being raised.
If aggregate demand increases, what will happen to actual inflation and expected inflation in the short run?
Increase, no change
If an economy is operating at an output level above full employment, what will eventually happen to inflation expectations and the short-run Phillips curve?
Inflation expectations will increase shifting the short-run Phillips curve to the right.
If aggregate demand increases (thus decreasing unemployment) what happens to inflation in the short run, and how would this be illustrated on a short-run Phillips curve graph?
Inflation increases, moving up along an existing short-run Phillips curve
If an economy is operating at an output level above full employment, what will eventually happen to inflation expectations and the short-run Phillips curve?
Inflationary expectations will increase shifting the short-run Phillips curve to the right.
Which of the following is true regarding open market operations?
Interest rates will decrease when the Fed buys bonds
Suppose the Federal Reserve buys $400,000 worth of securities from the securities dealers on the open market. If the reserve requirement is 20% and the hanks hold no excess reserves, what will happen to the total money supply?
It will expand by $2,000,000
An increase in which of the following will lead to lower inflation and lower unemployment?
Labor Productivity
Which of the following does the Fed have the least amount of control over?
Long-Term Interest Rates
Which of the following is the strictest, and thereby most liquid, monetary aggregate (that is, definition of the money supply)?
M1
Which of the following is a key feature of Keynesian economics?
Macroeconomic equilibrium can occur at less than full employment
Assume that wages and prices are fully flexible and all inflation is correctly anticipated. According to the quantity theory of money, what would be the impact of expansionary monetary policy on real output and the price level?
No impact on real output, price level increases
Which of the following is most likely the result of the Fed implementing a contractionary monetary policy? HINT: Contractionary monetary policies shrink the money supply.
Nominal interest rates would rise.
If no policy actions are taken in response to a recession, which of the following will likely happen?
Nominal wages will decrease causing a short-run Phillips curve to shift to the left.
A surplus of money in the money market will be eliminated how?
People buy bonds to reduce cash holdings, bidding up their price and pushing interest rates down.
Which of the following would be true if the actual rate of inflation were less than the expected rate of inflation?
People who borrowed funds at the nominal interest rate during this time period would lose
When people with higher incomes pay a higher tax rate and those with lower incomes pay a lower tax rate, we say that the income tax is:
Progressive
In 2008 the Fed took the extraordinary step of buying distressed stock from troubled banks. This activity is most effectively termed
Quantitative Easing
Assume the government implements a tax incentive to encourage individuals to increase savings for retirement. How would the real interest rate change and how would that affect the capital stock and aggregate supply in the long run?
Real interest rates would decrease, the capital stock would increase and the LRAS would shift to the right.
In order to finance an increase in government spending on national defense, the government borrows funds from the public. As a result of the increased government borrowing, what would happen to the real interest rate, private investment spending, and the rate of economic growth?
Real interest rates would increase, investment spending would decrease and the rate of economic growth would decrease.
All of the following are financial assets except
Selling government securities
Which of the following would lead to a decrease in the money supply?
The FED sells government securities
How would an improvement in production technology affect a country's production possibilities curve and LRAS curve?
The PPC would shift away from the origin and the LRAS would shift to the right.
What is the primary cause of deflation according to monetarist theory?
The money supply decreases faster than real output decreases
According to monetarists, what is the primary cause of inflation?
The money supply increases faster than real output is increases
According to the long-run Phillips Curve, which of the following is true?
The natural rate of unemployment is independent of monetary and fiscal policy changes that affect aggregate demand
According to the long-run Phillips Curve, which of the following is true?
The natural rate of unemployment is independent of monetary and fiscal policy changes that affect aggregate demand.
If the demand for money increases in the money market, what will happen to the nominal interest rate, the quantity of money and the price of bonds?
The nominal interest rate increases, the quantity of money remains the same and the price of bonds decreases
When interest rates increase, how is the price of existing bonds affected?
The price decreases.
According to the quantity theory of money, what happens if the money supply increases by 10% assuming the current rate of unemployment is equal to the natural rate of unemployment?
The price level increases by 10%
How do we correctly describe the relationship between bond prices and interest rates?
The price of a bond varies inversely with market interest rates.
Which of the following statements correctly describes the relationship between bond prices and interest rates?
The price of a bond varies inversely with market interest rates.
According to the quantity theory of money, which of the following best describes what determines the rate of inflation in the long run?
The rate of growth of the money supply
Which of the following is true regarding the Phillips Curve?
The short run Phillips curve shifts right when AS shifts right
Which of the following curves illustrates that there is a trade-off between inflation and the unemployment rate?
The short-run Phillips curve (SRPC)
In an economy at full employment, a presidential candidate proposes cutting the government debt in half in four years by increasing income tax rates and reducing government expenditures. According to Keynesian theory, implementation of these policies is most likely to increase:
Unemployment
In an economy at full employment, a presidential candidate proposes cutting the government debt in half in four years by increasing income tax rates and reducing government expenditures. According to the Keynesians, implementation of these policies is most likely to increase:
Unemployment.
Which of the following will most likely result from a decrease in government spending?
a decrease in aggregate demand
Which of the following would most likely cause the United States economy to fall into a recession?
a decrease in consumer spending
An unanticipated decrease in aggregate demand when the economy is in equilibrium would result in:
a decrease in real gross domestic product.
Which of the following changes would cause an economy's aggregate demand curve to shift to the right?
a decrease in the overall price level in the economy
In the secondary bond market where already issued bonds are exchanged, an increase in the interest rate will lead to:
a decrease in the price of these already issued bonds.
Which of the following policies would a Keynesian economist most likely recommend in an economy with an annual inflation rate of 2 percent and an unemployment rate of 11 percent?
a decrease in the tax rate on corporate profits and a decrease in the discount rate
Which of the following policies would a Keynesian economist most likely recommend in an economy with an annual inflation rate of 2 percent and an unemployment rate of 11 percent?
a decrease in the tax rate on corporate profits and an increase in the money supply
According to the short run Phillips Curve (SRPC), an increase in inflation will be accompanied by
a decrease in unemployment
In the short run, following a decrease in aggregate demand there will be:
a movement downward along an existing Phillips curve
In the short run, following an increase in aggregate demand there will be:
a movement upward along an existing Phillips curve.
An increase in short-run aggregate supply caused by declining key input prices would be consistent with which of the following?
a shift of the short-run Phillips curve to the left
According to the short-run Phillips curve, a decrease in unemployment is expected to be accompanied by:
an increase in inflation
An inflationary gap could be reduced by:
an increase in the income tax rate.
In an inflationary gap, which of the following responses would be neither favorable to Keynesians nor Classical economists?
an increase in the money supply
Suppose-a new fear of imminent bank failure pervaded the American economy due to a looming recession and negative economic data Also. suppose this caused large numbers of private citizens to to withdraw funds from barks. The most likely Fed action would be to:
buy bonds
What must increase in order for any type of government policy to have a positive impact on economic growth?
capital stock
To reduce inflation, the Federal Reserve could
contract the money supply in order to raise interest rates, which decreases investment
Sue loses her job at a shoe factory when the economy falls into a recession. Sue is
cyclically unemployed.
Econoland is experiencing high inflation rates. What fiscal policy would be appropriate to address the inflationary gap?
decrease government purchases and increase taxes
Assume an economy is at full employment when a negative supply shock occurs. Which of the following will NOT occur?
decrease in AD
If the economy was in a severe recession, the most expansionary fiscal policy would be to:
decrease personal income taxes and increase government spending by equal amounts.
Which of the following policies would a Keynesian recommend during a period of high unemployment?
decreasing taxes to stimulate aggregate demand
When banks make loans to each other, they charge the:
federal funds rate
Which of the following is not included in M2?
gold
Under which of the following circumstances would expansionary fiscal policy be most effective?
high unemployment and low inflation
Econoland is in short-run equilibrium with output below full employment. Which of the following would be an appropriate fiscal policy to increase output and decrease unemployment?
increase government purchases and decrease taxes
The purchase of securities on the open market by the central bank will:
increase the supply of money.
An increase in investment will likely cause price level and unemployment to change in which of the following ways in the short run?
increase, decrease
If aggregate demand increases, what will happen to actual inflation and expected inflation in the short run?
increase, no change
If a worker's nominal wage rate increases from $10 to $12 per hour and at the same time the general price level increases by 10%, the worker's real wage has:
increased by approximately 10%.
As the price level decreases, the value of money:
increases, so people want to hold less of it.
According to the short-run Phillips Curve, there is a trade-off between
inflation and unemployment
When the Federal Reserve buys bonds, which of the following happens to interest rates and bond prices?
interest rates decrease; bond prices increase
Deficit spending may cause crowding out when higher
interest rates lead to a decrease in investment
Which of the following measures would NOT result in economic growth?
limiting the amount of capital per worker
In the Keynesian model, expansionary monetary policy will lead to:
lower real interest rates and more investment
In the Keynesian model, expansionary monetary policy will lead to:
lower real interest rates and more investment.
The real interest rate is simply stated as the
nominal interest rate minus the expected inflation rate.
What are the three primary goals for every economy?
price stability, full employment, economic growth
The money market will be in equilibrium when:
quantity of money demanded is equal to quantity of money supplied
When the central bank increases the money supply to stimulate aggregate demand, workers believe that this action will cause inflation in the future and ask for higher wages to offset the expected increase in inflation. This is an example of:
rational expectations
The Net Export Effect may:
reduce the effectiveness of fiscal policy
All of the following are financial assets except
required reserves
The classical economists argued that involuntary unemployment would be eliminated by:
self-correcting market forces stemming from flexible prices and wages.
Suppose the economy had the following statistics - 3% unemployment - Real GDP growth of 4.5% - 5% inflation The most likely monetary response to this situation would be to:
sell bonds on the open market
When the quantity of money demanded is greater than the quantity of money supplied, people will most likely ________ bonds while the interest rate will ________.
sell; rise
Assume the economy is operating at full employment. If the economy enters a sudden economic expansion, the quantity of money available in the economy will:
stay the same.
The money supply curve is vertical no matter what the interest rate is because:
the Federal Reserve controls the supply of money.
The opportunity cost of holding money is equal to
the interest rate
A change in government spending will have a greater short run impact on real output when
the marginal propensity to consume is larger
The interaction between institutions through which money is supplied to individuals, firms, and other institutions is referred to by economists as:
the money market
Government Spending generally falls into two categories, spending on goods and services and:
transfer payments
If AD decreases (thus decreasing inflation in the short run) what happens to unemployment, and how would this be illustrated on a short-run Phillips curve graph?
unemployment increases, moving down along an existing short-run Phillips curve
If aggregate demand decreases (thus decreasing inflation in the short run) what happens to unemployment, and how would this be illustrated on a short-run Phillips curve graph?
unemployment increases, moving down along an existing short-run Phillips curve