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TxState 2315

When the Fed changes interest rates, lithe result is a change inconsumption, investment , and net exports. If the Fed decreas interest rates, then this makes American assets________ appealing, which causes the dollar (relative to foreign currencies) to ________, which causes net exports to _________.

Less, depreciate, rise

Which of the following does not occur with expansionary monetary policy

Higher interest rates

Which of the following is FALSE if the economy is at point B?

Inflation is more likely to occur in the near future

Suppose the. Economy is at point A. If there is an Unexpected increase in oil prices, then the economy will move from point ___ in the short run, and point __ in the long run. (Assume there is no monetary or fiscal policy pursued by the government.)

B to A

Suppose the economy is inline run equilibrium. If investment falls due to increased pessimism about future business conditions' then wwe would expect that in the short run, real GDP to

Fall and the price level will decline

Last week, six Swedish kronor could purchase one US dollar. This week, four Swedish kronor can purchase one US dollar. This change in the value of the dollar will ______ exports from the US to Sweden and ______ US aggregate demand.

Increases; increases

A rise in wage rates

Causes the SRAS curve to shift leftward

If the current unemployment rate is less than the natural unemployment rate, then the economy is most likely

In an inflationary gap

Which of the following shift the LRAS curve rightward

An increase in the education level of the labor force

Assume government increases personal income taxes for all households. As a result, in the short run, real GDP will

Decreases and the price level will fall

When the Fed purchases government securities on the open market, bank reserves _____ and the interst rate ______.

increases; falls

The term ecpansionary fiscal policy refers to the government's attempt to stimulate the economy by

increasing government experniture or decreasing taxes

Using fiscal policy, the best way to get the economy out of a svere recession is to________ government expenditures on goods and services and/ or ________ taxes

increases; decrease

If t he federal government adopted a contractionary fiscal policy, then aggregate demand ______ and real GDP ________

decreases; decreases

In the absence of any policy action, long-run equilibrium in this economy:

could occur if short-run aggregate supply curve shifts upward and to the left due to upward pressure on wages

Reer to the figure above. If the economy is currently at long-run equlibrium with price level P1, andoutput at Y2, an adverse supply shock would:

shift AS from AS1 to AS2

Assume evonomy is currently at long-run equilibrium with price level P! and output at Y2. If an adverse supply shock occurs, policymakers may be able to use stabilization policy (monetary or fiscal) to restore output to potential GDP by ____. Doing so would cause ______.

shift AD to the right; the price level to increase further

The Federal Reserve systekm consists of ______ regional Banks,______ governors on the Board of Governors, and ________ voting members of the Federal Open Market Coommittee.


The Feredal Open Market Committee makes decisions about _______ policy


If potential output equals 4000 and short run equilibrium output equals 3500, there is a ________ gap and the Federal Reserve must ______ real interest rates in order to close the gap.

recessionary; reduce

The opportunity cost of holding money is

nominal interst rate

The money demand curve will shift to the right if

real income increases and/ or the price level increases

If the Fed wishes to reduce nominal interest rates, it must engage in an open market ________ of bonds that ____ the money supply.

purchase; increases

If the Federa ;Reserve wants to decrease the money sypply, it could

increase reserve requirements and/ or increase the discount rate and/ or conduct open market sals

To increases investment, the Rederal Reserve should

conduct expansionary monetary policy (lowering the interest rate)

If real income decreases, demand for money will _______, and nominal interest rate will ______

decrease; decrease

Each of the following helps explain a downward-sloping aggregate demand curve except

the inflation effect

The wealth effect describes

the fact that changes in the price level affect real household wealth, which affects planned consumption

The aggregate demand curve shifts when there are changes in

planned spending that are not caused by changes in output of the price level

firms suddenly becoming pessimistic about future business prospects is an example of a _______ demand shock, which would shift the AD to the _______

negative; left

For given price level, if a rise in the stock market makes consumers more willing to spend, then the_______ shifts _______

aggregate demand curve; right

For a given price level, if an increase in threats to domestic security causes the government to increase military spending, then the _______ shifts ______

aggregate demand curve; right

The aggregate demand curve shifts to the right if the Fed

increases the money supply and, therefore, interest rates fall

The AD curve would shift to the right in response to an increase in_______ or a decrease in ______.

government spending or the money supply; taxes

as the available technology improves, ______ shifts to the _______

aggregate supply; right

If households and firms increase their expectation for the future price level, the ______ curve will shift ______.

short-run aggregate supply; leftward

When actual output equals potiental output, there is _____ output gap and the price level will _______.

no; be equal to the expected price level

When actual ouptu is less than potential output, there is ______ output gap and the price level will ____.

recessionary; be lower than the expected price level

Suppose the economy is currently operating at potential output; a recessionary gap may be caused by each of the following EXCEPT:

a negative supply shock

Starting from potential output, if firms become more optimistic about the future and decide to increase their investment in new capital, then this will shift the _____ curve to the right and generate ______

aggregate demand; an expansionary output gap

Starting from potential output, if consumer confidence increases and consumers decide to spend more, then this will shift the ____ curve to the right and generate _____

aggregate demand; expansionary output gap

The self-correcting property of the economy means that output gaps are eventually eliminated by:

rising or falling in price

To achieve long-run equilibrium in an economy with a recessionary gap, without the use of stabilization policy, the price level must:


Policymakers' use of stabilization policy to eliminate output gaps in more appropriate when an economy self corrects very___ and when the output gap is very ____

slowly; large

Shocks to aggregate demand _____ require the Fed to choose between price level and output stability; shocks to aggegate supply _____ require the Fed to choose between price level and output stability.

do not; do

The US government used _____ to respond to the two negative demand shocks that caused the Great Recession of 2009.

monetary and fiscal policy

Starting from long-run equalibrium, assume consumer confidence in the economy rises, and as a result, real GDP rises above potential GDP. To move US GDP back to potential GDP, the Federal Reserve could:

raise the interest rate

Starting from long-run equlibrium, if Congress lowers personal income taxes, real output will _____ and price level will _____, in the short-run, other things held constant

rise; rise

Suppose prices are quoted in dollars and transactions are conducted in pesos. The peso serves as a _____ and the dollar serves as a _____.

medium of exchange; unit of account

Which of the following is the most liquid?

the US dollar in your pocket

The reserves of a commercial bank

consist of vault cash and deposits at the Federal Reserve
are the funds the bank can use to satisfy the cash demands of its customers
are a small fraction of the bank's deposits

A bank with $100 million in deposits has $15 million cash in it's vault, $10 million in deposits at the Fed, and $15 million in government securities. Its total reserves equal

$25 million

According to the equation of exchange, V = 5, P = $3, and Y = 50, then the quantity of money equals

5 = 3 (50)/ M
5M = 150
M = 150/5
M = $30

Assume desired reserve-depositratio is 10%. If the Federal Reserve sells securities of $2 million in the open market, then chackable deposits will (assuming change is currency is zero):

MULTIPLIER is 1/ (.1) desired reserve-deposit ratio = 10
10 * securities of $2 million
= 20,000,000
since securities where sold it is a decrease
ANSWER: decrease by $20 million

Commerical banks are able to create money by

making loans

In an open market sale, the Federal Reserve _____ government bonds and the bank reserves _____

sells; decreases

Bobby deposits $5000 cash in his checkable deposit at the Bank of America. If the required reserve ratio is 10%, Bank of America's

required reserves increase by $500 and its reserves increase by $4500

The "double coincidence of wants" is

eliminated with the use of money.
( has to do with the barter system)

If real GDP is $200, the price level is 2.5, quantity of money is 100, then the velocity must equal:

V = P*Y/ M
V = 2.5 * 200/ 100
V = 5

Suppose that real GDP grows by 3 % a year, the quantity of money grows 5% a year, and velocity does not change. In the long run, the inflation rate equals


An increase in the value of a currency relative to other currencies is called a(n):


An increase in the nominal exchange rate, e, defined as the number of units of the foreign currency that one unit of the domestic currency will buy, indicates that the domestic currency has ______ relatice to the foreign currency.


When the nominal exchange rates changes from 4 francs per dollar to 6 francs per dollar, the dollar has:


If the exchange rate moves from 10 mexican pesos per US dollar to 8 Mexican pesos per US dollar, then the Mexican peso has _____ and the US dollar has _____

appreciated; depreciated

An exchange rate that varies according to the supply and demand for the currency in the foreign exchange market is called a ______ exchange rate.


The principal suppliers of US dollars to the foreign exchange market are:

US households or firms wishing to purchase foreign goods and assets

European firms wishing to purchase American goods and services are _____ the foreign exchange market.

demanders of the US dollar in

As the dollar exchange rate, e increases, the quantity of dollars supplied in the foreign exchange market_____ and the quantity of dollars demanded in the foreign exchange market______

increases; decreases

Each of the following would increase the supply of US dollars, shifting the supply curve for dollars to the right, EXCEPT:

an appreciation of the US dollar relative to other currencies

Holding all else constant, an increase in the preferences of Americans for Mexican foods will ______ the supply of dollars in the foriegn exchange market and ______ the equilibrium Mexican peso/ US dollar exchange rate.

Increase; decrease

Holding all else constant, a decrease in the real interest rate on Mexican assets will ______ the supply of dollars in the foreign exchange market and _____ the equilibrium Mexican peso/ US dollar exchange rate.

decrease; increase

The US dollar exchange rate, e, where e is the nominal exchange rate expressed as Jap yen per US dollar, will appreciate when:

real GDP in Japan increases

All else equal, if US stocks are perceived to have become riskier compared to financial investments tin other countries, then the market equilibrium value of the exchange rate for the US dollar will:


When the Fed tightens US monetary policy, domestic interest rates_____, making US assets relatively more attractive to foreign investors, and _____ the equilibrium exchange rate.

rise; increasing

Tight monetary policy raises the real interest, which _____ the demand for dollars, _____ the supply of dollars, and _____ the equilibrium value of the dollar.

increases; decreases; increases

As the US dollar appreciates relative to other currencies, the dollar price of goods imported to the US ______ causing net exports to ______.

falls; fall

The CPI in 1980 was 82, and the CPI in 2006 was 202. If you earned salary of $30,000 in 1980, what would be a salary with equivalent purchasing power in 2006?

30000(202/82) = $73902

On Jan 1, 2004, Edward invested $10,000 at 5% interest for one uear. The CPI on Jan 1, 2004 stood at 1.60. On Jan 1, 2005, the CPI was 1.76. The real rate of interest earned by Edward was _____ %.


refer to chart above # 6 on Quiz 4.
How many workers will Joe hire if he must pay each one $35 a day?


refer to chart above # 6 on Quiz 4.
How many workers will Joe hire if he must pay each one $45 a day?


Holding other factors constant, if a larger proportion of the population enters the labor force as a result of a growing social acceptance of women working, then the real wages of workers will _____ and employment of workers will _____.

decrease; increase

In a small town of 1000 people, there are 10 children under 16, 10 retired people, 60 people with full-time jobs, 3 people with part-time jobs, 3 full-time students over 16, and 4 full-time homemakers. The remaining people did not have jobs, but wanted jobs. All but one of these had actively looked for a job in the previous four weeks. What is the unemployment rate in this town?


Ina country with 200 million people aged 16 years and older, 120 million in the labor force, and 114 million employed, what is the participation rate?


Decentralized market-based finanical systems improve the allocation of saving by:

providing information and risk-sharing services

Firms that extend credit borrowers using funds from savers are called

financial intermediaries

A bond is:

legal promise to repay a debt

If the prinipal amount of a bond is $10,000,000, the coupon rate is 7%, and the inflation rate is 4%, then the annual coupon payment made to the holder of the bond is:


The market value of a particular bond at any given point in time is called the bond's


Fred purchases a bond, newly issued by the Big Time Corporation, for $10,000. The bond pays $400 to its holder at the end of the first, second, and third years and $10,400 upon its maturity at the end of four years. The principal amount of this bond is _____, the coupon rate is _____, and the term of this bond is _____.

$10,000; 4%; four years

When the interest rate on newly issued bonds increases, the price of existing bonds:


Shares of stock are:

claims to partial ownership of a firm

A regular payment received by stockholders for each share they own is called a:


Money is:

any asset used to make purchases

Double coincidence of wants is avoided if money is used as a

medium of exchange

When a baker exchanges a pie for follars, this is an example of dollars serving as:

medium of exchange

If you post your car on eBay with a Buy-it-Now price of$1800, you are using money as

a unit of account

The main disadvantage of using money as a store of value is that:

other assetspay reatively high interest than money

The components of M2 that are not also in M1:

are usable for making payments, but at a greater cost or inconvenience than currency or checks.

Assets of the commercial banking system include:

reserves and loans

Liabilities of the commercial banking system include:


Banks hold reserves

to meet depositor withdrawls and payments

In a fractional-reserve banking system the reserve/ deposit ratio equals

less than 100 %

When a bank makes a loan by crediting the borrower's checking account balance with an amount equal to the loan:

money is created

If the Central Bank of Macroland puts an additional 1000 units of currency into the economy, the public deposits all currency into the banking system, and banks have a desired reserve/deposit ratio of 0.10, then the banks will eventually make new loans totaling _____ and the money sypply will increase by _____

$9000; $10,000

When an individual deposits currency into a checking account:

bank reserves increase, which allows banks to lend more and increases the money supply

If banks' desired reserve ratio increases from 0.10 to 0.15, the public still desires to hold the same amount of currency, and the Fed takes no actions, the money supply will:


The central bank of the US is:

Federal Reserve System

When the Fed sells government securities, the banks'

reserves decrease and lending will contract; causing a decrease in money supply

Assume in Macroland, currency held by the public is $2000, bank reserves are $300, and the desired reserve/ deposit ratio is 10%. If the Central Bank buys $200 worth of government bonds from the public, the money supply in Macroland will increase from _____ to _____, assuming that the public does not wish to change the amount of currency it holds.

$5000; $7000

When the central bank buys $1,000,000 worth of government bonds from the public, the money supply:

increases by more than $1,000,000

The two main responsibilities of the Federal Reserve System are to ____ and to ____.

conduct monetary policy; and oversee financial markets

The most important, most convenient, and most flexible way in which the Federal Reserve affects the supply of bank reserves is through:

conducting open-market operations

In an open-market purchase the Federal Reserve _____ government bonds and the supply of bank reserves ______.

buys; increase

The money supply in Macroland is currently 2500, bank reserves are 200. Currency held by public is 500, and banks' desired reserve/ deposit ratio is 0.10. Assuming the values of the currency held by the public and the desired reserve/ deposit ratio do not change, if the Central Bank of Macroland wishes to increase the money supply to 3,000, then it should conduct and open-market _____ government bonds.

purchase of 50

Nominal GDP divided by the money stock equals:

velocity of money

If real GDP equals 5,000, nominal equals 10,000, and the price level equals 2, then what is velocity if the money stock equals 2,000?


Velocity is determined by

payments methods and technology

Exrtemely rapid rate of money growth are usually the result of:

large government budget deficits

If the money supply equals 2,000, velocity equals 3, and real GDP equals 4,000, then the price level equals:


According to the quantity theory of money, if velocity and real GDP are constant, and the central bank increases the money supply by 5%, then the price level.

increases by 5%

There is a federa; budget deficit when

the government spends more than it collects in taxes

The Investment function has a _____ slope because the lower the interest rate, the _____ number of investment projects are profitable, and the _____ the quantity of funds demanded.

negative; greater; greater

Using the savings and investment graph, which of the followng has the potential to raise the real interest rate, other things held constant?

a decrease in national savings and an investment tax credit which reduces the after-tax cost of buying a new equipment

The savings curve has a _____ slope because the greater the interest rate, the ______ the reward to savings, and the _____ the quantity of funds supplied.

positive; greater; greater

Equlibrium in the savings and investment market determines

the real interest rate

If technological change increases the profitability of new investment for firms, then the _____ curve will shift to the _____ and the equilibrium real interest rate will _____.

investment; right; rise

An increase in government budget surplus will shift the _____ curve to the _____ and the equilibrium real inerest rate will _____.

savings; right; fall

Crowding out is the tendency for increased government deficits to:

reduce investment spending

Shares of stock are:

clains to partial ownership of a firm

When the current market interest rate increases, the price of existing bonds


Current Income minus spending on current needs equals:


Pat earns $1,000 per week and spends $850 per week on iving expenses, puts $50 in a savings account, and buys $100 worth of shares in a stock mutual fund. Pat's saving is_____, and Pat's savings rate is _____%.

150/ 15%

Liabilities are:

the debt one owes

If total government tax collections = $200 billion, transfer payments = $75 billion, and government interest payments = $10 billion, then net taxes equal:

$115 billion

Social security benefits, welfare payments, and farm support payments are examples of:

transfer payments

Which of the following contributed to the turn-around in the government from a surplus in the early 2000s to record deficits by the end of the decade?

an increase in governmental spending on homeland securities and wars

The marginal product of new capital depends on _____ and _____.

productivity of capital; relative price of the firm's output

Joe's Taco Hut can purchase a delivery truck for $20,000 and he estimates it will generate a net income (after taxes, maintenance and operating costs) of $2,000 per year. He has no other opportunities. He should:

purchase the truck if the real interest rate is less than 10%

Holding other factors constant, a technological improvement that increases the marginal product of capital will:

increase investment

Holding other factors constant, an increase in the tax rate on revenue generated by capital will:

decrease investment

In an economy without international trade, investment must equal ______ saving.


The supply and demand for saving are brought into equilibrium by adjustments of the _____ rate.

real interest

As the real interest rate increases, the quantity of saving supplied ____ and the quantity of saving demanded______.

increases; decreases

The introduction of new technology that raises the marginal product of new capital will:

increase real interest rate and the equlibrium quantity of saving supplied and demanded

Holding other factors constant, if a tax increase moves the government budget from deficit to surplus, then the real interest rate will _____ and the equilibrium quantity of national saving and investment will ______.

decrease; increase

Holding other factors constant, if growing concerns about job security raise precautionary saving, then the real interest rate will _____ and the equilibrium quantity of national saving and investment will ____.

decrease; increase

Holding other factors constant, if employers automatically enroll employees in retirement savings programs in order to overcome psychological barriers to savings, then the real interest rate will _____ and the equalibrium quantity of saving and investment will _____.

decrease; increase

Holding other factors constant, if the income tax is replaced with a consumption tax so that saving is not taxed, then the real interest rate will_____ and the equilibrium quantity of saving and investment will _____.

decrease; increase

Crowding out is the tendency for increased government deficits to:

reduce investment spending

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