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The most important determinant of consumer spending is
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Terms in this set (197)
The investment demand curve portrays an inverse (negative) relationship betweenthe real interest rate and investmentThe investment demand slopes downward and to the right because lower real interest ratesenable more investment projects to be undertaken profitablyOther things equal, a decrease in the real interest rate willmove the economy downward along its existing investment demand curveThe immediate determinants of investment spending are theexpected rate of return on capital goods and the real interest rateif business taxes are reduced and the real interest rate increases,the level of investment spending might either increase or decreaseOther things equal, a 10 percent decrease in corporate income taxes willshift the investment demand curve to the rightThe investment demand curve will shift to the right as the result ofbusinesses becoming more optimistic about future business conditions and technological progressThe investment demand curve will shift to the left as a result ofan increase in the excess production capacity available in industryWhen we draw an investment demand curve, we hold constant all of the following expect: A. the present stock of capital goods B. a decrease in business taxes C. an increase in the excess production capacity available in industry D. increased business optimism with respect to future economic conditionsC. an increase in the excess production capacity available in industryIf the nominal interest rate is 18 percent and the real interest rate is 6 percent, the inflation rate is12 percentInvestment spending in the US tends to be unstable becauseall of the factors mentioned in other answers contribute to the instabilityThe multiplier effect means thatan increase in investment can cause GDP to change by a larger amountThe multiplier is useful in determining thechange in GDP resulting from a change in spendingThe multiplier can be calculated as1/(1-MPC)If the MPC is 0.70 and investment increases by $3 billion, the equilibrium GDP willincrease by $10 billionThe practical significance of the multiplier is that itmagnifies initial changes in spending into larger changes in GDPThe actual multiplier effect in the U.S. economy is less than the multiplier effect in the text examples becausein addition to saving, households use some of any increase in income to buy imported goods and to pay additional taxes(Consider This) During the Great Recession of 07-09, both real interest rates and investment spending declined. This suggests thatthe investment demand curve shifted inwardThe aggregate demand curveshows the amount of real output that will be purchased at each possible price levelThe real-balances effect indicates thata higher price level will decrease the real value of many financial assets and therefore reduce spendingWhich of the following is incorrect? A. Given aggregate demand, an increase in aggregate supply increases real output and, assuming downward-flexible prices, reduces the price level. B. As the price level falls, the demand for money declines, the interest rate declines, and interest-rate-sensitive spending increases C. When the price level increases, real balances increase and businesses and households find themselves wealthier and therefore increase their spending. D. As the U.S. price level rises, U.S. goods become relatively more expensive so that U.S. exports fall and U.S. imports riseC. When the price level increases, real balances increase and businesses and households find themselves wealthier and therefore increase their spendingThe factors that affect the amounts that consumers, businesses, government, and foreigners wish to purchase at each price level are thedeterminants of aggregate demandThe foreign purchases effect suggests that an increase in the U.S. price level relative to other countries willincrease U.S. imports and decrease U.S. exportsThe aggregate demand curve isdownsloping because of the interest-rate, real-balances, and foreign purchases effectsThe interest-rate effect suggests thatan increase in the price level will increase the demand for money, increase interest rates, and decrease consumption and investment spendingThe determinants of aggregate demandexplain shifts in the aggregate demand curveOther things equal, if the national incomes of the major trading partners of the United States were to rise, the U.S.aggregate demand curve would shift to the rightWhich one of the following would not shift the aggregate demand curve? A. a decline in the interest rate at each possible price level B. a change in the price level C. an increase in personal income taxes rates D. depreciation of the international value of the dollarB. a change in the price levelOther things equal, a decrease in the real interest rate willexpand investment and shift the AD curve to the rightAn increase in net exports will shift the AD curve to theright by a multiple of the change in net exportsIf investment increases by $10 billion and the economy's MPC is 0.8, the aggregate demand curve will shiftrightward by $50 billion at each price levelWhich of the following would most likely reduce aggregate demand (shift the AD curve to the left)? A. an appreciation of the U.S. dollar B. a reduced amount of excess capacity C. increased government spending on military equipment D. increased consumer optimism regarding future economic conditionsA. an appreciation of the U.S. dollarSuppose that technological advancements stimulate $20 billion in additional investment spending. If the MPC=0.6, how much will the change in investment increase aggregate demand?$50 billionIn an effort to avoid recession, the government implements a tax rebate program, effectively cutting taxes for households. We would expect this toincrease aggregate demandThe immediate-short-run aggregate supply curve represents circumstances whereboth input and output prices are fixedAn economy's aggregate demand curve shifts leftward or rightward by more than changes in initial spending because of themultiplier effectWhich of the following would most likely shift the aggregate demand curve to the right? A. a reduction in household borrowing because of tighter lending practices B. an increase in personal income tax rates C. an increase in stock prices that increases consumer wealth D. increased feat that a recession will cause workers to lose their jobsC. an increase in stock prices that increases consumer wealthThe aggregate supply curveshows the various amounts of real output that businesses will produce at each price levelThe aggregate supply curve (short run) is upsloping becauseper-unit production costs rise as the economy moves toward and beyond its full-employment real outputOther things equal, an improvement in productivity willshift the aggregate supply curve to the rightA rightward shift in the aggregate supply curve is best explained by an increase inproductivitiyOther things equal, if the US dollar were to depreciate, theaggregate supply curve would shift to the leftWhich one of the following would increase per-unit production cost and therefore shift the aggregate supply curve to the left? A. production bottlenecks occurring when producers near full plant capacity B. deregulation of industry C. a reduction in business taxes D. an increase in the price of imported resourcesD. an increase in the price of imported resourcesThe determinants of aggregate supplyinclude resource prices and resource productivityOther things equal, appreciation of the dollardecreases aggregate demand in the United States and may increase aggregate supply by reducing the prices of imported resourcesOther things equal, a reduction in personal and business taxes can be expected toincrease both aggregate demand and aggregate supplyWhich of the following would not shift the aggregate supply curve? A. a decline in the price of imported oil B. adecline in business taxes C. an increase in the price level D. an increase in labor productivityC. an increase in the price levelProductivity measuresreal output per unit of inputThe short-run aggregate supply curve represents circumstances whereinput prices are fixed, but output prices are flexibleThe economy's long-run AS curve assumes that wages and other resource priceseventually rise and fall to match upward or downward changes in the price levelGiven a fixed upsloping AS curve, a rightward shift of the AD curve willincrease both the price level and real outputA decrease in aggregate demand will cause a greater decline in real output theless flexible is the economy's price levelIf aggregate demand increases and aggregate supply decreases, the price levelwill increase, but real output may increase, decrease, or remain unchangedIF the follow price of foreign currencies falls (that is, the dollar appreciates), we would expectaggregate demand to decrease and aggregate supply to increaseThe size of the multiplier associated with an initial increase in spending will bediminished if inflation occursEfficiency wages areabove-market wages that bring forth so much added work effort that per-unit production costs are lower than at market wagesWhen aggregate demand declines, wage rates may be inflexible downward, at least for a time, because ofwage contractsWhen aggregate demand declines, many firms may reduce employment rather than wages because wage reductions mayreduce worker morale and work effort and thus lower productivity(Consider This) The ratchet effect is the tendency ofthe price level to increase but not to decreaseThe group of three economists appointed by the president to provide fiscal policy recommendations is thecouncil of economic advisersDiscretionary fiscal policy refers tointentional changes in taxes and government expenditures made by Congress to stabilize the economyCountercyclical discretionary fiscal policy calls fordeficits during recessions and supplies during periods of demand-pull inflationExpansionary fiscal policy is so named because itis designed to expand real GDPContractionary fiscal policy is so named because itis aimed at reducing aggregate demand and thus achieving price stabilityIf the MPS in an economy is 0.1, government could shift the aggregate demand curve rightward by $40 billion byincreasing government spending by $4 billionIf the MPC in an economy is 0.8, government could shift the aggregate demand curve rightward by $100 billion bydecreasing taxes by $25 billionAn economist who favored expanded government would recommendincreases in government spending during recession and tax increases during inflationIf the MPS in an economy is 0.4, government could shift the aggregate demand curve leftward by $50 billion byreducing government expenditures by $20 billionIf the MPC in an economy is 0.75, government could shift the aggregate demand curve leftward by $60 billion byincreasing taxes by $20 billionAssuming the economy is at full employment and that investment spending declines dramatically. If the goal is to restore full employment, government fiscal policy should be directed towardan excess of government expenditures over tax receiptsSuppose the economy is in the midst of a recession. Which of the following policies would most likely end the recession and stimulate output growth?Reductions in federal taxe rates on personal and corporate incomeIn a certain year, the aggregate amount demanded at the existing price level consists of $100 billion of consumption, $40 billion of investment, $10 billion of net exports, and $20 billion of government purchases. Full-employment GDP is $120 billion. To obtain price-level stability under these conditions, the government shouldincrease tax rates and/or reduce government spendingIn an aggregate demand- aggregate supply diagram, equal decreases in government spending and taxes willshift the AD curve to the leftA contractionary fiscal policy is shown as aleftward shift in the economy's aggregate demand curveAn expansionary fiscal policy is shown as arightward shift in the economy's aggregate demand curveSuppose the price level is fixed, the MPC is 0.5, and the GDP gap is a negative $80 billion. To achieve full-employment output (exactly), government shouldreduce taxes by $80 billionBuilt- in stability means thatwith given tax rates and expenditures policies, a rise in domestic income will reduce a budget deficit or produce a budget surplus, while a decline in income will result in a deficit or a lower budget surplusA major advantage of the built-in or automatic stabilizers is that theyrequire no legislative action by Congree to be made effectiveWhich of the following best describes the built-in stabilizers as they function in the US?personal and corporate income tax collections automatically rise and transfers and subsidies automatically decline as GDP risesWhich of the following statements is correct?built-in stability only partially offsets fluctuations in economic activityThe cyclically adjusted budget refers tothe size of the federal government's budgetary surplus or deficit when the economy is operating at full employmentThe cyclically adjusted beget tell uswhat the size of the federal budget deficit or surplus would be if the economy was at full employmentIf the economy has a cyclically adjusted budget surplus, this means thattax revenues would exceed government expenditures if full employment were achievedSuppose the government purposely changes the economy's cyclically adjusted budget from a deficit of 0 percent of real GDP to a deficit of 3 percent of real GDP. The government is engaging in a(n)expansionary fiscal policyEconomists refer to a budget deficit that exists when the economy is achieving full employment as acyclically adjusted deficitThe amount by which government expenditures exceed revenues during a particular year is thebudget deficitWhich of the following best describes the sea of a political business cycle?politicians will use fiscal policy to cause output, real incomes, and employment to be rising prior to electionsThe crowding-out effect of expansionary fiscal policy suggests thatincrease in government spending financed through borrowing will increase the interest rate and thereby reduce investmentThe U.S. public debtconsists of the historical accumulation of all past federal deficits and surplusesThe public debt is held astreasury bills, treasury notes, treasury bonds, and U.S. savings bondsThe crowding-out effect suggests thatgovernment borrowing to finance the public debt increases the real interest rate an reduces private investmentWhich of the following might offset a crowing-out effect of financing a large public debt?an increase in public investmentMoney functions asa store of value, a unit of account, and a medium of exchangeWhen economists say that money serves as a unit of account, they mean that it isa monetary unit for measuring and comparing the relative values of goodsIn the US, the money supply (M1) includescoins, paper currency, and checkable depositsIf defining money as M1, economists exclude time deposits becausethey are not directly or immediately a medium of exchangeWhich of the following is not part of the M2 money supply?large-denomiated time depositsMoney market deposit accounts are included inM2 onlyThe M2 money supply includesindividual shares in money market mutual fundsCurrency held in the vault of First National Bank isnot counted as part of the money supplyCheckable deposits are classified as money becausethey can be readily used in purchasing goods and paying debtsWhen economists say that money serves as a store of value, they mean that it isa way to keep wealth in a readily spendable form for future useIf you are estimating your total expenses for school next semester, you are using money primarily asa unit of accountIf you place a part of your summer earnings in a savings account, you are using money primarily as astore of valueIf you write a check on a bank to purchase a used Honda Civic, you are using money primarily asa medium of exchangeThe largest component of the money supply (M1) ischeckable depositsThe difference between M1 and M2 is thatthe latter includes small-denominated time deposits, non checkable savings accounts, money market deposit accounts, and money market mutual fund balancesAssuming no other changes, if checkable deposits decrease by $40 billion and balances in money market mutual funds increase by $40 billion, theM1 money supply will decline and the M2 money supply will remain unchangedThe M2 definition of money includesnon checkable savings deposits, currency (coins and paper money) in circulation, small-denominated (under $100,000) time deposits, checkable deposits, money market deposit accounts, money market mutual fund balances held by individualsThe money supply is backedby the government's ability to control the supply of money and therefore to keep its value relatively stableThe value of money variesinversely with price levelDuring periods of rapid inflation, money may cease to work as a medium of exchangebecause people and businesses will not want to accept it in transactionsStabilizing a nation's price level and the purchasing power of its money can be achievedwith both fiscal and monetary policyOther things equal, an excessive increase in the money supply willdecrease the purchasing power of each dollarThe Federal Reserve System was created in1913The group that sets the Federal Reserve System's policy on buying and selling government securities (bills, notes, and bonds) is thefederal open market committee (FOMC)An important routine function of the Federal Reserve Bank is toprovide facilities by which commercial banks and thrift institutions may collect checksWhich of the following is the basic economic policy function of the Federal Reserve Banks?controlling the supply of money"Subprime mortgage loans" refers tohigh-interest-rate loans to home buyers with above-average credit riskIn the financial industry, "securitization" refers tobundling groups of loans, bonds, mortgages, and other financial debts into new securitiesSome economists are concerned that the financial rescue provided by the TARP will encourage financial investors and firms to make on greater risks in the future. This is an example ofmoral hazardCollateralized default swapsinsured holders of loan-backed securities in case the underlying loans were not repaidWhat does it mean when economists say that home buyer are "underwater" on their mortgages?buyers owe more on their mortgage than the properties are worthWhat best describes the 12 Federal Reserve Banks?they are privately owned and publicly controlled central banks whose basic goal is to control the money supply and interest rates in promoting the general economic welfareIn the U.S. economy, the money supply is controlled by thefederal reserve systemThe goldsmith's ability to create money was based on the fact thatpaper money in the form of gold receipts was rarely redeemed for goldMost modern banking systems are based onfractional reservesIn a fractional reserve banking system,banks can create money through the lending processWhat describes the identity embodied in a balance sheet?Assets equal liabilities plus net worthWhat are all assets to a commercial bank?vault cash, property, and reservesThe primary purpose of the legal reserve requirement is toprovide a means by which the monetary authorities can influence the lending ability of commercial banksWhen a check is drawn and cleared, thebank against which the check is cleared loses reserves and deposits equal to the amount of the checkThe ABC commercial bank has $5,000 in excess reserves, and the reserve ratio is 30 percent. This information is inconsistent with the bank having$90,000 in checkable deposit liabilities and $32,000 in reservesSuppose a commercial bank has checkable deposits of $100,000 and the legal reserve ratio is 10 percent. If the bank's required and excess reserves are equal, then its actual reservesare $20,000The reserves of a commercial bank consist ofdeposits at the Federal Reserve Bank and vault cashExcess reserves refer to thedifference between actual reserves and required reservesSuppose the reserve requirement is 10 percent. If a bank had $5 million of checkable deposits and actual reserves of $500,000, the bakcannot safely lend out more moneyThe reserve ratio refers to the ratio of a bak'srequired reserved to its checkable-deposit liabilitiesA commercial bank can expand its excess reserves bydemanding and receiving payment on an overdue loanA reserve requirement of 20 percent means a bank must have at least $1,000 of reserves if its checkable deposits are$5,000Banks create money when theybuy government bonds from householdsIn prosperous times, commercial banks are likely to hold very small amounts of excess reserves becausefederal reserve banks pay lower rates of interest on bank reserves than could be earned by the commercial banks loaning out the reservesGranting a bank loan creates money;repaying a bank loan destroys moneyWhat would reduce money supply?commercial banks sell government bonds to the publicOvernight loans from one bank to another for reserve purposes entail an interest rate called thefederal funds rateA bank temporarily short of required reserves may be able to remedy this situation byborrowing funds in the federal funds marketThe market for immediately available reserve balances at the federal reserve is known as thefederal funds marketSuppose a commercial banking system has $100,000 of outstanding checkable deposits and actual reserves of $35,000. If the reserve ratio is 20%, the banking system can expand the supply of money by the maximum amount of$75,000The basic reason why the commercial baking system can increase its checkable deposits by a multiple of its excess reserves is thatreserves lost by any particular bank will be gained by some other bankThe term "leverage" refers tousing borrowed money in an attempt to increase profitsThe greater the leverage in the financial system, all else equal,the greater the instability of the financial systemThe transactions demand for money is most closely related to money functioning asmedium of exchangeThe asset demand for money is most closely related to money functioning asstore of valueThe asset demand for moneyvaries inversely with the rate of interestAn increase in nominal GDP increases the demand for money becausemore money is needed to finance a larger volume of transactionsThe asset demand for money is downsloping becausethe opportunity cost of holding money increases as the interest rate risesThe equilibrium rate of interest in the market for money is determined by the intersection of thesupply-of-money curve and the total-demand-for-money curveReserves must be deposited in the Federal Reserve Banks byall depository institutions, that is, all commercial banks and thrift institutionsThe securities held as assets by the Federal Reserve Banks consist mainly oftreasury bills, treasury notes, and treasury bondsWhat will increase commercial bank reserves?the purchase of government bonds in the open market by the Federal Reserve BanksWhen a commercial bank borrows from a Federal Reserve Bank,the commercial bank's lending ability is increasedThe Federal Reserve Banks sell government securities to the public. As a result, the checkable depositsand reserve of commercial banks both decreaseIn the U.S., monetary policy is the responsibility of theBoard of Governors of the Federal Reserve SystemThe for main tools of monetary policy arethe discount rate, the reserve ratio, interest on excess reserves, and open-market operationsOpen-market operations refer tothe purchase or sale of government securities, as well as collateralized money loans, by the FedIf the Federal Reserve System buys government securities from commercial banks and the public,it will be easier to obtain loans at commercial banksThe purchase of government securities from the public by the Fed will causethe money supply to increaseWhen the Federal Reserve buys governmentexpands and commercial bank reserves increaseWhen the required reserve ratio is increased, the excess reserves of member banks arereduced and the multiple by which the commercial banking system can lend is reducedThe discount rate is the interestrate at which the Federal Reserve Banks lend to commercial banksA commercial bank can add to its actual reserves byborrowing from a Federal Reserve BankProjecting that it might temporarily fall short of legally required reserves in the coming days, the Bank of Beano decides to borrow money from its regional Federal Reserve Bank. The interest rate on the loan is called thediscount rateWhat is the tool of monetary policy that is considered the most important on a day-to-day basis?open-market operationsIf the Fed wants to discourage commercial bank lending, it willincrease the interest paid on excess reserves held at the FedThe federal funds rate is the interest rate that __________ charge(s) ____________banks; other banksThe Federal Reserve does not set the federal funds rate, buthistorically has influenced it through the use of its open-market operationsTo increase the federal funds rate, the Fed historically hassold government bonds to commercial banksAccording to the Taylor rule,if real GDP rises by 2 percent above potential GDP, the Fed should raise the real federal funds rate by 1 percentage pointAccording to the Taylor rule, if real GDP is 4 percent below potential GDP, the Fed shouldlower the federal funds rate by 2 percentage pointsWhat best describes the cause-effect chain of an expansionary monetary policy?an increase in the money supply will lower the interest rate, increase investment spending, and increase aggregate demand and GDPIf the Federal Reserve authorities were attempting to reduce demand-pull inflation, the proper policies would be tosell government securities, raise reserve requirements, raise the discount rate, and increase the interest paid on reserves held at the Fed banksA contraction of the money supplyincreases the interest rate and decreases aggregate demandThe purpose of a restrictive monetary policy is toraise interest rates and restrict the availability of bank creditWhich of the following best describes the cause-effect chain of a restrictive monetary policy?a decrease in the money supply will raise the interest rate, decrease investment spending, and decrease aggregate demand and GDPIf the economy were encountering a severe recession, proper monetary and fiscal policies would call forbuying government securities, reducing the reserve ratio, reducing the discount rate, reducing interest paid on reserves held at Fed banks, and a budgetary deficitOne of the strengths of monetary policy relative to fiscal policy is that monetary policyis subject to closer political scrutinyThe problem of cyclical asymmetry refers to the idea thata restrictive monetary policy can force a contraction of the money supply, but an expansionary monetary policy may not achieve an increase in the money supply