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econ 002 midterm 2
Terms in this set (39)
C = AC + MPC(Y-T)
when taxes (T) rise, consumption (C):
when taxes (T) fall, consumption (C):
Aggregate Expenditure (AE)
C + Ip + G + NX
marginal propensity to consume (mpc)
the slope of the consumption function: the amount by which consumption spending changes when disposable income changes
change in inventory
Automatic stabilizers partially combat the difficulty that comes from Congress figuring out how to agree on fiscal policy. What are automatic stabilizers?
the change in government spending and taxation that occurs automatically when there is a change in production.
Which of the following best describes fiscal policy?
The Federal Government changing taxes and government expenditures to reach full-employment equilibrium.
Congress and the President carry out expansionary fiscal policy. This means,
they will increase government spending and decrease taxes.
Congress and the President carry out contractionary fiscal policy. This means,
they will decrease government spending and increase taxes.
Which of the following statements about monetary and fiscal policy is most correct?
Monetary policy can be implemented quickly, relative to fiscal policy. This is because changes at the FOMC meetings involve a smaller number of individuals than fiscal policy changes
When an asset can be used as a medium of exchange, it takes on all of the following attributes except
the asset has to be valuable, even when it is not being used as a means of payment or medium of exchange
In order for an asset to be used as a medium of exchange, which of the following need to hold?
The asset must be accepted and used by buyers and sellers.The asset should be divisible into small, valuable and durable denominations, relative to its weight.The asset should be such that units are identical.
an asset that can be used as a means of payment, is backed by a central bank and does not have to be converted into another form money before being used
Which of the following would be considered part of M2, but not part of M1?
Deposits in Savings Accounts
Which statement best describes M1 and M2 money supply?
M1 focuses on liquid money and M2 is broadly defines the money supply and includes M1.
Open market purchases
the Federal Reserve buys Treasury securities/bonds from sellers, who deposit the funds into their bank account.
open market sales
households buy Treasury securities from the Federal Reserve, reducing the amount in their checking account, decreasing bank reserves
goals of the Federal Reserve.
1) Stabilize financial markets when there is a shock to the economy.
2) Have the economy produce at the full-employment level of output.
3) Keep prices stable
"maximum sustainable employment"
unemployment is frictional, seasonal and structural.
Which best describes "stable prices"?
inflation is low and predictable
Actions by the Fed that change the money supply, and eventually, the interest rate
demand for money
the relationship between the interest rate and the fraction of wealth households hold as M1 money
What is the benefit of having wealth in the form of M1 money?
There are no transactions costs when using M1 money to purchase goods or services.
What is the cost of holding wealth in the form of M1 money?
M1 money earns less interest in a checking account relative to other accounts.
Federal Funds Rate
The interest rate that banks charge other banks for short-term loans.
How is the Federal Funds rate related to monetary policy?
it is important for monetary policy since other interest rates in the economy tend to follow the Federal Funds rate.
Federal Reserve would like to reduce the interest rate. The Federal Reserve should...
Purchase bonds, driving up the price of bonds
An increase in interest rates affects the aggregate expenditure curve by
shifting the aggregate expenditure curve down, reducing real GDP and increasing the price level
As the interest rate increases,
consumption (C), investment (I), and autonomous consumption (AC) decrease; aggregate expenditure (AE) decreases.
If policy makers are correctly enacting contractionary policy, it must mean that...
GDP is above full-employment GDP and prices are increasing.
There is an increase in the general level of prices. What is the consequence of the price increase?
the demand for money will increase, the equilibrium interest rate will increase, autonomous consumption and planned investment spending will decrease, aggregate expenditures will decrease.
The Federal Reserve carries out Open Market Purchases. This means:
the money supply will increase, bond prices will rise, interest rates will decrease, autonomous consumption & investment will increase, equilibrium output will increase.
interest rate x debt
nominal GDP/price index x100
an increase in the general level of prices will cause...
money demand to shift right
why does a decrease in money supply increase the interest rate?
there is excess demand for money
there is an excess supply of bonds
an excess supply of bonds causes the price of bo
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