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Macroeconomics Final

Terms in this set (143)

7 Questions From Midterm that will be on the Final

The absolute value of the slope of the production possibilities frontier represents

a) the growth rate of the economy
b) the opportunity cost of producing the good on the vertical axis
c) the rate of technological change
d) the opportunity cost of producing the good on the horizontal axis

d) the opportunity cost of producing the good on the horizontal axis

Consider a graph of the labor market for unskilled labor. Suppose that the equilibrium wage rate is $4.50 per hour. A law is passed imposing a minimum wage of $6.00. Compared to the equilibrium without a minimum wage, the minimum wage law results in

a) a rightward shift of the supply curve in the labor market for unskilled labor
b) a leftward shift of the demand curve in the labor market for unskilled labor
c) unemployment
d) all of the above

c) unemployment

Rising prices (assuming no change in the quantity of output) imply

a) an increase in nominal GDP
b) an increase in real GDP
c) both (a) and (b)
d) none of the above

a) an increase in nominal GDP

the production of goods and services valued at current prices (includes price levels)

the production of goods and services valued at constant prices (adjusted not to take the price level into account)

Suppose that a lender and borrower would have agreed to a 2% interest rate if they expected zero inflation. If instead they expect 4% inflation, they would agree to a nominal interest rate of approximately

a) 2%
b) 6%
c) 8%
d) 16%

In the Keynesian model, if the economy is not in equilibrium and planned expenditure is greater than GDP, there will be

a) an unplanned decrease in inventories, causing firms to increase prices
b) an unplanned decrease in inventories, causing firms to reduce prices
c) an unplanned increase in inventories, causing firms to reduce output
d) an unplanned decrease in inventories, causing firms to increase output

d) an unplanned decrease in inventories, causing firms to increase output

the "statistical discrepancy" is equal to

a) the difference between Gross Private Domestic Investment and Net Private Domestic Investment
b) the difference between Gross Domestic Product and Net Domestic Product
c) both (a) and (b)
d) the difference between Net Domestic Product and Net Domestic Income

d) the difference between Net Domestic Product and Net Domestic Income

Non-multiple choice question on midterm that will be in the form of multiple choice on the final

What is the value of the marginal propensity to consume from disposable income?

C = 500 + .75(Q-T)
C = α + ß(Q-T)

T = 100 + .20Q
T = t0 + t1(Q)

ß / Marginal Propensity to Consume (MPC) = 0.75

What is the value of the slope of the planned expenditure line (the marginal propensity to consume from GDP)?

C = 500 + .75(Q-T)
C = α + ß(Q-T)

T = 100 + .20Q
T = t0 + t1(Q)

b = ß(1 - t1) -> b = .75(1 - .20) ->
b = .75(1 - .20) -> b = (4/5)(0.75)

b = .60

What is the value of the autonomous expenditure multiplier?

(1 / (1 - b)) = 1 / (1 - .6) ->

1 / .40 = 2.5

The monetary base includes
a) bank reserves
b) currency in circulation
c) both (a) and (b)
d) only vault cash

c) both (a) and (b)

the amount of funds that a bank holds in reserve to ensure that it is able to meet liabilities in case of sudden withdrawals

excess reserves

reserves held - required reserves

the currency a bank has on hand in its vault and cash drawers

If the target reserve ratio (RES) increases,

a) the monetary base will increase
b) the money supply will increase
c) both (a) and (b)
d) the money multiplier will decrease

d) the money multiplier will decrease

If the currency to deposit ratio (CUR) increases,

a) the monetary base will increase
b) the money supply will increase
c) both (a) and (b)
d) the money multiplier will decrease

d) the money multiplier will decrease

If the Federal Reserve engages in an open market operation buying government securities,

a) the monetary base will increase
b) the money supply will increase
c) both (a) and (b)
d) the money supply will decrease

c) both (a) and (b)

The Federal Open Market Committee, in directing open market operations, sets a target range for the

a) federal funds rate
b) discount rate
c) prime rate
d) none of the above

a) federal funds rate

Quiz 5 - Questions that could've been asked

reserve deposits + vault cash

currency in circulation + bank deposits

Money Supply is the total quantity of money in circulation at a point in time

if people are holding more money in currency in circulation rather than in the bank, the money multiplier (telling you how much banks can expand the money supply based on a given monetary base) decreases

excess reserves =

reserves - required assets

Reserves / Bank Deposits

Currency in Circulation / Bank Deposits

Money Supply

M = (1 + CUR / RES + CUR) ß

(1 + CUR / RES + CUR) ß
⬇️
"money multiplier" = (1 + CUR / RES + CUR)

CUR = (Currency in Circulation/Bank Deposits)

RES = Reserves/Bank Deposits

ß = monetary base

money multiplier

The money multiplier is the amount of money that banks generate with each dollar of reserves

if banks are required to have more reserves— ability of the banks to expand the money supply decreases

if the target reserve ratio (RES) decreases,

the money multiplier will increase

if the currency to deposit ratio (CUR) decreases,

the money multiplier will increase

If the Federal Reserve engages in an open market operation selling government securities,

1) the monetary base will decrease, and 2) the money supply will decrease

federal funds rate

Interest rate banks charge each other for loans

The interest rate on the loans that the Fed makes to banks

set by central banks—the Federal Reserve in the U.S.

currency in circulation

cash held by the public - readily accepted as a means of payment

The aggregate demand curve is downward sloping and real consumption increases as the price level declines because, if the price level decreases, real wealth will

a) decrease because the real value of assets with a fixed nominal value such as bank accounts will decline

b) decrease because the real value of assets with a variable nominal value such as real estate will decline

c) increase because the real value of assets with a fixed nominal value such as bank accounts will increase

d) increase because the real value of assets with a variable nominal value such as real estate will decline

c) increase because the real value of assets with a fixed nominal value such as bank accounts will increase

Aggregate demand will shift to the right if

a) business confidence improves, causing an increase in planned investment

b) income growth in other countries causes an increase in exports

c) both (a) and (b)

d) interest rates rise, causing an increase in planned investment

c) both (a) and (b)

When discussing the "long run" in macroeconomics, economists mean a period of time in which

a) all prices (including wage rates) are flexible and adjust to their equilibrium values

b) the capital stock is variable and adjusts so that the rate of return is equal to the "natural rate of interest"

c) both (a) and (b)

d) none of the above

a) all prices (including wage rates) are flexible and adjust to their equilibrium values

Which of the following is true?

a) the long-run aggregate supply curve is vertical

b) the short-run aggregate supply curve is upward sloping

c) both (a) and (b)

d) the long-run aggregate supply curve is horizontal

c) both (a) and (b)

the "natural level of output" or "potential GDP" will increase and long-run aggregate supply will shift to the right if

a) the price level falls
b) technology improves
c) both (a) and (b)
d) the money supply increases

b) technology improves

Quiz 6 - Questions that could've been asked

What relationship is shown by the aggregate supply curve?

the aggregate supply curve shows the relationship between the price level and the production/real GDP of the economy

What relationship is shown by the aggregate demand curve?

the aggregate demand curve shows the relationship between the price level and the quantity of real GDP demanded by households, firms, and the government

The short-run aggregate supply curve is upward sloping because

the quantity supplied increases when the price rises.

The long-run aggregate supply curve is

a vertical line, reflecting the fact that long‐run aggregate supply is not affected by changes in the price level

real consumption decreases as the price level increases because, if the price level increases, real wealth will

decrease because the real value of assets with a fixed nominal value such as bank accounts will decline

Aggregate demand will shift to the left if

business confidence declines, causing a decrease in planned investment, &

income decreases in other countries, which causes a decrease in exports

Aggregate supply will shift to the right if

wages decrease, the capital stock increases, or technology improves

Aggregate supply will shift to the left if

the price of key inputs rises -- making a combination of lower output, higher unemployment, and higher inflation possible.

When discussing the "short run" in macroeconomics, economists mean a period of time in which

some (input) prices (ie. nominal wages) are "sticky" or "rigid" and don't change in the short run

Which of the following is false?

a) the long-run aggregate supply curve is vertical
b) the short-run aggregate supply curve is upward sloping
c) both (a) and (b)
d) the long-run aggregate supply curve is horizontal

d) the long-run aggregate supply curve is horizontal

The "natural level of output" or potential GDP will decrease and long-run aggregate supply will shift to the left if there are

1. decreases in quantities of factors of production
(ie. an increase in the quantity of physical capital, or land - the economy is capable of producing more real GDP)

2. increases in the natural rate of unemployment

3. decreases in efficiency

4. technology declines

The "natural level of output" or potential GDP will increase and long-run aggregate supply will shift to the right if there are

1. increases in quantities of factors of production
(ie. an increase in the quantity of physical capital, or land - the economy is capable of producing more real GDP)

2. decreases in the natural rate of unemployment

3. increases in efficiency

4. technology improves

In the short term, economic growth is caused by an increase in aggregate demand (AD).

AD= C + I + G + X- M

C = Consumer spending
I = Investment (gross fixed capital investment)
G = Government spending
X = Exports
M = Imports

The short-run effect of an increase in the money supply is that the aggregate price level

increases, and real output also increases.

In the long run, an increase in the money supply causes the price level to ____________.

a decrease in the money supply causes the price level to ____________

Longer time lags

a) make countercyclical monetary policy more effective

b) make countercyclical monetary policy less effective

c) do not matter

b) make countercyclical monetary policy less effective

An example of the time "inconsistency problem" is

a) the "political business cycle" in which elected officials find it politically advantageous to implement policies that increase aggregate demand and real GDP in the short but only increase inflation in the long run

b) when the "recognition lag" is greater than the length of a recession

c) when short term interest rates are greater than long term interest rates

a) the "political business cycle" in which elected officials find it politically advantageous to implement policies that increase aggregate demand and real GDP in the short but only increase inflation in the long run

If the Federal Reserve was following the Taylor rule, it would raise the operating target for the federal funds rate when

a) the inflation rate increases
b) actual GDP falls below potential GDP
c) both (a) and (b)

a) the inflation rate increases

If real GDP was growing at 2% per year and the Federal Reserve was following a rule making the money supply grow 2% per year,

a) the inflation rate would be 2% if velocity remained constant
b) the inflation rate would be zero if velocity remained constant
c) nominal GDP would grow 2% per year if velocity declined

b) the inflation rate would be zero if velocity remained constant

If the Federal Reserve was targeting a 2% rate of growth in nominal GDP,

a) it would maintain a constant 2% growth rate of the money supply every year

b) it would increase the money supply more if velocity declined

c) it would increase the money supply more if velocity increased

b) it would increase the money supply more if velocity declined

Quiz 7 - Questions that could've been asked

shorter time lags

make countercyclical monetary policy more effective

political business cycle

A business cycle that results primarily from the manipulation of policy tools (fiscal policy, monetary policy) by incumbent politicians hoping to stimulate the economy just prior to an election and thereby greatly improve their own and their party's reelection chances.

using fiscal and monetary policy to "counter" the business cycle

Recognition Lag

The time it takes for policy makers to recognize the existence of a recession or an expansion.

If the Federal Reserve was following the Taylor rule, it would lower the operating target for the federal funds rate when

the inflation rate decreases

According to the Taylor Rule, if unemployment increases,

the target for interest rate should decrease

Fiscal policy is the means by which a government adjusts its spending levels and tax rates to monitor and influence a nation's economy

monetary policy

Government policy that attempts to manage the economy by controlling the money supply and thus interest rates.

Taylor's rule makes the recommendation that the Federal Reserve should ______ interest rates when inflation is high or when employment exceeds full employment levels. Conversely, when inflation and employment levels are low, interest rates should be _____________

raise; decreased

MV = PQ

Δ%M + Δ%V = Δ%P + Δ%Q
M = money supply
V = Velocity of money
P = price level
Q = real GDP

Equation of Exchange - money supply X velocity of money = price X quantity;

monetary policymakers can control inflation by allowing the money supply (M) to grow no faster than the desired rate of economic growth (Q)

Increasing the money supply faster than the growth in real output will cause __________

the increase in monetary demand causes firms to ___________ prices

inflation; increase

velocity of money

the average number of times each dollar in the money supply is used to purchase goods and services included in GDP

Inflation = Δ%P
= Δ Price Level

a measure of how fast the average price level is changing over time.

If the Federal Reserve was targeting a 2% rate of growth in nominal GDP,

it would increase the money supply less if velocity increased

a curve that shows the short-run trade-off between inflation and the unemployment rate

The long run Philips Curve is

The short run Philips Curve is

downward sloping / L-shaped

Long-Run Phillips Curve ("LRPC")

a curve illustrating that there is no relationship between the unemployment rate and inflation in the long-run; the LRPC is vertical at the natural rate of unemployment.

natural rate of unemployment

the level of unemployment at which inflation can be fully anticipated (when actual and expected inflation are the same)

the level of unemployment at which the inflation rate in an economy stays stable

According to the Phillips Curve, when unemployment _______, inflation ________.

Any change in the Aggregate Demand or Aggregate Supply model will have a corresponding

change in the Phillips curve model

The relationship between inflation rates and unemployment rates is _________

When the Aggregate Demand curve shifts to the right,

the short-run Phillips curve moves up and to the right because the price level rises corresponding with a rise in inflation, while the level of output increases, which decreases unemployment.

Conversely, when the Aggregate Demand curve shifts to the left,

the economy moves down on the short-run Phillips curve

The leftward shift of the Aggregate Demand curve decreases the _______ _________ and _________

price level and output

The _____________ shift of the Aggregate Demand curve increases the price level and output

If expectations of inflation are high

People tend to raise wages and prices which causes inflation.

if nominal wages increase by more than productivity growth,

Short run aggregate supply (SRAS) shifts upward and causes inflation

if nominal wages increase by less than productivity growth,

Short run aggregate supply (SRAS) shifts downwards which causes deflation and sustained fall in price level

The long-run Phillips curve equation suggests that the inflation rate is entirely determined by inflation expectations

When inflation expectations rise, the Phillips curve shifts upward

increase (↑) inflation usually causes

contractionary fiscal + monetary policies, resulting in slower economic growth, and ↑ unemployment in the short term as firms may substitute capital for labour.

movements in the Philips Curve are generated by

shifts in Aggregate Demand (AD)

The level of inflation influences nominal wage demands

↑ inflation means consumer + producers have ↓ purchasing power and ↓ real incomes. high inflation means employees will seek ↑ wage increases

Government Budget Surplus / Deficit =

T - G
(net taxes) - government purchases

ie. Total Expenditures by the Government − Total Income of the government

Structural Budget Surplus / Deficit =

Tp - G
Net Taxes based on potential GDP (Tp) - Government Expenditures

Tp = t0 + t1(Q)
t0 = autonomous taxes
t1 = marginal tax rate
Q = potential GDP

Cyclical Budget Surplus / Deficit =

T - Tp

Net Taxes - (Net Taxes based on Potential GDP)

autonomous expenditure multiplier

Change in GDP in response to change in anything except for autonomous taxes (ΔQ) =

ΔQ = 1 / (1 -b)ΔA

ie. planned investment, government purchases, net exports, etc.

b = ß (1 - t1)

b = slope of the planned expenditure line
ß = Marginal Propensity to Consume
t1 = marginal tax rate

Change in GDP in response to change in autonomous taxes (ΔQ) =

ΔQ = (-ß / (1 - b))Δt0

if a foreign country experiences a recession and European incomes fall, exports from the U.S. will ____________

if a foreign country experiences an expansion and European incomes rise, exports from the U.S. will ____________

A decrease in European incomes and U.S. exports causes the demand for U.S. dollars ($) in other countries to ___________

decrease

the curve shifts down and to the left

An increase in European incomes and U.S. exports causes the demand for U.S. dollars ($) in other countries to __________

A decrease in the interest rate in the U.S. will _____________ foreign investment, and __________ foreign purchases of assets in the U.S.

U.S. purchases of foreign assets will increase

discourage; decrease

If the foreign exchange rate to U.S. $ (ie. Euro/$) increases, net American exports __________ because exports increase and imports decrease

net exports = Ex - Im

If the foreign exchange rate to U.S. $ (ie. Euro/$) decreases, net American exports __________ because exports decrease and imports increase

net exports = Ex - Im

When the real exchange rate is high, the relative price of goods at home is ________ than the relative price of goods abroad

In order for a foreign country to maintain a lower value for their currency (ie. a higher value of the U.S. $),

the foreign country's central bank can purchase U.S. Government bonds / exchanges their currency for U.S. government bonds or dollars

this raises the value of the U.S. $ in proportion to the foreign currency

In order for a foreign country to maintain a higher value for their currency (ie. a lower value of the U.S. dollar $),

the foreign country's central bank can sell U.S. Government bonds

this lowers the value of the U.S. $ in proportion to the foreign currency

By purchasing U.S. government bonds, foreign countries do the following ...

1) increase their monetary base (the part of the money supply which is highly liquid (i.e. easy to use)

and

2) increase the money supply (money supply is the total quantity of money in circulation at a point in time)

By selling U.S. government bonds, foreign countries do the following ...

1) decrease their monetary base (the part of the money supply which is highly liquid (i.e. easy to use)

and

2) decrease the money supply (money supply is the total quantity of money in circulation at a point in time)

As a result purchasing U.S. government bonds, foreign countries increase their price level ...

MV = PQ

If the money supply (M) increases/↑, Q must also increase/↑

A higher-valued currency makes a country's imports _____ expensive and its exports ______ expensive in foreign markets.

Economic resources (things of value) owned by a firm.

liquid assets =

something that can be converted to money easily homes are not an example of a liquid asset because it takes a long time for people to get money for them

Amounts/debts owed to creditors

Currency in Circulation / Bank Deposits

Reserves / Bank Deposits

reserve deposits + vault cash

federal reserve

the central bank of the United States

the difference between current assets and current liabilities

A security, in a financial context, is...

a certificate or other financial instrument that has monetary value and can be traded

The most narrowly defined money supply

m1 = currency in circulation + checkable deposits + tracker's checks

A broader definition of money, m2 includes everything in m1 but also adds other types of deposits

m2 = m1 + savings deposits + retail money market mutual funds + money market deposit accounts + time deposits

savings deposits =

accounts you can't directly write checks on

retail money market mutual funds =

investments in short-term securities that do not fluctuate a lot in value — mutual funds allow people to diversify their portfolio with a small amount of money

money market deposit accounts =

limited check writing with higher interest rates

time deposits =

accounts that have a maturity date, a penalty if money is pulled out early, and higher interest rates

Typically, a country with a consistently lower inflation rate exhibits a ________ currency value, as its purchasing power increases relative to other currencies

An increase in the value of a currency

A decrease or loss in value (ie. of a currency)

Functions of Money

MSU

medium of exchange
unit of accounting
store of value/wealth

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