Business cycles are:

economic fluctuations, movements of GDP away from potential output, and periods in which real GDP grows too slow or too fast.

In macroeconomics short run:

prices do not fully adjust to changes in demand.

A period when economic growth is negative for at least six months is called a:

recession

The date at which a recession ends is:

a trough

The date at which a recession stars is:

a peak

Which of the following economic measures is/are procyclical?

investment spending, consumption, and price of stocks

Which of the following economic measures is countercyclical?

unemployment

Real business cycle theory emphasizes the role of:

technology shocks as a cause of economic fluctuations

Suppose consumer tastes and preferences shift from desire to ski to snowboarding. If skis and snowboards are produced by different firms, then firms that produce snowboards will:

experience a rise in prices, inducing them to increase production and the number of workers

Which of the following is a problem with the price system that can lead to a break down in the coordination of economic activity.

prices can be slow to adjust

Prices for industrial commodities such as steel rods or machine tools are

custom and sticky prices

If prices are sticky

economic activity will not be coordinated efficiently

Workers often have --- contracts and so their wages are ---

long-term, sticky

The short run in macroeconomics is the period in which

prices do not change (or at least do not change much) and demand determines output

Keynesian economics means that

demand determines output in the short run

Aggregate demand refers to the relationship between

the price level and the quantity of real GDP demanded

Which of the following does NOT shift the aggregate demand curve

decrease in price level

Which of the following cause an increase in aggregate demand?

an increase of GDP in a foreign country

Which of the following would cause a decrease in aggregate demand?

a fall in investor confidence

Assuming long-run classical aggregate supply curve, a decrease in the money supply results in --- in output and --- in prices

no change, a decrease

Assuming long-run aggregate supply curve, an increase in Japanese GDP results in --- in output and --- in prices

no change, an increase

Which of the following factors influence the position of the long-run classical aggregate demand curve?

the level of employment output

Assuming short-run Keynesian aggregate supply curve, an increase in government spending results in --- in output and --- in prices

an increase, a slight increase

Which of the following curves reflects the idea that in the short-run, prices are sticky and firms adjust production to meet demand?

the Keynesian aggregate supple curve

Assuming short-run Keynesian aggregate supply curve, an increase in the money supply results in --- in output and --- in prices

an increase, a slight increase

Assuming short-run Keynesian aggregate supply curve, a decrease in German GDP results in --- in output and --- in prices

a decrease, a slight decrease

The level of output determined by the intersection of the short-run Keynesian aggregate supply curve and the aggregate demand curve:

may be above, below, or equal to full employment output.

Assuming short-run Keynesian aggregate supply curve, a massive crop failure results in --- in output and --- in prices

a decrease, and increase

Using fig. 9.2 and economy-wide decrease in manufacturing costs is represented by a movement from points:

B to D

Expansionary policies are policies that

aim to increase level of GDP

Stabilization policies are

policies taken to move the economy closer to potential output

Automatic stabilizers

work without the need doe decisions from Congress or the White House

Increases in government spending and/or decreases in taxes will --- aggregate demand

increase

If the government wants to reduce unemployment, government spending should be __________ and/or taxes should be __________.

increased, decreased

he basic idea of the fiscal multiplier is that an initial increase in government spending will have a:

more than proportional impact on aggregate demand

Congress and the President typically use what kind of spending to conduct fiscal policies that affect the economy?

discretionary spending

Who sets the rules for "entitlements" when spending is authorized under this category?

the Congress when it appropriates spending

What is the largest single component of federal revenue?

individual income taxes

The largest category of discretionary federal spending is:

funding for the Defense Dept.

In a situation where the government is operating on a budget surplus, it can reduce its overall debt by _________.

buying back bonds it has sold to the public

If the budget were balanced and the economy entered a period of recession, what kind of budget would likely result?

deficit budget

Budget deficits tend to be procyclical for all the following reasons except:

the selling of government securities to pay for the deficit spurs private investment spending

Although running a budget deficit during a recession should not be a source of concern, running a budget deficit when there is no recession is a bad policy due to:

crowding out

According to Keynes, in the short-run the level of output is determined by

the demand for goods and services

In the Keynesian cross model, the 45 degree diagonal line represents the

set of points where output = demand

In a simple demand-side model with only consumers and firms, each of which demands a fixes amount of goods, equilibrium occurs where the C+I line

crosses the 45 degree line

If the demand for goods and services is less than output, then there will be

an increase in inventories (excess inventory)

If firms experience an unplanned increase in inventories, they are likely to

decrease production

In fig. 10.1 if y0 is the level of output, unplanned inventories will

decrease, because demand exceeds output

If the consumption function is C=50+.75y then the marginal propensity to consume is:

.75

If the consumption function is C=50+.75y, then the level of autonomous consumption is

50

The slope of the consumption function is = to

the marginal propensity to consume

Decrease in consumer confidence shifts the consumption function in fig. 10.2 from

C2 to C1

A change in the MPC can occur as a result of

consumers' perceptions of change in their incomes and changes in tax rates

In figure 10.1, if y2 is the level of output, firms will --- production

decrese

In fig. 10.3, a decrease in the marginal propensity to save is represented by a change in the consumption function from

C1 to C2

MPC= 1-MPS, so when MPS is smaller the slope is steeper

Let C =100 + 0.6y and I = 150. Then the equilibrium level of income y* is

625

y* = (Ca + I)/(1-b)

Let C =100 + 0.6y and I = 150. At the equilibrium level of income y*, the level of savings is

150, S=I

In the simple Keynesian cross model with no government or foreign sectors, the value of the multiplier is defined as

1/(1-MPC)

Let C =25 + 0.75y and I = 50. Assume no government or foreign sectors. If investment increases by 150, then the value of the multiplier is

4

The multiplier --- as the MPC increases

increases

The multiplier --- as autonomous consumption increases

is constant

The following questions are based upon the Keynesian model below.

C = 50 + 0.8(y -T)

I = 200

G = 150

T = 100

What is the equilibrium level of output

1600, Demand is C +G + I and y* = 320/.2

The following questions are based upon the Keynesian model below.

C = 50 + 0.8(y -T)

I = 200

G = 150

T = 100

What is the value of the government spending multiplier?

5, 1/(1-MPC) = 1/.2

The following questions are based upon the Keynesian model below.

C = 50 + 0.8(y -T)

I = 200

G = 150

T = 100

If taxes decrease by 50, then the change in output is

200, y* = 360/.2

Suppose the MPC for the US is 0.7. If the policy makers wish to increase GDP by $50 billion, how much does government spending have to increase to meet this target?

$15 million

multiplier = 1/(1-.7) = 3.3

change in y* divided by ? is equal to 3.3 and solve

Refer to fig. 10.4. Which diagram illustrates the effect if an increase in the income tax rate?

A

Refer to fig. 10.4. Which diagram illustrates the effect if an increase in government spending?

D

Which of the following is an example od an automatic stabilizer?

more unemployment benefits are paid during a recession

The following questions are based upon the Keynesian model below.

C = 100 + 0.75(y -T)

I = 100

G = 150

T = 100

X = 75

M = 0.10y

What is the marginal propensity to consume?

0.25, 1-MPC = MPS

A decrease in the level of imports --- the demand for goods and services produced in the US

increases

The following questions are based upon the Keynesian model below.

C = 100 + 0.75(y -T)

I = 100

G = 150

T = 100

X = 75

M = 0.10y

What is the value of the government spending multiplier?

2.86, 1/[1-(.75-1)], 1/[1-(b-m)]

The following questions are based upon the Keynesian model below.

C = 100 + 0.75(y -T)

I = 100

G = 150

T = 100

X = 75

M = 0.10y

What is the equilibrium level of output?

1000

y* = (Ca - bT + I + G +X)/ 1(b-m)

The following questions are based upon the Keynesian model below.

C = 100 + 0.75(y -T)

I = 100

G = 150

T = 100

X = 75

M = 0.10y

If the exports increase by 100 (X=175), what is the new equilibrium level of output?

1286

y* = (Ca - bT + I + G +X)/ 1(b-m)

The following questions are based upon the Keynesian model below.

C = 100 + 0.75(y -T)

I = 100

G = 150

T = 100

X = 75

M = 0.10y

If the marginal propensity to import increases to 0.2 (M = 0.20) what is the new level of equilibrium output?

777.78

y* = (Ca - bT + I + G +X)/ 1(b-m)

The interest rates quoted in the market are

nominal interest rates

Which of the following equations is correct?

real interest rate = nominal interest rate - inflation

Financial intermediaries are

firms that receive funds from savers and channel them to investors

Financial intermediaries

reduce the risks associated with investment

Firms are likely to --- investment spending when they believe that growth in real GDP will ---

increase, increase

accelerator theory

The model in which downturn in real GDP leads to a sharp fall in investment, which further reduces GDP through the multiplier, is known as the --- model

multiplier-accelerator

the interest rate on a loan will be --- as its risk --- and its maturity ---

higher, increases, lengthens

Compared to a 30 yr. US Treasury, the interest rate on a 30 year fixed mortgage will be --- because it is a loan with ---

higher, more risk

If the nominal interest rate is 8% and the inflation rate is 5% then the real rate of interest is

3%

If you have $200 to invest at a nominal interest rate of 8% and the inflation rate is 3%, then the real return on your investment is

$10. .05 x 200

If you have $300 and the inflation rate is 6%, in order to earn a real return of $18 on your investment, the nominal interest rate must be

12%, 18/300 = 6 +6 = 12

Expected real interest rates are the

interest rates quoted in the market minus the expected inflation rate

If the nominal interest rate is 7%, the expected real interest rate is 3%, and the inflation rate for the past year was 3%, then the expected inflation rate is --- the past inflation rate

greater than, nom. - expected is greater than 3 (past year's rate)

Referring to table 11.2 , if the nominal interest rate is 9% and there is no inflation, which investment should be undertaken?

investment E

Referring to table 11.2 , if the nominal interest rate is 3% and there is no inflation, which investment should be undertaken?

investments E, B, C, and A

Table 11.3 represents all the investments available to the economy, the nominal interest rate is 10 % and there is no inflation, what will(should) be the level of investment in the economy?

$100

As the real interest rate ---, the real investment spending ---

increases, decreases and decrease, increases

inverse relationship

Referring to fig. 11.1, if the real interest rate is 5% then the level of investment is

$40 billion

The neoclassical theory of investment

emphasizes the role of real interest rates and taxes

The Q-theory of investment

links investment spending to stock prices

Financial intermediaries are institutions that facilitate the movement of funds from savers to investors because they

reduce costs of negotiating transactions, monitor investments, reduce risks, and provide liquidity

Financial intermediaries reduce risk by

investing in a large number of projects with independent return, and expertise

Insurance companies can reduce risk by accepting premiums from:

many people to insure against independent events

In the US, runs on banks are prevented by

the government guarantees banks' accounts up t0 $100,000

The supply of money in the economy is determined primarily by

the banking system and the actions of the Federal Reserve

In the --- increases in the supply of money will ---

short run, raise total demand and output and long run, lead to higher prices

Money is

anything that is regularly used in economic transactions or exchanges

Barter transactions will occur only when

there exists a double coincidence of wants

Money solves the dilemma of a double coincidence of wants by serving as a

medium of exchange

When money is used to express the value of goods and services it is functioning as a

unit of account

As inflation rates increase, money becomes less useful as a

store of value

Suppose after a semester ends, you take a trip to an island. Upon arriving you make a stop at a market and notice everyone is carrying around jars of small turtles. You also notice the person in line in front of you just paid for a bottle of rum with 6 turtles, and someone else a straw hat with 2 turtles. You can conclude that

the little turtles are serving the function of money

Checking account balances are included in

both M1 and M2

Which of the following is not included in M1?

savings accounts

Checking accounts that pay interest are included in the

"other checkable deposits" part of M1

Which of the following is included in M2?

savings accounts

Which of the following appears in M2 and not M1?

money market mutual funds

Economists keep an eye on both M2 and M1 because

it is not clear how citizens use money market accounts

From the point of view of a commercial bank, a --- is a(n) ---

loan, asset and deposit, liability

Given the following information:

Assets $2,500

Liabilities $2,100

A bank's net worth is

$400

Which of the following is a bank liability?

demand deposit balances

The fraction of deposits that banks are required by law to hold and not lend out are called

required reserves

Suppose that while vacationing in Monaco, you won 25,000 French fans which is = to $5,000. When you return to the US you deposit $5,000 into your checking account. The effect (assuming the required reserve ratio is 20%) is

to increase your bank's liabilities by $5,000, increase your bank's excess reserves by $4,000, lead to a multiple expansion in the money supply(checking account balances) by $25,000, and increase your bank's required reserves by $1,000.

Meg digs out $100 from under her bed and deposits it into a bank. As a result of this single transaction, M1 has

not changed, because the money was already in circulation even if she didn't know it

Given the information about Acme Bank

Bank Deposits $30,000

Loans $20,000

Reserves $5,000

Reserve Requirement 10%

Acme bank is holding --- in excess reserves

$2,000

Suppose a bank has $200,000 in deposits, a required reserve ratio of 5%, and a bank reserve of $12,000. The bank can make new loans in the amount of

$2,000

Suppose a bank has $2 million in deposits, a required reserve ration of 15%, and bank reserves of $320,000. The bank can make new loans in the amount of

none of the listed answers, $20,000 is the correct amount

Suppose Barry deposits $10, 000 in his bank. If the reserve ratio is 20%, this will lead to an increase of --- in his checking account balances

$50,000 because $10,000/ 0.2

Suppose Kirk deposits $5,000 in his bank. If the reserve requirement is 25%, this will lead to an increase of --- in M1

$15,000, because $5,000/0.25 = $20,000 - $5,000

If the banking system has a required reserve ratio of 5%, then the money multiplier will be

20

A bank may make loans until its

excess reserves are exhausted

The money multiplier tends to be greater when

banks hold few excess reserves

The money multiplier is smaller when

bank customers prefer to hold a bigger amount of their money as cash and banks prefer to lend out 95% of their excess reserves instead of 100%

Which of the following is responsible for buying government securities in order to influence monetary policies?

The Federal Reserve

An open market purchase occurs when

the Federal Reserve purchases Treasury Bonds

An open market sale by the Fed

decreases the total amount of reserves in the banking system

If the Fed sells $7.5 million of US bonds and the reserve requirement is 25%, M1 will eventually

none of the listed answers, it will decrease by $30 million

If the Fed by $60,000 of US bonds and the reserve requirement is 10%, M1 will eventually

increase by $600,000

Changing the reserve requirement will

disrupt the banking system

In the federal funds market --- will barrow or lend reserves to ---

a bank, another bank

An increase in the discount rate

increases the cost of reserves borrowed fro the Fed

A decrease in the discount rate will

increase the money supply

In practice, the Federal Reserve keeps the discount rate close to the --- rate in order to avoid large swings in borrowed reserves by banks

federal funds

members of the Federal Reserve Board of Governors are

appointed to 14 yr. terms, confirmed by the Senate, members of the Federal Open Market Committee, and serve in Washington DC

Which of the following is responsible for decisions on monetary policy?

The Federal Open Market Committee

The Federal Open Market Committee is composes of

the members of the Board of Governors and all the Presidents of the 12 Federal Reserve banks

The president of the --- Federal reserve Bank is always a member of the FOMC

New York

In the short run when prices don't have enough time to change, the Federal reserve

can influence the level of interest rates in the economy

Generally when the Federal Reserve lowers interest rate, investment spending --- and GDP ---

increases, increases (Law of Demand)

Decreased investment spending in the economy would be a possible result of

an open market sale of bonds

The transactions demand for money comes mostly from the fact that

money makes it easier to make purchases

The opportunity cost of holding money is

the return that could have been earned from holding wealth in other assets

An increase in interest rates leads to

a leftward movement up along the demand for money curve

The demand for money curve has shifted left. This may be the result of

a decrease ub the level of prices and a decrease in real GDP

Speculative demand for money is the demand for money that arises

because money is less risky than other assets

The demand for money in practice is the sum of

transactions, liquidity, and speculative demands

The --- determines the supply of money

Federal reserve

If the quantity of money demanded = the quantity of money supplied then the

interest rate will be in equilibrium

If the Federal Reserve conducts an open market sale then the

interest rate will increase

Based on the model of the money market, when prices in the economy increase, the equilibrium interest rate should

increase

Based on the model of the money market, when real income decreases, the equilibrium interest rate should

decrease

Based on the model of the money market, when the risk associated with holding other assets increases, the equilibrium interest rate should

increase

If a bond were to pay off one yr. from now for $200 and the interest rate is 10%, that is the price of the bond (rounded)?

$182, 200/ (1+0.1)

Ifa bond were to pay off one yr. later for $200 and was purchases for 4182, what is the interest rate

10%

An open market purchase by the Fed

increases investment and output

Actions by the Federal reserve to influence the level of GDP are known as

monetary policy

An increase in the reserve requirement

increases interest rates and decreases output

A decrease in the money supply and increase in GDP are consistent with

none of the listed answers,

An increase in the money supply should increase output

An increase in the money supply and a decrease in GDP are consistent with

none of the listed answers

If the Fed wished to decrease inflation, it could

increase in the reserve requirement or conduct an open market sale

The exchange rate is

the rate at which one currency trades for another currency

Higher US interest rates cause the value of the dollar to

rise, making US goods relatively more expensive on world markets

An open market purchase by the Fed causes the value of the dollar to

fall, increasing net exports

The depreciation of the dollar will make US goods --- to foreigners and make exports --- for US residents

cheaper, more expensive

Policies taken to move the economy closer to potential output are called

stabilization policies

An outside lag is

the period of time it takes for policies to work

Outside lags are usually

longer for monetary policy than fiscal policy