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The basic aggregate demand and aggregate supply curve model help explain...
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short term fluctuations in real GDP and the price level
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because of the slope of the aggregate demand curve we can say that a decrease in the price level ...
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leads to HIGHER level of real GDP demanded
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the "interest rate effect" can be described as an increase in the price level that raises the interest rate and chokes off...
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investment and consumption spending.
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the international trade effect states
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an increase in the price level will LOWER NET EXPORTS
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which of the following is one explanation as to why the aggregate demand curve slopes downward?
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decreases in the price level raise real WEALTH and INCREASE CONSUMPTION SPENDING.
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higher personal taxes...
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DECREASE aggregate demand
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which of the following will shift the aggregate demand curve to the right, ceteris paribus?
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an increase in net exports
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if the U.S. dollar decreases in value relative to other currencies, how does this affect the aggregate demand curve?
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this will sift the demand curve to the RIGHT
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the level of aggregate supply in the long run is not affected by..
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changes in PRICE LEVEL
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potential GDP refers to the level of
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REAL GDP in the LONG RUN
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full employment GDP is also known as
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potential GDP
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the short run aggregate supply cure has a _________ slope because as prices of ___________ rise, the prices of _________________ rise more slowly
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positive, final goods and services, inputs
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an increase in the price level will...
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move the economy up along a stationary short run aggregate supply curve
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Most recessions in the united states since world war 2 have begun with
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a decline in residential construction
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interest rates in the economy have fallen. how will this affect aggregate demand and equilibrium in the short run?
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Aggregate demand will RISE, the equilibrium price level will RISE, and GDP will RISE.
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when the aggregate demand curve and the short run aggregate supply curve intersect...
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the economy is in the short-run macroeconomic equilibrium
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if short run aggregate supply increases (shifts to the right) by less than long run aggregate supply, then, at the short run equilibrium..
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GDP will be BELOW potential GDP
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the process of an economy adjusting from a recession back to potential GDP in the long run without any government intervention is known as
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an automatic mechanism
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suppose the economy is at full employment and firms become more optimistic about the future profitability of new investment. which of the following will happen in the short run?
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unemployment will decline.
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why does the short run aggregate supply curve shift to the right in the long run, following a decrease in aggregate demand?
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workers and firms adjust their expectations of wages and price DOWNWARD and they ACCEPT the lower wages and prices
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which of the following is not an assumption made by the dynamic model of aggregate demand and aggregate supply?
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aggregate demand and potential real GDP decrease continuously
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in the diagram above, LRAS1 and SRAS1 denote LRAS and SRAS in year 1, while LRAS2 and SRAS2 denote LRAS and SRAS in year 2. given the economy is at point A in year 1, what is the growth rate in potential GDP in year 2
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10%
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refer to the diagram to the right. give the economy is at point A in year 1, what will happen to the unemployment rate in year 2?
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it will rise
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refer to the diagram to the right. give the economy is at point A in year 1, what is the inflation rate between year 1 and year 2?
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1.8%
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at the beginning of the recession in 2007-2009, real GDP in the United States was ______________ potential GDP, and in June 2009, real GDP was ________________ potential GDP
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above: below
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in the dynamic aggregated demand and aggregate supply model, if AD shifts faster than AS then...
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inflation occurs
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which of the following is one reason for the decline in aggregate demand that led to the recession of 2007-2009?
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the end of the housing bubble
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(T/F?) Inflation is generally the result of total spending growing faster than total production
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true
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economies where goods and services are traded directly for other goods and services are called
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barter
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the major shortcoming of the barter economy is
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the requirement of a DOUBLE COINCIDENCE of wants
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commodity money
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has value independent of its use as money
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which of the following is one of the most important benefits of money in an economy
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money makes exchange easier, leading to more specialization and higher productivity
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which of the following assets is most liquid
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money
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fiat money has
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little to no intrinsic value and IS AUTHORIZED by the central bank or government body
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dollar bills in the modern economy serve as money because
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people have confidence that others will accept them as money
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money is
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an ASSET that people are willing to accept in exchange for goods and services
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the statement, "this Dell laptop costs $1,200" illustrates which function of money?
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unit of account
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the M1 measure of money supply equals
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currency plus checking account balances plus traveler's checks.
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the largest proportion of M1 is made up of
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checking account deposits
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economists estimate that _________ of U.S. currency is outside the United States and held primarily by _______________.
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over half; households and firms in countries where there is little confidence in the local currency
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the M2 measure of supply equals
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M1 PLUS SAVINGS ACCOUNT account balances plus small- denomination time deposits plus non institutional MONEY MARKET FUND SHARES
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most payments in the U.S. for goods and services are made using
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checking account deposits
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a bank will consider a car loan to a customer _____________ and a customer's checking account to be _______________
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an asset; a liability
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the required reserves of a bank equal its __________ the required reserve ratio
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deposits multiplied by
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imagine that Kristy deposits $10,000 of currency into her checking account deposit at Bank A and that the required reserve ratio is 20%. as a result of Kristy's deposit, Bank A RESERVES IMMEDIATELY increase by
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$10,000
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imagine that Kristy deposits $10,000 of currency into her checking account deposit at Bank A and that the required reserve ratio is 20%. as a result of Kristy's deposit, Bank A's REQUIRED RESERVES increase by...
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$2,000
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imagine that Kristy deposits $10,000 of currency into her checking account deposit at Bank A and that the required reserve ratio is 20%. as a result of Kristy's deposit, Bank A's EXCESS RESERVES increase by.
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$8,000
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imagine that Kristy deposits $10,000 of currency into her checking account deposit at Bank A and that the required reserve ratio is 20%. Bank A can make a MAXIMUM LOAN of
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$8,000
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The more excess reserves banks choose to keep,
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the smaller the deposit multiplier
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if households choose to take some fraction of each check they deposit and hold it as currency, then the simple deposit multiplier __________________ the real world multiplier.
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is greater than
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if the central bank can act as a lender of last resort during a banking panic, banks can
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satisfy customer withdrawal needs and eventually restore the public faith in banking system
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then seven members of the Board of Governors of the Federal Reserve are appointed by
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the president
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Which of the following is not a function of the Federal Reserve System or the "Fed"?
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insuring deposits in the banking system
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a central bank like the Federal Reserve in the United States can help banks survive a bank run y
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acting as a lender of last resort
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open market operations refer to the purchase or sale of ________ to control the money supply
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U.S. Treasury securities by the Federal Reserve.
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the three main monetary policy tools used by the Federal Reserve to manage money supply are
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open money market operations, discount policy, and reserve requirements
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the purchase of Treasury securities by the Federal Reserve will, in general
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increase the quantity of reserves held by banks
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to decrease the money supply, the Federal Reserve could
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conduct an open market sale of Treasury securities
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a decrease in the discount rate _______________ bank reserves and ___________ the money supply if banks respond appropriately to the change in the rate.
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increases; increases
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the quantity equation states that the
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money supply TIMES THE VELOCITY of money equals the price level TIMES real output
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the quantity theory of money predicts that, in the long run, inflation results from the
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money supply growing at a faster rate than real GDP
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the quantity theory of money was derived from the quantity equation by asserting that
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the velocity of money was fixed
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according to the quantity theory of money, if the money supply grows at 20% and real GDP grows at 5% then the inflation rate will be
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15 percent
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if the probability of losing your job remains ________, a recession would be a good time to purchase a home because the fed usually _________ interest rates during this time
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low; lowers
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when the Federal Reserve was established in 1913 , its main policy goal was
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preventing bank panics
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monetary policy refers to the actions the Federal Reserve takes to manage
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the money supply and interest rates to pursue its economic objectives
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federal reserve Board Chairmen Paul Volcker, Alan Greenspan, and Ben Bernanke all have focused on which of the following as their main goal of monetary policy?
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price stability
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with the federal funds rate near zero and he economy still struggling, the Fed began buying 10-year Treasury notes and certain mortgage-backed securities to keep interest rates low. this policy is known as
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quantitative easing
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expansionary monetary policy refers to the __________ to increase real GDP
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Federal Reserve's increasing the money supply and DECREASING interest rates
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in the figure to the right, if the economy is at point A, the appropriate monetary policy by the Federal Reserve would be to
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lower interest rates
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in the figure to the right. suppose the Fed sells Treasury Bills in pursuit of contractionary monetary policy. using the staticAD-AS model, this situation would be depicted as a movement from
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C to B
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which of the following describes what the Fed would do to pursue an expansionary monetary policy
answer
use open market operations to BUY treasury bills
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When the Fed uses contractionary policy
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the price level rises LESS than if would if the Fed did not pursue policy.
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which of the following is true about the Federal Reserve and its ability to prevent recessions? the Federal Reserve...
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cannot realistically fine tune the economy, but seeks to keep recessions SHORTER AND MILDER than they would otherwise be
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lowering the interest rate will
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increase investment project by firms
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in the figure to the right, suppose the economy is initially at point A. the movement of the economy to point B as shown on the graph illustrates the effect of which of the following policy actions by the Federal Reserve?
answer
an open market sale of Treasury bills
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when the Fed increases the money supply,
answer
the interest rate rate and this stimulates investment spending.
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in the dynamic model AD-AS in the diagram to the right, if the economy is at point A in year 1 and is expected to go to point B in year 2, the Federal Reserve would most likely
answer
decrease interest rates
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in the dynamic model AD-AS in the diagram to the right, if the economy is at point A in year 1 and is expected to go to point B in year 2, and the federal reserve pursues no policy, then at point B
answer
the economy is below full employment
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in the diagram to the right, if the economy is year 1 is at point A and is expected to go to point B in year 2,then the appropriate monetary policy by the federal reserve would be to
answer
raise interest rates
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in the diagram to the right, if the economy is year 1 is at point A and is expected to go to point B in year 2. which of the following policies could the federal reserve use to move the economy to point C
answer
buy Treasury bills
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when housing prices fall, as they did beginning in 2006 following the housing market bubble, consumption spending on furniture, appliances, and home improvements ____________ as many households found it __________ to borrow against the value of their homes
answer
declined; harder
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which of the following explains why mortgages weren't considered securities prior to 1970
answer
prior to 1970, mortgages were rarely resold in the secondary market
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by the 2000s, an important change in the mortgage market had occurred when ____________ became significant participants in the secondary market for mortgages
answer
investment banks
question
in 2008, the Treasury and Federal Reserve took action to save large financial forms such as Bear Stearns and AIG from failing. which of the following is one reason why these measures were taken
answer
the bankruptcy of a large financial firm would force the firm to sell its holdings and securities, which could cause other firms that hold these securities to also fail
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in October 2008, Congress passed the ____________, under which the Treasury provided funds to banks in exchange for stock
answer
troubled asset relief program (TARP)
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if the amount you owe on your house is greater than the price of the house,you have
answer
negative equity in your house
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a financial asset is considered________ if it can be sold in a secondary market
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a security
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the smaller the fraction of an investment financed by borrowing,
answer
the SMALLER the potential return and potential LOSS on that investment
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Fiscal policy refers to changes in
answer
federal taxes and purchases that are intended to achieve macroeconomic policy objectives
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automatic stabilizers refer to
answer
government spending and TAXES that automatically increase or decrease along with the business cycle
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which of the following would not be considered an automatic stabilizer
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legislation increasing funding or job retraining passed during a recession
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the larges and fastest- growing category of the federal government expenditures is
answer
transfer payments
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the largest source of federal government revenue in 2014 wa
answer
individual income taxes
question
since the social security system began in 1935, the number of worker per retiree has
answer
continually declined
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Fiscal policy is defined as changes in federal _____________ and ____________ to achieve macroeconomic objectives such as price stability, high rates of economic growth, and high employment
answer
taxes; expenditures
question
active changes in tax and spending by government intended to smooth out the business cycle are called ___________ and changes in taxes and spending that occur passively over the business cycle are called ______________
answer
discretionary fiscal policy; automatic stabilizers
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congress and the president carry out fiscal policy through changes in
answer
government purchases and taxes
question
expansionary fiscal policy involves
answer
increasing government purchases or decreasing taxes
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suppose the economy is in short run equilibrium BELOW potential GDP and Congress and he president lower taxes to move the economy back to long run equilibrium. using the static AD- AS model in the diagram to he right, this wold be depicted as a movement from
answer
A to B
question
suppose the economy is in short run equilibrium ABOVE potential GDP and wages and prices are rising. if contractionary policy is used to move the economy back to the long run equilibrium, this would be depicted as a movement from _____________ using the static AS-AD model in the diagram to the right
answer
C to B
question
tax cuts on business income increase aggregate demand by increasing
answer
business investment spending
question
which of the following is considered contractionary fiscal policy
answer
congress increases the income tax rate
question
in the dynamic model of AD-AS in the figure to the right if the economy is at point A in year 1 and is expected to get to point B in year 2,
congress and the president would most likely
congress and the president would most likely
answer
increase government spending
question
in the dynamic model of AD-AS in the figure to the right if the economy is at point A in year 1 and is expected to get to point B in year 2,
and no fiscal or monetary policy is pursued, then at point B
and no fiscal or monetary policy is pursued, then at point B
answer
firms are operating at below capacity
question
from an initial long run equilibrium, if aggregate demand grows faster than long run and short run aggregate aggregate supply, then Congress and the president would most likely
answer
decrease government spending
question
in the dynamic model of AD-AS in the figure to the right if the economy is at point A in year 1 and is expected to get to point B in year 2
congress and the president would most likely pursue
congress and the president would most likely pursue
answer
contractionary fiscal policy
question
the federal reserve plays a larger role than congress and the president in stabilizing the economy because
answer
the Federal Reserve can more quickly change MONETARY POLICY than the president and the congress can change FISCAL POLICY
question
crowding out refers to a decline in ___________ asa result of an increase in __________
answer
private expenditures; government purchases
question
the impact of crowding out maybe the least
answer
during a deep recession
question
when president Obama took office inJanuary2009, he pledged to pursue an expansionary fiscal policy to try to pull the economy out of the recession. the next month, congress passed he American Recover and Reinvestment Act Of 2009, a $840 billion package of spending increases and taxes cuts that was
answer
the largest fiscal policy action in the U.S. history
question
poorly timed discretionary policy can do more harm than good. getting the timing right with fiscal policy is generally
answer
more difficult than with monetary policy
question
if policymakers implement an expansionary fiscal policy but do not take into account the potential for crowding out, the new equilibrium level of GDP is likely to
answer
be BELOW potential GDP
question
suppose that at the same time Congress and the president pursue an expansionary fiscal policy, the Federal Reserve pursues an expansionary monetary policy.
How might an expansionary monetary policy affect the
How might an expansionary monetary policy affect the
answer
an expansionary monetary policy would DECREASE interest rates and thus REDUCE the extent of crowding out.
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