Final Help

HOMEWORK 7

Question 1

According to the aggregate demand curve, when the aggregate price level _________, the quantity of _________.Answer

Correct Answer:    rises; aggregate output demanded falls

Question 2

The components of aggregate demand are:Answer

Correct Answer:

   C (consumption), I (investment), G (government) expenditures, and X – IM (net exports).

Question 3

The aggregate demand curve is negatively sloped in part because of the impact of:Answer

Correct Answer:    the wealth effect on consumption.

Response Feedback: See text book page 317

Question 4

Which of the following is a factor which can not shift the aggregate demand curve?Answer

Correct Answer:    changes in the price level

Question 5

Aggregate demand will increase if:Answer

Correct Answer:    the public becomes more optimistic about future income.

Question 6

A movement from AD1 to AD2 may have been the result of:

Answer

Correct Answer:    an increase in government spending

Question 7

The aggregate supply curve shows the relationship of prices:Answer

Correct Answer:    and the output producers are willing to provide

Question 8

The short-run aggregate supply curve is positively sloped becauseAnswer

Correct Answer:

   wages are sticky or don't readily adjust to changes in economic conditions in the short run.

Question 9

The long-run aggregate supply curve may shift to the right if:Answer

Correct Answer:    productivity increases.

Question 10

Using the accompanying figure we can safely conclude that:

Answer

Correct Answer:

   that there has been an increase in the short-run aggregate supply.

Question 11

If nominal wages fall, then short-run aggregate:Answer

Correct Answer:    supply shifts to the right.

Question 12

In the long-run, nominal wages are:Answer

Correct Answer:

   flexible because contracts and informal agreements are renegotiated in the long run

Question 13

In the long run, the aggregate price level has:Answer

Correct Answer:    no effect on the quantity of aggregate output

Question 14

The long-run aggregate supply curve is:Answer

Correct Answer:    vertical.

Question 15

In the short run, a decrease in investment is illustrated by:

Answer

Correct Answer:    Panel (b).

Question 16

In the short run, a decrease in wages is illustrated by:

Answer

Correct Answer:    Panel (c).

Question 17

In the accompanying figure, curve 1 refers to _____, curve 2 refers to _____, and curve 3 refers to _____.

Answer

Correct Answer:

   aggregate demand; long-run aggregate supply; short-run aggregate supply

Question 18

In Panel (a), the intersection of SRAS with AD indicates:

Answer

Correct Answer:    an economy experiencing a recessionary gap

Question 19

In Panel (b), the level of real GDP represented by Yp:

Answer

Correct Answer:    is potential output for this economy

Question 20

Assume that the economy depicted in Panel (a) is in short-run equilibrium at a real GDP level of Y1. Doing nothing and letting the economy correct itself:

Answer

Correct Answer:    occurs in the long run when wages fall.

HOMEWORK 8

Question 1

The basic equation of national income accounting shows: GDP = C + I + G + X – IM. When the government uses fiscal policy to make changes to taxes and transfers, this policy primarily affects:Answer

Correct Answer:    C

Response Feedback:

Because when money comes back to the consumer the consumer then spends a portion of it (C).

Question 2

The accompanying graph shows the current short-run equilibrium in the economy. Appropriate fiscal policy action in this situation would be

Answer

Correct Answer:    a decrease in transfer payments.

Response Feedback:

Here you have a inflationary gap which could lead to inflation.  If one wants to use fiscal policy to tackle the problem then you must use a policy to shift the aggregate demand curve to the left.  One way of doing this is to decrease transfer payments.

Question 3

Using the accompanying figure, which of the following would be the appropriate response of the North-West government?

Answer

Correct Answer:

   Expand aggregate demand by decreasing taxes to close the recessionary gap.

Response Feedback:

Here you have a recessionary gap which could leads to unemployment.  If one wants to use fiscal policy to tackle the problem then you must use a policy to shift the aggregate demand curve to the right.  One way of doing this is to decrease taxes.

Question 4

If the economy is at equilibrium below potential output:Answer

Correct Answer:

   there is a recessionary gap, and expansionary fiscal policy may be appropriate.

Question 5

Expansionary fiscal policy:Answer

Correct Answer:    increases aggregate demand

Question 6

An increase in government transfers is considered to be an example of ________ because it ________.Answer

Correct Answer:

   expansionary fiscal policy; shifts the aggregate demand curve to the right, increasing aggregate output

Question 7

At E1, the economy:

Answer

Correct Answer:    has a recessionary gap

Question 8

 The movement from AD1 to AD3 could be caused by (pick single best answer):

Answer

Correct Answer:    All of the above.

Question 9

An inflationary gap would be:

Answer

Correct Answer:    Y3-Y2.

Question 10

Fiscal policy that increases aggregate demand is:Answer

Correct Answer:    expansionary.

Question 11

Contractionary fiscal policy includes:Answer

Correct Answer:    decreasing government expenditures.

Question 12

The multiplier effect of changes in government purchases of goods and services is equal to:Answer

Correct Answer:    1/(1 – MPC).

Question 13

Assume that marginal propensity to consume is 0.8, and potential output is $800 billion. The government spending multiplier is:Answer

Correct Answer:    5

Response Feedback: 1/(1-0.8) = 1/(0.2) = 5

Question 14

If the marginal propensity to save is 0.25, investment spending is $700 million, and the government increases its purchases of goods and services by $100 million, then real GDP increases by:Answer

Correct Answer:    $400 million.

Response Feedback:

If mps = .75 then mpc = (i-mps) = (1-0.75) = 0.25.  Then plug into the multiplier formula 2 questions earlier to get a multiplier of 4.  Then multiply that by the change in government spending (100 million) and you get $400 million.

Question 15

The federal budget tends to move toward _____ as the economy ____.Answer

Correct Answer:    deficit; contracts

Question 16

The budget balance is calculated as:Answer

Correct Answer:    T – G – TR

Question 17

When the unemployment rate increases, the budgetAnswer

Correct Answer:    tends to move into deficit.

Question 18

Some people insist that the budget be 'balanced' each fiscal year. Do most economists consider this correct?Answer

Correct Answer:

   No, a budget needs to be balanced only on average; it can be in a deficit when there is a recession and offset by surpluses when the economy is doing well

Question 19

When the federal government finances a deficit, the government mayAnswer

Correct Answer:    borrow funds.

Question 20

Discretionary fiscal policy involvesAnswer

Correct Answer:

   using government spending or tax policy to affect aggregate demand.

HOMEWORK 9

Question 1

Money is anything that:Answer

Correct Answer:    serves as a medium of exchange for goods and services.

Question 2

Money is:Answer

Correct Answer:    anything that can easily be used to buy goods and services.

Question 3

Which of the following would NOT fit the economist's definition of money?Answer

Correct Answer:    bonds

Question 4

When we use money to buy groceries, money is playing the role of a:Answer

Correct Answer:    medium of exchange.

Question 5

Money that the government has ordered be accepted as money is:Answer

Correct Answer:    fiat money.

Question 6

The reserve ratio is the:Answer

Correct Answer:

   fraction of bank deposits that a bank holds as reserves

Question 7

 If the reserve ratio is 25%, loans are:

Answer

Correct Answer:    $60,000.

Response Feedback:

If the reserve ratio is 0.25 then the original deposit was $80,000 of which the bank kept $80,000*0.25 = $20,000 in reserve and loaned out the other $60,000.

Question 8

If the reserve ratio is 25%, deposits are:

Answer

Correct Answer:    $80,000.

Response Feedback:

If the reserve ratio is 0.25 then the original deposit was $80,000 of which the bank kept $80,000*0.25 = $20,000 in reserve and loaned out the other $60,000.

Question 9

Suppose the reserve ratio is 20%. If Sam deposits $500 into his checking account, his bank can increase loans byAnswer

Correct Answer:    $400.

Question 10

The reserve requirement is 20%, and Leroy deposits his $1,000 check received as a graduation gift in his checking account. The bank does NOT want to hold excess reserves.Which of the following is an accurate description of the bank's balance sheet immediately after the deposit?Answer

Correct Answer:

   Reserves increase by $1,000, and demand deposits increase by $1,000.

Question 11

The reserve requirement is 20%, and Leroy deposits his $1,000 check received as a graduation gift in his checking account. The bank does NOT want to hold excess reserves.How much of the deposit is the bank required to keep in reserves?Answer

Correct Answer:    $200

Question 12

All of the following are responsibilities of the Fed EXCEPT:Answer

Correct Answer:    making a profit

Question 13

The Fed's main assets are:Answer

Correct Answer:    U.S. Treasury bills.

Question 14

To change the money supply, the Fed most frequently uses:Answer

Correct Answer:    open-market operations.

Question 15

If the Fed conducts an open-market purchaseAnswer

Correct Answer:    bank reserves increase and the money supply increases.

Question 16

If the Fed conducts a $10 million open-market sale and the reserve requirement is 20%, the maximum change in the money supply is:Answer

Correct Answer:    a decrease of $50 million.

Question 17

If the Federal Reserve buys $250 million worth of U.S. Treasury bills in the open market, and the reserve ratio is 10%, then the money supply will:Answer

Correct Answer:

   potentially increase by $2,500 million.

HOMEWORK 10

Question 1

If the interest rate on CDs increases from 5% to 10%, the opportunity cost of holding money will ______ and the quantity demanded of money will ______.Answer

Correct Answer:    increase; decrease

Question 2

If during 2007 the interest rate on 1-month Treasury bills was 2.5% and during 2008 the interest rate on 1-month Treasury bills was 2%, one could conclude thatAnswer

Correct Answer:    the opportunity cost of holding money decreased.

Question 3

The demand curve for money will shift to the right because of a:Answer

Correct Answer:    rise in real GDP

Question 4

If the money market is initially in equilibrium at point E and the central bank sells bonds, then the interest rate will:

Answer

Correct Answer:    move toward point H.

Response Feedback:

Remember the Federal Reserve is a Central Bank (text 396).  If the Feds Sell bonds they contract the money supply.

Question 5

If the money market is initially in equilibrium at point E and the central bank buys bonds, then the interest rate will:

Answer

Correct Answer:    move toward point L.

Response Feedback:

When the Feds buy bonds (with money) that money ends up in the banking system and it expands the money supply. 

Question 6

If the interest rate is currently at rL and the central bank neither buys nor sells bonds, then the interest rate will:

Answer

Correct Answer:    move toward point E.

Question 7

Expansionary monetary policy:Answer

Correct Answer:

   increases the money supply, decreases interest rates, and increases consumption and investment.

Question 8

Monetary policy affects GDP and the price level by:Answer

Correct Answer:    changing aggregate demand.

Question 9

Monetary policy affects aggregate demand through changes in:Answer

Correct Answer:    consumer and investment spending.

Question 10

An increase in interest rates will lead to a(n):Answer

Correct Answer:    decrease in aggregate demand.

Question 11

If the economy is experiencing an inflationary gap, the Fed can conduct ______ monetary policy to ______ aggregate demand.

Answer

Correct Answer:    contractionary; decrease

Question 12

Inflation doesn't reduce overall purchasing power if:Answer

Correct Answer:    it causes an increase in nominal wages.

Question 13

(Figure: AD-AS Model) Suppose the economy is currently at YE with a price level of P1. Which of the following would represent the new long-run equilibrium position if the aggregate demand curve shifted to the right from AD1 to AD2 as a result of an increase in the money supply?

Answer

Correct Answer:    YE and P3

Response Feedback:

Because at Y1 and P2 nominal wages will increase shifting the short-run aggregate supply curve to the left.

Question 14

In the short run, an increase in aggregate demand from a position of full employment leads toAnswer

Correct Answer:    higher prices and higher output.

Question 15

In the long run, an increase in aggregate demand from a position of full employment leads to:Answer

Correct Answer:    higher prices and the same output

Question 16

If potential GDP is growing at 3% and actual GDP is growing at 2%, then the unemployment rate is below the natural rate.Answer

Correct Answer:  False

Question 17

(Figure: AD-AS Model and the Short-Run Phillips Curve) If the central bank increases the money supply such that aggregate demand shifts from AD1 to AD2, then real GDP would increase by:

Answer

Correct Answer:    4%.

Question 18

(Figure: AD-AS Model and the Short-Run Phillips Curve) If the central bank decreases the money supply such that aggregate demand shifts from AD2 to AD1, then the unemployment rate would increase to:

Answer

Correct Answer:    6%.

Question 19

(Figure: AD-AS Model and the Short-Run Phillips Curve) If the central bank increases the money supply such that aggregate demand shifts from AD1 to AD2, then the inflation rate would be:

Answer

Correct Answer:    2%.

Question 20

Suppose that commodity prices across the economy begin to fall and consumers and firms begin to expect a lower rate of future inflation. What do we expect to happen to the SRAS curve and short-run Phillips curve?

Answer

Correct Answer:

   The SRAS curve will shift to the right, and the short-run Phillips curve will shift downward.

Response Feedback:

Opposite of an expected inflation increase (see text page 456).  If expect inflation to decrease will not demand as high of wages and employment will increase for each current price level.  As unemployment decreases more workers make more products and the short-run aggregate supply curve shifts right (output increases at each price level).