University of Idaho Econ 201 final

the federal reserve

Monetary policy is controlled by

increase gov spending, lowers taxes, increases GDP, and decreases unelpoyment rates

Expansionary fiscal policy

store of value

During periods of inflation, which function of money is most severely affected?

The current chairman of the Federal Reserve is

Jerome Powell

Greater optimism about the expected profits from investment projects

shifts the demand for loanable funds curve rightward.

When banks borrow money from the Federal Reserve, these funds are called

discount loans

For a commercial bank, the term "reserves" refers to

the cash in its vaults and its deposits at the Federal Reserve.

If a bank's net worth is negative, then the bank definitely is

insolvent

The "double coincidence of wants" problem is

resolved by the use of money

When you keep money in a change jar to be used later, what function is it fulfilling?

store of value

The sum of currency in circulation and bank reserves is the ________.

monetary base

The nation is divided into ________ Federal Reserve districts, each having a Federal Reserve Bank.

12

"Those borrowers who most desperately want loans are the ones who are least able to repay the loans," is an example of:

adverse selection.

If bad credit risks are the ones who most actively seek loans then financial intermediaries face the problem of

adverse selection.

With a 20% reserve requirement ratio, a $100 deposit into New Bank means that the maximum amount New Bank could lend is

$80

Depository institutions

make profit from the spread between the interest rate they pay on deposits and the interest rate they receive on loans.

The regulatory function of the central bank began with the:

National banking ERA

Today the United States has a dual banking system in which banks supervised by the ________ and by the ________ operate side by side.

federal government; states

If the Fed wants to decrease the quantity of money, it can

sell U.S. government securities.

On the Fed's balance sheet, assets include

U.S. government securities and loans to depository institutions (discount loans).

3-6-3 Rule: Pay savers 3% interest on savings, charge borrowers 6% on loans, and be on the golf course by 3pm.

True or False

True

The free banking ERA was from:

1836-1864.

Contactionary monetary policy:

fights inflation and risks recession

tools used by the fed to control quantity of money.

open market operations, discount window and rate, reserve equipment, interest on reserve rates

Financial intermediaries reduce transaction costs by:

expertise.

diversification.

economies of scale.

What do these dates in the U.S. have in common (1819,1837,1857,1873,1884,1893,1907, 1930-1933, 2007-2009)?

Financial panics that caused recessions

The FED was founded in 1913 due to the banking panic of 1907

true or false

true

The demand for loanable funds curve is

downward sloping when plotted against the real interest rate.

The ________ the expected profit, the greater is the ________.

higher; investment demand

Money that has value simply because the government declares it so, is called:

fiat money.

The interest rate the Fed charges banks borrowing from the Fed is the

discount rate.

The Federal Open Market Committee (FOMC) is composed of

Presidents of 5 Federal Reserve regional banks and the Board of Governors.

"Being careless with fire because you have fire insurance," is an example of:

moral hazard

Members of the Federal Reserve system's Board of Governors

hold 14-year staggered terms.

Monetary base

currency in circulation plus bank reserves.

The most important function of money is its role as:

medium of exchange.

Money is created by

banks making loans.

The functions of money are

medium of exchange, unit of account, store of value, and standard of deferred value.

An increase in the quantity of money

increases aggregate demand.

If the economy is in short run equilibrium then

real GDP can be greater than, less than, or equal to potential GDP.

Other things constant, the economy's aggregate demand curve shows that

the quantity of real GDP demanded decreases when the price level rises.

The U.S. aggregate demand curve shifts leftward (decreases) if:

the Federal Reserve increases the interest rate by cutting the money supply.

The long-run aggregate supply curve is vertical because

potential GDP is independent of the price level.

When talking about aggregate supply, it is necessary to

distinguish between long-run aggregate supply and short-run aggregate supply.

An increase in the price level creates a

wealth effect.

decrease in consumption expenditures.

movement along the aggregate demand curve.

An increase in disposable income leads to a decrease in aggregate demand.

true of false

false

What shifts the aggregate demand curve?

consumption, investment, government spending, net exports

Aggregate supply describes the behavior of

producers.

Other things equal, along the aggregate demand curve, a higher price level is associated with

a decrease in the quantity of real GDP demanded.

According to the wealth effect, if real wealth decreases then people

decrease their consumption expenditure.

Which of the following increases aggregate demand and shifts the AD curve rightward?

an increase in the quantity of money and a resulting fall in the interest rate

At potential GDP unemployment

is at its natural rate.

As the price level falls and other things remain the same, real wealth ________ and ________.

increases; the quantity of real GDP demanded increases

long-run aggregate supply curve GDP

real GDP is equal to potential GDP.

For movements along the long-run aggregate supply curve,

the price level and the money wage rate change by the same percentage.

Moving along a short-run aggregate supply curve, resource prices (and other input prices) ________, the money rate wage ________, and potential GDP ________.

do not change; does not change; does not change

People expect their incomes will decrease next year. As a result, the ________ will shift ________.

aggregate demand curve; leftward

One possible result of a decrease in aggregate demand (ceteris paribus):

recession

Substitution (i.e. interest rate) effects help explain the slope of the aggregate demand curve. This refers to the:

effect on investment expenditures that result from a change in interest rates produced by a change in the price level.

The quantity of real GDP supplied (or aggregate production) at different price levels is reflected by the

aggregate supply curve.

A decrease in government transfer payments

decreases aggregate demand.

Which of the following does NOT shift the aggregate demand curve?

an increase in the price level

A fall in the money wage rate (or other input prices) shifts

the SRAS curve rightward but leaves the LAS curve unchanged.

According to the interest rate effect (i.e. intertemporal substitution effect), a fall in the price level will

cause the interest rate to fall so that investment increases and the quantity of real GDP demanded increases.

Aggregate demand decreases when

the government implements monetary policies that decrease the quantity of money.

The short-run aggregate supply curve is upward sloping because

marginal costs rise with increased output so firms have to receive higher prices to justify their increase in output.

Why does the aggregate demand curve slope downward?

Wealth effect

export effect

interest rate effect

An increase in the money wage rate (or of other input prices)

decreases the short-run aggregate supply.

The long-run aggregate supply (LRAS) curve

is vertical.

The supply of real GDP is a function of

the quantities of labor, capital and the state of technology.

A decrease in government expenditure on goods and services

decreases aggregate demand.

People expect their incomes will decrease next year. As a result, the ________ will shift ________.

aggregate demand curve; left ward

Higher taxes

decrease aggregate demand

What increase long run aggerate supply

tech, labor, human capital, capital of stock, resources

"Current economic parameters are determined by past rational expectations" is a property of the__________ school of thought.

New Keynesian

Economists who believe tax policy has a big effect on employment and potential GDP are called

supply-siders.

The real business cycle theory proposes that::

aggregate demand shocks do not effect the business cycle.

For monetarists the main cause of economic fluctuations is changes in

inappropriate monetary policy.

The Keynesian explanation of the business cycle rests on several concepts, including

rigid money wage rates (i.e., very sticky prices and wages).

Keynes Law: Demand creates its own supply; implies there cannot be insufficient aggregate supply and implies demand-caused recessions.

True

The short-run aggregate supply curve is upward sloping because in the short run the

price level changes but the money wage rate (or other input prices) does not.

Taken to its logical conclusion, the real business cycle theory (and New Classical Theory) proposes that:

actual GDP always equals potential GDP, making all unemployment voluntary.

According to aggregate demand and supply analysis, the rising oil prices coupled with the global financial crisis in 2007-2008 caused the unemployment rate to ________ and the level of real aggregate output to ________.

increase; decrease

"If policy is anticipated, there is no short-run" is a property of the__________ school of thought.

rational expectations/new classical

An decrease in the input prices (such as the money wage) ceteris paribus:

increases the short-run aggregate supply.

Factors that shift the long-run aggregate supply and potential GDP rightward include an increase in:

quality and quantity of other inputs.

quantity of capital (physical capital and human capital).

quantity of labor.

technology.

Fiscal policy

involves changing taxes and government spending.

Sticky prices and wages are a property of the__________ school of thought.

Keynesian

Rational expectations are

based on all relevant information.

The supply side school of thought proposed:

cutting the (top) marginal tax rates.

cutting government regulation.

cutting the size of government.

The rational expectations/new classical theory argues that the primary factor leading to business cycles are

unexpected changes in aggregate demand.

One assumption of the new classical model is that

people make rational expectations about aggregate demand.

If the economy is on the negative slope of the Laffer curve and you raise taxes:

tax revenues will fall.

If a tax cut increases people's labor supply, then

tax cuts increase potential GDP.

Real business cycle theory says that the factor leading to the business cycle is changes in

productivity.

The forces that generate economic growth are those that shift the

long-run aggregate supply curve rightward.

Which theory fundamentally denies demand-side economic shocks?

real business cycle theory

Suppose that following an expected decline in the price level, workers immediately renegotiate their money wage rates to match the fall in prices. This behavior is most consistent with

the new classical cycle theory.

Which theory distinguishes between expected and unexpected fluctuations in aggregate demand and asserts that only unexpected changes can affect real GDP?

new classical cycle theory

By itself, an increase in aggregate demand increases GDP by the least amount (or zero) in the ________.

real business cycle theory