Macro Placement Exam

what happens when the money supply increases

interest rate go down

what are the ways the money supply increases

open market operations (central bank buying bonds), fractional reserve banking (consumer deposits), lowering interest rates and reserve requirements, and quantitative easing (central bank buying long term assets)

what is the formula for spending multiplier

1/mps or 1/(1-mpc)

what happens if there is both fiscal and monetary expansion

real gdp increases, interest rates are indeterminate

what does the term crowding out refer to

gov borrowing increases, private sector investment spending decreases

why do the effects of crowding out occur

government borrowing increases which increases the interest rates which makes interest sensitive spending more expensive and hence private sector invests less

what will happen when there is a disequilibrium in credit markets (more borrowers than savers

the interest rate will rise till there is equilibrium

What is the quantity theory of money and what are the variables?

The quantity theory of money is expressed as $mv = py$, where: $m$ = money supply, $v$ = velocity of money, $p$ = average price level, and $y$ = real GDP.

in the QToM, a change in which variable will affect the rate of inflation in the long run

m, because v is assumed to be stable and m has no affect on y(real output), so p can only be affected by m

what are ample reserves

when a bank has a ton of reserves that far exceeds the required amount

what is interest on reserve (IoR)

the interest the central bank pays a commercial bank on the reserve balances they hold

In a system with ample reserves, what is a consequence of lowering the IoR

the commercial bank can choose to lend more, leading to an expansionary effect

what is typically used to measure avg labor productivity

output per capita

what are the types of unemployment

• frictional, workers voluntarily leaving jobs, new entrents to the market like college grads, or returning

• structural, mismatch between the skills employees have vs the ones employers need, driven by tech, automation, or globalization

• cyclical, when econ slows down, drop in demand so there are layoffs, rises during recessions and falls during expansions

what counts as being in the labor force

• employed, have a job or conduct business

• unemployed, dont have job but are actively looking for one

what is the definition of an economic system

a mechanism for deciding what to make, how to make it, and who gets it

how is opportunity cost best defined

the value of the next best option given up when making a decision

What is the equation for the output (OC) of good x when the other good is y?

OC of good x = max output of y /max output of x

OOO output, over

What is the equation for the input OC of good x when the other good is y?

OC of good x = time required of x / max output of y

IOU input, opposite under