Explanation: Money serves as a medium of exchange, facilitating transactions; a unit of account, providing a common measure of value; and a store of value, allowing wealth to be held in a readily exchangeable form over time.

Which of the following is an example of fiat money?

C. U.S. dollar

Explanation: Fiat money has value because a government decrees it to be legal tender, not because it has intrinsic value like gold or silver. The U.S. dollar is fiat money.

What is the term used for the ease with which an asset can be converted into the economy's medium of exchange?

B. Liquidity

Explanation: Liquidity refers to the ease with which an asset can be converted into cash or used to make purchases. It's a measure of how quickly and easily an asset can be bought or sold without significantly affecting its price.

Which of the following is included in M1 but not in M2?

A. Small time deposits

Explanation: M1 includes currency, demand deposits, traveler's checks, and other checkable deposits, but excludes certain less liquid assets like small time deposits, which are included in M2.

How is the money multiplier calculated?

C. By dividing 1 by the reserve ratio

Explanation: The money multiplier is calculated by dividing 1 by the reserve ratio. It represents the amount of money that can be created by banks through the deposit and lending process based on their reserve requirements.

What is the interest rate at which banks make overnight loans to one another called?

B. Federal funds rate

Explanation: The federal funds rate is the interest rate at which banks lend reserves to each other overnight in the federal funds market. It's an important tool for the Federal Reserve in implementing monetary policy.

What is the tool used by the Federal Reserve to influence the quantity of reserves?

A. Open-market operations

Explanation: Open-market operations involve the buying and selling of government securities by the Federal Reserve in the open market to influence the quantity of reserves and the level of interest rates in the economy.

Why doesn't the Federal Reserve have perfect control of the money supply?

D. All of the above

Explanation: Banks holding excess reserves, fluctuations in the demand for money, and unpredictable economic conditions all contribute to the Federal Reserve's inability to have perfect control over the money supply.

What is the main role of the Federal Reserve?

A. Regulate banks and ensure the health of the banking system

Explanation: The primary role of the Federal Reserve is to regulate banks, oversee the financial system, and implement monetary policy to achieve economic stability and growth.

Which committee within the Federal Reserve is responsible for setting monetary policy?

A. Federal Open Market Committee (FOMC)

Explanation: The Federal Open Market Committee (FOMC) is responsible for setting monetary policy in the United States. It makes decisions regarding interest rates and the conduct of open-market operations to achieve the Federal Reserve's objectives.

Chapter 20 Q’s

Why does the aggregate-demand curve slope downward?

A. Due to changes in the natural level of output

B. Because of shifts in the long-run aggregate-supply curve

C. Reflecting the impact of changes in consumption, investment, government purchases, and net exports

D. As a result of changes in the nominal variable

What is the long-run equilibrium in the AD-AS model defined by?

A. The intersection of the aggregate-demand curve and short-run aggregate-supply curve

B. The point where the short-run aggregate-supply curve intersects the long-run aggregate-supply curve

C. The point where the aggregate-demand curve intersects the long-run aggregate-supply curve

D. When the natural level of output equals the actual level of output

What is the primary cause of stagflation in the short run?

A. A leftward shift in the aggregate-demand curve

B. A rightward shift in the short-run aggregate-supply curve

C. A decrease in the expected price level

D. An increase in the natural level of output

Which theory explains why the aggregate-supply curve slopes upward in the short run?

A. Sticky-wage theory

B. Misinterpretation theory

C. Rational expectations theory

D. Rational choice theory

How does an adverse shift in aggregate supply affect the short-run equilibrium?

A. It increases output and lowers prices.

B. It decreases output and raises prices.

C. It increases output and raises prices.

D. It decreases output and lowers prices.

Chapter 20 Answers:

Answer: C. Reflecting the impact of changes in consumption, investment, government purchases, and net exports
- Explanation: The aggregate-demand curve slopes downward due to changes in the components of aggregate demand. These components include consumption (C), investment (I), government purchases (G), and net exports (NX). When the price level falls, real wealth increases, interest rates decline, and exchange rates depreciate, leading to higher levels of consumption, investment, and net exports, thereby increasing aggregate demand.
Answer: C. The point where the aggregate-demand curve intersects the long-run aggregate-supply curve
- Explanation: The long-run equilibrium in the AD-AS model is defined by the point where the aggregate-demand curve intersects the long-run aggregate-supply curve. At this point, the economy is producing at its natural level of output, and the price level is stable.
Answer: B. A rightward shift in the short-run aggregate-supply curve
- Explanation: Stagflation in the short run occurs when there is a rightward shift in the short-run aggregate-supply curve. This shift leads to a decrease in output (due to supply-side factors) and an increase in prices simultaneously, resulting in stagflation—a combination of stagnant economic growth and inflation.
Answer: A. Sticky-wage theory
- Explanation: The sticky-wage theory explains why the aggregate-supply curve slopes upward in the short run. It suggests that nominal wages are slow to adjust to changes in economic conditions due to factors like long-term contracts, social norms, and notions of fairness. As a result, firms may not immediately adjust wages in response to changes in the overall price level, leading to an upward-sloping short-run aggregate-supply curve.
Answer: B. It decreases output and raises prices.
- Explanation: An adverse shift in aggregate supply decreases output and raises prices in the short run. This occurs because factors such as increases in input costs or supply disruptions lead to a decrease in the quantity of goods and services supplied at each price level, resulting in a leftward shift of the short-run aggregate-supply curve. As a consequence, output decreases and prices increase in the short run.

Chapter 21 Q’s

What are the three reasons why the aggregate-demand (AD) curve slopes downward?

A) The income effect, the substitution effect, and the supply-side effect

B) The wealth effect, the interest-rate effect, and the exchange-rate effect

C) The demand-side effect, the production effect, and the consumption effect

D) The inflation effect, the deflation effect, and the unemployment effect

Which of the following is NOT a reason why the interest-rate effect is important for the downward slope of the aggregate-demand curve in the U.S. economy?

A) Money holdings are a small part of household wealth

B) The exchange-rate effect is large

C) Exports and imports are a small fraction of GDP

D) The interest-rate effect is the most important reason for the downward slope

According to the theory of liquidity preference, what happens when the interest rate is above the equilibrium level?

A) The quantity of money demanded exceeds the quantity the Fed has created

B) The quantity of money demanded is less than the quantity the Fed has created

C) There is downward pressure on the interest rate

D) Both A and C

What does the multiplier effect of a change in fiscal policy refer to?

A) The decrease in the money supply caused by government borrowing

B) The increase in aggregate demand that results from an initial increase in government spending

C) The reduction in aggregate demand due to an increase in taxes

D) The decrease in investment due to higher interest rates caused by government borrowing

How does expansionary fiscal policy cause crowding out?

A) By decreasing government spending

B) By increasing taxes

C) By raising interest rates, which reduces private investment

D) By decreasing the money supply

Chapter 21 Answers:

B) The wealth effect, the interest-rate effect, and the exchange-rate effect
B) The exchange-rate effect is large
D) Both A and C
B) The increase in aggregate demand that results from an initial increase in government spending
C) By raising interest rates, which reduces private investment

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