ECON chapter 7&8

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Physical capital is​ ______. Financial capital is​ ______.

the​ tools, instruments,​ machines, buildings, and other items that have been produced in the past and that are used today to produce goods and​ services; the funds that firms use to buy physical capital

Examples of physical capital are​ ______.
Examples of financial capital are​ ______.

ovens used by Pizza Hut and lawn mowers used by​ Larry’s Mowing; bonds issued by​ Wal-Mart and stocks issued by Boeing

Gross investment is​ ______.

Net investment is​ ______.

the total amount spent on new capital; the change in the value of capital

The three main types of markets for financial capital are​ _______.

loan​ markets, bond​ markets, and stock markets

Choose the correct statement.

When the price of an asset​ rises, the interest rate​ falls, everything else remaining the same.

Michael is an Internet service provider. On December​ 31, 2010​, he bought an existing business with servers and a building worth ​$500,000.

During his first year of​ operation, his business grew and he bought new servers for ​$300,000.

The market value of some of his older servers fell by ​$150,000.

Calculate​ Michael’s gross​ investment, net​ investment, and depreciation during 2011.

​Michael’s gross investment during 2011 was ​$300,000 ​Michael’s depreciation during 2011 was ​$150,000 ​Michael’s net investment during 2011 was ​$150,000

Treasury Yields Fall to​ Two-Week Low

Treasury bond prices rose on​ Monday, pushing interest rates down. The interest rate on​ 10-year bonds fell 4 basis points to​ 1.65%.

Choose the statement that is incorrect.

if the demand for Treasury bonds increases, , the interest rate on the Treasury bond rises

The following items are​ (approximate) facts about the U.S.​ economy:
bullet• In​ 2005, the nominal interest rate on bonds was 5 percent a year and the real interest rate was 2 percent a year. Investment was​ $2.7 trillion and the government budget deficit was​ $0.5 trillion.

bullet• By​ 2009, the real interest rate had increased to 5 percent a​ year, but the nominal interest rate was unchanged at 5 percent a year. Investment had crashed to​ $1.8 trillion and the government budget deficit had climbed to​ $1.8 trillion.
Assume that the private demand for and private supply
of loanable funds did not change between 2005 and 2009.

What was the inflation rate in 2005 and​ 2009? How do you​ know?
The inflation rates in 2005 and 2009 were​ _____ percent and​ _____ percent respectively because the inflation rate equals​ _____ .

The price of a bond ​ _____ between 2005 and 2009 because the​ _____.

3; 0; nominal interest rate minus real interest rate remained​ unchanged; nominal interest rate remained unchanged

​G-20 Leaders Look to Shake off Lingering Economic Troubles

The​ G-20 aims to take stock of the economic recovery. One achievement in Pittsburgh could be a deal to require that financial institutions hold more capital.

The​ "capital" referred to in the news clip is​ ______.

The financial institutions that the​ G-20 might require to hold more capital are​ ______.

The requirement to hold more capital can make financial institutions safer because by using more of its own funds and less borrowed​ funds, a financial institution​ ______.

the institutions own funds; banks and insurance companies decreases its risk of insolvency

Which of the following is an example of financial capital​?

Rachel has taken a loan to buy a new home.

Using a Federal grant of​ $150,000, a research lab buys equipment for​ $75,000 that has depreciated by​ $11,000 after two years. Calculate gross investment and net investment.

$75,000; $64,000.

Wealth is the value of all the things that people​ _____.

own

Saving is the amount of income that is​ _____ in net taxes or spent on​ _____ goods and services.

not​ paid; consumption

A mortgage is a legal contract that gives ownership of a​ _____ to the​ _____ in the event that the​ _____ fails to meet the agreed loan payments​ (repayments and​ interest).

home; lender; borrower

A bond is a promise to pay​ _____ sums of money on​ _____ dates.

specified; specified

Bonds issued by​ _____ are traded in the bond market.

firms and governments

A type of​ _____ is a ​mortgage-backed security​, which entitles​ _____ to the income from a package of mortgages.

a​ bond; its holder

A stock is a certificate of​ _____ and claim to the​ _____ that a firm makes.

ownership; profits

A stock market is a financial market in which shares of stocks of​ _____ are traded.

corporations

A financial institution is a firm that operates on both sides of the markets for​ _____: It​ _____ in one market and​ _____ in another.

inancial​ capital; borrows; lends

The Federal Reserve​ (usually called the​ Fed) is the central bank of the United​ States, a​ _____ authority whose main role is the regulation of​ _____.

public; banks and money

Net worth is the total market value of what a financial institution has​ _____ minus the market value of what it has​ _____.

lent; borrowed

The loanable funds market is​ ______.

the aggregate of all the individual financial market

The​ ______ interest rate is the opportunity cost of loanable funds because​ ______.

​real; the real interest paid on borrowed funds is the opportunity cost of borrowing and the real interest rate forgone is the opportunity cost of not saving or not lending those funds

Choose the statement concerning​ firms’ investment decisions that is incorrect.

The higher the real interest​ rate, the greater is the demand for loanable​ funds, other things remaining the same.

The demand for loanable funds is determined by​ ______.
The demand for loanable funds changes when​ ______ changes.

the real interest rate and expected profit; expected profit

Households make saving decisions by considering all of the following factors except​ _______.

expected profit

Choose the statement that is incorrect.

The greater the default​ risk, the greater is the supply of loanable funds.

The demand for loanable funds increases and the supply of loanable funds increases.

As a​ result, the equilibrium real interest rate​ ______ and the equilibrium quantity of loanable funds​ ______.

rises, falls, or remains the same; increases

The demand for loanable funds increases and the supply of loanable funds decreases.

As a​ result, the equilibrium real interest rate​ ______ and the equilibrium quantity of loanable funds​ ______.

rises; increases, decreases, or remains the same

First​ Call, Inc. is a smartphone company. First Call expects its profit to double next year. If everything else remains the​ same, how does this increase in expected profit influence First​ Call’s demand for loanable​ funds?
This increase in expected profit​ _______ the demand for loanable funds and brings​ _______ the demand for loanable funds curve.

increases; a rightward shift of

In a speech at the CFA Society of Nebraska in February​ 2007, William​ Poole, former Chairman of the St. Louis Federal Reserve​ said:

U.S. household income has grown considerably since 1984.

U.S. saving has​ ______ because wealth has​ ______.

decreased; increased due to capital gains

Households preferred to buy corporate equities rather than bonds because​ ______.

corporate equities deliver capital gains, which increases wealth

The loanable funds market is the aggregate of all the individual​ _____ markets.

financial

Net taxes are taxes paid to the government minus​ _____.

the cash transfers received from gov

The sum of​ _____ is called national saving.

private saving and gov saving

If the annual interest paid on a​ $500 loan is​ $25, the nominal interest rate is​ _____ percent per year.
If the nominal interest rate is 5 percent per year and the inflation rate is 2 percent a​ year, the real interest rate is​ _____ per year.

5; 3

The demand for loanable funds is the relationship between​ _____ demanded and the​ _____ when all other influences on borrowing plans remain the same.

the quantity of loanable​ funds; real interest rate

The supply of loanable funds is the relationship between​ _____ supplied and the​ _____ when all other influences on lending plans remain the same.

the quantity of loanable​ funds; real interest rate

A government budget surplus
___________________
the supply of loanable funds.

increases

A government budget surplus​ _______ the real interest​ rate, decreases​ ______.

decreases; private saving and increases investment

A government budget deficit
_______________
the demand for loanable funds.

increases

A government budget deficit​ _______ the real interest​ rate, increases​ ______.

increases; private saving and decreases investment

The​ crowding-out effect is the tendency for a government budget deficit to​ ______ the real interest rate and decrease​ ______.

raise; investment

A government budget deficit​ ______ the real interest rate because​ ______.

raises; the demand for loanable funds increases

According to the​ Ricardo-Barro effect, a government budget deficit​ ______ the real interest rate.

has no effect on

According to the​ Ricardo-Barro effect, when a government budget deficit occurs​ today, ______.

saving​ increases, the supply of loanable funds​ increases, and the real interest rate does not change

The ​crowding-out effect is the tendency for a government budget deficit to raise the​ _____ and​ _____ investment.

real interest rate; decrease

1. The​ "fiscal cliff" is all of the following except ​_________.

what happens whenever the economy enters a recession

A government budget deficit
_____________
the demand for loanable funds.
The equilibrium real interest rate
________________
________________
​increases, and
_____________
decreases.

increases, rises, private saving, investment

The economy is in a recession and with incomes​ falling, ________.
If the government cuts its budget deficit ​_____ .

saving decreases, which decreases the supply of loanable funds; the demand for loanable funds will decrease and the real interest rate might rise of fall

At full​ employment, a decrease in the government budget deficit ​ _______ the real interest rate and ​ _______ investment.

lowers; increases

Suppose if when the United States hits its​ "fiscal cliff," the governments in​ Europe, China, and Japan also were to cut their budget deficits. As a​ result, the world interest rate​ _______.
World saving​ _______.

falls; decreases and world investment increases

Suppose if when the United States hits its​ "fiscal cliff," the governments in​ Europe, China, and Japan were to increase their budget deficits. As a​ result, the world interest rate​ _______.
World saving​ _______.

rises; increases and world investment decreases

The news article draws attention to the​ long-term problems of​ ______.

the growth of U.S. government debt and U.S. international debt

The major event in the global and U.S. loanable funds markets in 2009 was the growth of world government budget
_____________
. This event
________________
the world real interest​ rate,
___________________
the global supply of loanable funds and
______________
the global demand for loanable funds.

deficits, increased, did not change, increased

This major event in the global and U.S. loanable funds markets
___________________
the U.S. supply of loanable​ funds,
_______________
the U.S. demand for loanable​ funds, and
_______________
the amount that the United States borrowed from the rest of the world.

did not change, increased, decreased

If governments in other countries lower their budget deficits but the U.S. government does not lower its​ deficit, the world real interest rate
_________
the U.S. supply of loanable funds
_________________
​the U.S. demand for loanable funds
___________________
​and the amount that the United States borrows from the rest of the world
_________________

falls, does not change, does not change, increases

If the United States lowers its budget deficit but the governments in other countries do not lower their​ deficits, the world real interest rate​ ______ and the amount that the United States borrows from the rest of the world​ ______.

falls; decreases

Money is any commodity or token that is generally acceptable as a​ ______.

means of payment

Choose the correct statements.

1.
Most people know the price of gum comma so it could serve as money because it is a unit of account.
2.
Because most people buy gum comma it can be used as money because it is a useful tool in barter.
3.
Gum does not serve as money because it is not a good store of value.
4.
Gum does not serve as money because it is not generally accepted in exchange for goods and services

3 & 4 are correct

A problem with using a commodity as money is​ ______.

a​ commodity’s value changes over time

The main components of money in the United States today are​ ______.

currency and deposits at banks and other depository institutions

The two main official measures of money in the United States today are​ ______.

The two main official measures of money in the United States​ ______ really money.

M1 and M2; are

Choose the correct statement.

a credit card is not a means of payment

Cash in Citibank’s cash machines
_____________
Coins inside a vending machine
__________
Your Visa card
______________
Your loan to pay for school fees
________________

not money; money; not money; not money

Which of the following is money​?

Charlie’s checking account deposit at the Bank of America.

A means of payment is a method of ​ _____ a debt.

settling

Currency consists of​ _____.

notes​ (dollar bills) and coins

M1 consists of currency held by​ _____ and​ _____, _____, and​ _____ owned by individuals and businesses.

individuals; businesses; traveler’s check; checkable deposits

M2 consists of​ _____ plus​ _____ and​ _____ deposits,​ _____, and other deposits.

M1; savings deposits; small time; money market funds

Choose the statement that is incorrect.

if a depository institution fails, its depository are guaranteed up to a max of $250,000 per deposited per bank

The functions of depository institutions include all of the following except​ ______.

providing insurance on loans

Depository institutions balance risk and return by​ _______.

placing some funds into safe low​ interest-earning assets and other funds into​ high-interest risky assets

A depository institution creates liquidity by​ ______.

borrowing short and lending long

Depository institutions pool risk because they use funds obtained from​ ______ depositors to make loans to​ ______ borrowers.

many; many

Depository institutions minimize the cost of monitoring borrowers by​ ______.

using specialized resources that have a much lower cost than what households would incur if they had to undertake the activity individually

Depository institutions have made innovations that have changed the composition of money in all of the following ways except​ ______.

the use of currency has fallen significantly

Europe’s Banks Must Be Forced to Recapitalize

E.U. banks must hold more capital. Where private funding is not​ forthcoming, recapitalization must be imposed by E.U. governments.

European banks need more capital because​ _______.
The​ "capital" that is referred to in the news clip is​ _________.

they risk failing if loans they hold are not repaid or if other assets lose​ value; owners’ investment in the bank

Requirements to hold more capital make banks safer because​ _______.

the requirement to hold more capital makes the possibility of failure less likely

Regulators Give Bleak Forecast for Banks
Regulators said that they were bracing for an uptick in the number of bank failures. The Fed declined to comment on the health of specific companies but said that Wall Street firms have learned a great deal from Bear Stearns and have reduced leverage and built up their liquidity.​ Today, investment banks are stronger than they were a​ month- and-a-half ago.

A​ bank’s "balancing​ act" balances​ _______.

The​ over-pursuit of profit or underestimation of risk can lead to bank failure because​ _______.

return against risk; some borrowers default and never repay , which can lead to bank insolvency

During times of​ uncertainty, it might be necessary for a bank to hold large cash reserves and to have a large percentage of its assets purchased by its own capital because​ ______.

its depositors may decide to make large withdrawals

A depository institution is a financial firm that takes deposits from​ _____.

households and firms

Reserves consist of the currency in the​ _____ plus the balance on its​ _____ account at​ _____.

bank’s vaults;​ reserve; a Federal Reserve Bank

The federal funds rate is the​ _____ rate on​ _____ loans.

interest; interbank

The central bank of the United States is the​ ______.

Federal Reserve System

A central bank performs all of the following functions except​ ______.

it provides general banking services for businesses and individual citizens

The monetary base is the sum of​ _______.
The monetary base is equal to​ _______.

Federal Reserve​ notes, coins, and depository institution deposits at the​ Fed; the liabilities of the Fed plus coins issued by the Treasury

The required reserve ratio is the ​______.

minimum % of deposits that depository institutions are required to hold as reserves

The Fed is the lender of last​ resort, which means​ _______.

if depository institutions are short of​ reserves, they can borrow from the Fed

Choose the correct statements.

1. The President of the United States is a member of the FOMC.
2. The president of the San Francisco Fed is always a member of the FOMC.
3. The FOMC is the main policy dash making organ of the Federal Reserve System.
4. The chairman and the other six members of the Board of Governors are members of the FOMC.

statements 3 & 4 are correct

An open market purchase​ ______ the monetary base.
An open market sale​ ______ the monetary base.

increases; decreases

Risky​ Assets: Counting to a Trillion

Prior to the financial​ crisis, the Fed held less than​ $1 trillion in assets and most were in safe U.S. government securities. By​ mid-December 2008, the​ Fed’s balance sheet had increased to over​ $2.3 trillion. The massive expansion began when the Fed rolled out its lending​ program: sending banks cash in exchange for risky assets.

The​ Fed’s policy tools include all of the following except​ ______.

changing government expenditure

To increase its assets to​ $2.3 trillion in​ 2008, the Fed used​ ______.

last resort loans

In September 2007 before the financial crisis and​ recession, the Fed had assets of​ $800 billion, mainly​ short-term government securities. In June 2012 after two rounds of quantitative​ easing, the​ Fed’s assets totaled​ $2,600 billion. Many of those assets were​ long-term securities and not all of them were government securities.

Choose the statement that is incorrect.

quantitative easing decreased bank reserves

Between 2007 and 2012 the monetary base​ _______.

increased

A central bank is a banks bank and a​ _____ authority that regulates a​ nation’s depository institutions and conducts​ _____ policy, which means that it adjusts the​ _____ and influences​ _____________

public; monetary; quantity of money in circulation; interest rates

A central bank is a​ bank’s bank and a​ _____ authority that regulates a​ nation’s depository institutions and conducts​ _____ policy, which means that it adjusts the​ _____ and influences​ _____.

​public; monetary; quantity of money in​ circulation; interest​ rates;

The Federal Reserve System ​(the Fed) is the​ _____ of the United States.

central bank

The Federal Open Market Committee is the​ Fed’s _____ committee.

main policy making

The monetary base is the sum of​ _____, _____, and​ _____ at the Fed.

coins; Federal Reserve​ notes; banks’ reserves

An open market operation is the purchase or sale of​ _____ -​ _____ – by the​ _____ in the open market.

gov securities; US treasury bills and bonds; NY Fed

The Fed is the lender of last resort​, which means that if​ _____ is short of​ reserves, it can borrow from the​ _____.

a bank; Fed

The required reserve ratio is the minimum percentage of​ _____ that​ _____ are required to hold as reserves.

deposits; depository institutions

Banks create money by​ ______.

making loans

The quantity of money that the banking system can create is limited by​ _______.

the monetary​ base, desired​ reserves, and desired currency holdings

A bank manager tells you that she​ doesn’t create money. She just lends the money that people deposit.
The bank manager is​ ______ because​ ______.

incorrect; every new loan creates a new deposit

China Cuts​ Banks’ Reserve Ratios

The​ People’s Bank of China announces it will cut the required reserve ratio.

Lowering the required reserve ratio​ ______, which​ ______ the quantity of loans that​ China’s banks can make and the quantity of money created.

increases excess​ reserves; increases

China Cuts​ Banks’ Reserve Ratios

The​ People’s Bank of China made a​ long-awaited move to boost lending in the​ country’s slowing economy with the announcement that it would lower the required reserve ratio by 50 basis points from February 24. The cut will bring the ratio down to 20.5 percent for the largest banks.

A lower required reserve ratio increases bank profits because​ ______.

the banks hold fewer reserves

The quantity of desired reserves depends on the level of deposits and is determined by the desired reserve ratio ​- the ratio of​ _____ to​ _____ that the​ _____ plan to hold.

reserves; deposits; banks

We call the leakage of bank reserves into currency the currency​ drain, and we call the ratio of​ _____ to​ _____ the currency drain ratio.

currency; deposits

Excess reserves are a​ bank’s _____ reserves minus its​ _____ reserves.

actual; desired

If the monetary base increases by​ $1 million and the quantity of money increases by​ $2.5 million, then the money multiplier is​ _____.

2.5

The main influences on the quantity of money that people and businesses plan to hold include all of the following
except​ ______.

the quantity of reserves

In the short​ run, ______ and​ ______ adjusts to achieve equilibrium.

real GDP determines the demand for money curve and the Fed determines the quantity of real money​ supplied; the nominal interest rate

In the short​ run, when the Fed decreases the quantity of​ money, people enter the loanable funds market and
_________
bonds.

sell

The price of a bond​ ______ and the interest rate​ ______.

falls; rises

In the long​ run, an increase in the quantity of money​ _______.

raises the price level and lowers the value of money

If the interest rate is greater than 4 percent a​ year, the price of a bond​ ______, and the interest rate​ ______.

rises; falls

The demand for money is the relationship between the quantity of money demanded and the​ _____, when all other influences on the amount of money that people wish to​ _____ remain the same.

nominal interest​ rate; hold

According to the quantity theory of​ money, in the long run an increase in the quantity of money of 5​ percent,
brings​ _____ in the price level.

a 5% increase

The velocity of circulation is the average number of times a dollar of money is used annually to buy​ ______.
The formula used to measure the velocity of​ circulation, V​, is​ ______, where P is the price​ level, Y is real​ GDP, and M is the quantity of money.

the goods and services that make up​ GDP; V​ = ​(P ×Y​) ÷M

The equation of exchange is​ ______ and it is true​ ______.

MV=PY; by definition

The​ long-run historical evidence and international evidence show us that the relationship between money growth and the inflation rate​ ______.

supports the quantity​ theory, but the correlation is not perfect

The quantity theory of money is the proposition that when real GDP​ _____ potential​ GDP, an increase in
the quantity of money brings​ _____ percentage increase in the​ _____.

equals; an​ equal; price level

The velocity of circulation is the​ _____ number of times in a​ _____ that each dollar of money gets used to buy final goods and services.

average; year

How can the change in U.S. wealth differ from U.S.​ saving?

The change in wealth includes changes in the prices of assets owned and saving excludes these items.

An increase in current income taxes​ ______ the supply of loanable funds today because it​ ______.

decreases​; decreases disposable​ income, which decreases saving

An increase in expected future income​ ______.

decreases the supply of loanable funds today because households with larger expected future income will save lessless today

A government budget surplus​ occurs, which increases the
______________
loanable funds.

supply of

The real interest rate​ ______, household saving​ ______,

falls; decreases and investment increases

A government budget deficit​ occurs, which​ ______.
The real interest rate​ ______.

increases the demand for loanable​ funds; rises

Private saving
___________
and investment
____________

increases; decreases

Physical capital is​ ______. Financial capital is​ ______.

the​ tools, instruments,​ machines, buildings, and other items that have been produced in the past and that are used today to produce goods and​ services; the funds that firms use to buy physical capital

Examples of physical capital are​ ______.
Examples of financial capital are​ ______.

ovens used by Pizza Hut and lawn mowers used by​ Larry’s Mowing; bonds issued by​ Wal-Mart and stocks issued by Boeing

The three main types of markets for financial capital are​ _______.

loan​ markets, bond​ markets, and stock markets

​G-20 Leaders Look to Shake off Lingering Economic Troubles

The​ G-20 aims to take stock of the economic recovery. One achievement in Pittsburgh could be a deal to require that financial institutions hold more capital.

the​ institutions’ own​ funds; banks and insurance companies

The requirement to hold more capital can make financial institutions safer because by using more of its own funds and less borrowed​ funds, a financial institution​ ______.

decreases its risk of insolvency

A mortgage is​ _______.

a legal contract that gives ownership of a home to the lender in the event that the borrower fails to meet the agreed loan payments​ (repayments and​ interest)

Choose the correct statement.

Commercial banks are financial institutions that accept​ deposits, provide payment​ services, and make loans to firms and households.

Choose the statement that is incorrect.

If a financial​ institution’s net worth is​ positive, the institution must be solvent and liquid.

What are the three sources of global investment​ funds?

household saving, government budget surplus, borrowing from the rest of the world

Suppose that Sara withdraws​ $1,000 from her savings account at the Lucky​ S&L, keeps​ $50 in​ cash, and deposits the balance in her checking account at the Bank of Illinois.
The immediate change is​ ______ in M1 of​ $1,000 and​ ______ in M2.

an​ increase; no change

Rapid inflation in Brazil in the early 1990s caused the cruzerio to lose its ability to function as money.
Which of the following commodities do you think would most likely have taken the place of the cruzeiro in the Brazilian​ economy?

packs of cigarettes because they are a good medium of exchange

From​ Paper-Clip to​ House, in 14 Trades
A​ 26-year-old Montreal man appears to have succeeded in his quest to barter a​ single, red paperclip all the way up to a house. It took almost a year and 14 trades.

Barter​ ______ a means of payment.
When trading on​ e-Bay, barter​ _______.

is; is not as efficient as money because barter requires a double coincidence of wants

Money serves as a​ ______.

medium of​ exchange, which means that it is generally accepted in exchange for goods and services

Choose the correct statement.

Deposits are​ money, checks are not​ money, and credit cards are not money.

Choose the statement that is incorrect.

Deposits are not money because you cannot settle a debt with a deposit.

U.S. Bank Earnings up​ 21% as Loan Losses​ Decline, FDIC Says
For the 12th straight​ quarter, U.S. bank profits increased. At​ $34.5 billion, they were 21 percent higher than a year​ earlier, and according to the Federal Deposit Insurance Corporation​ (FDIC), balance sheets were less risky. FDIC Acting Chairman Martin Gruenberg said​ "Levels of troubled assets and troubled institutions remain​ high, but they are continuing to​ improve." The number of institutions on​ FDIC’s list of banks deemed to be at greater risk of collapse fell for a fifth straight quarter. By​ August, 40 banks had failed in 2012. The​ FDIC’s deposit insurance​ fund, which protects customer accounts up to​ $250,000 against bank​ failure, increased.

A​ bank’s attempts to pursue profit can sometimes lead to bank failure because​ _______.

a combination of all of the above

U.S. Bank Earnings up​ 21% as Loan Losses​ Decline, FDIC Says

FDIC insurance helps to minimize bank failures and bring more stability to the banking system because​ _______.

depositors know that money they have deposited with a bank will be repaid

Choose the statement that is incorrect.

Liquid assets have a higher interest rate than securities.

A central bank is​ ______.
The central bank in the United States is the​ ______.

a​ bank’s bank and a public authority that regulates a​ nation’s depository institutions and conducts monetary​ policy; Federal Reserve System

One of the​ Fed’s main policy tools is​ ______.

the last resort​ loan, which means that if a bank is short of​ reserves, it can borrow from the Fed

Choose the statement about the Fed that is incorrect.

The policy decisions of the Federal Open Market Committee are implemented each month by a different Federal Reserve Bank.

An open market operation is​ ______.

the purchase or sale of securities by the Federal Reserve System in the loanable funds market

The ratio of reserves to deposits that a bank plans to hold is its​ ______.
If a bank has​ $10 million in actual reserves and​ $8 million in desired​ reserves, then it has​ ______

desired reserve​ ratio; excess reserves

The money multiplier is the ratio of the change in the quantity of​ ______ to the change in the quantity of​ ______.

money; monetary base

When the Fed buys securities from a​ bank, ______.

the​ bank’s reserves increase but its deposits do not change

If the interest rate is 5​ percent, people will​ ______.

buy​ bonds, bid up their​ price, and the interest rate will fall

Suppose the Fed increases the quantity of money.
In the long​ run, supply and demand in the​ ______ market determines the real interest rate.
The​ ______ adjusts to make the quantity of real money supplied equal to the quantity demanded.

loanable​ funds; price level

When the interest rate falls​, other things remaining the​ same, the opportunity cost of holding money​ ______ and​ ______.

falls​; the quantity of money demanded increases

In the short​ run, the quantity of real money and real GDP are given and the​ ______ adjusts to achieve equilibrium.
In the long​ run, supply and demand in the loanable funds market determines the​ ______.

interest​ rate; real interest rate

In the long​ run,
_________________
adjusts to make the quantity of real money supplied equal the quantity demanded.

the price level

An economy at a​ full-employment equilibrium experiences an increase in aggregate demand.
The unemployment rate​ ______ its natural​ rate, and to return to the​ long-run equilibrium, the money wage rate begins to​ ______.

falls​ below; rise

A​ cost-push rise in the price level can arise from an increase in​ _______.

the money wage rate or money prices of raw materials

An economy is at potential GDP when it experiences an increase in costs.
The economy experiences​ _______.

stagflation

A stagflation can turn into a​ cost-push inflation process when​ _______.

the quantity of money persistently increases

If inflation is​ expected, _______.

either a​ cost-push inflation nor a​ demand-pull inflation occur

The best forecast​ available, which is based on all the relevant information is called​ _______.

a rational expectation

If the government increases its expenditure on goods and services and as a​ result, the money wage rate​ increases, the economy has experienced​ _______.

a​ demand-pull rise in the price level

A rise in the price of oil creates​ _______.

a​ one-time cost-push rise in the price level

A stagflation can turn into a​ cost-push inflation process when​ _______.

the quantity of money persistently increases

Along the​ short-run Phillips​ curve, ______.

the expected inflation rate and the natural unemployment rate are constant

Along the​ long-run Phillips​ curve, _______.

the unemployment rate is constant at the natural unemployment rate

A movement​ ______ along the​ short-run Phillips curve occurs when there is an​ ______ increase in aggregate demand.

up; unexpected

If the natural unemployment rate increases and the expected inflation rate remains​ constant, then​ ______.

the​ long-run Phillips curve shifts rightward and the​ short-run Phillips curve shifts rightward

Choose the statement about the​ long-run Phillips curve that is incorrect.

An unexpected increase in aggregate demand shifts the​ long-run Phillips curve rightward

If the expected inflation rate increases and the natural rate of unemployment remains​ constant, then​ _______.

the​ short-run Phillips curve shifts upward and the​ long-run Phillips curve does not shift

Deflation is​ _______.

a persistently falling price level

Choose the statement that is incorrect.

In a​ deflation, the inflation rate is positive but decreasing in consequent years.

Deflation occurs when​ _______.

aggregate demand increases at a persistently slower rate than aggregate supply

The consequences of deflation include all of the following except​ _______.

falling real wage rates for workers with​ long-term wage contracts

The mainstream business cycle theory is that​ ______ grows at a steady rate while​ ______ grows at a fluctuating rate.

potential​ GDP; aggregate demand

In mainstream business cycle​ theory, the money wage rate is
__________

sticky

If aggregate demand grows faster than potential​ GDP, ______ gap emerges and if it grows more slowly than potential​ GDP, ______ gap emerges.

an inflationary; a recessionary

In​ ______ cycle​ theory, fluctuations in investment driven by fluctuations in business confidence are the main source of fluctuations in aggregate demand.

In​ ______ cycle​ theory, fluctuations in both investment and consumption​ expenditure, driven by fluctuations in the growth rate of the quantity of​ money, are the main source of fluctuations in aggregate demand.

Keynesian; monetarist

In​ ______ cycle​ theory, the rational expectation of the price​ level, which is determined by potential GDP and expected aggregate​ demand, determines the money wage rate and the position of the SAS curve.

In​ ______ cycle​ theory, past rational expectations of the current price level influence the money wage rate and the position of the SAS curve.

new​ classical; new Keynesian

According to RBC​ theory, the source of the business cycle is​ _______, which result mainly from​ _______.

fluctuations in​ productivity; fluctuations in the pace of technological change

According to RBC​ theory, the main source of economic fluctuations is a decrease in​ ______

productivity growth

The effect of this decrease is
______________
in investment​ demand,
____________
in the demand for loanable​ funds, and
______________
in the real interest rate.

a decrease; a decrease; a decrease

The effect of this decrease is
______________
in the demand for​ labor,
_____________
in the supply of​ labor,
_____________
in​ employment, and
_____________
in the real wage rate.

a decrease; a decrease; a decrease; a decrease

The main criticisms of RBC theory include all of the following except​ ______.

real business cycle theory relies too heavily on the role of money in the economy to make its predicitons

Defenders of RBC theory claim all of the following except ​_______.

RBC theory is consistent with a negligible intertemporal substitution effect

Debate on Causes of Joblessness Grows

What is the cause of the high unemployment​ rate? One side says there is not enough government spending. The other says​ it’s a structural problemlong dash—people who​ can’t move to take new jobs because they are tied down to burdensome mortgages or firms that​ can’t find workers with the requisite skills to fill job openings.

​______ cycle theory would say that the rise in unemployment is not cyclical but is a change in the natural unemployment rate.

real business

Suppose that the business cycle in the United States is best described by RBC theory.
An advance in technology increases productivity.

The​ when-to-work decision depends on the real interest rate. The​ _____ the real interest​ rate, other things remaining the​ same, the​ _____ is the supply of labor today.

higher; larger

RBC theorists believe the​ when-to-work effect is
_________

large

Real Wages Fail to Match a Rise in Productivity

For most of the last​ century, wages and productivitylong dash—the key measure of the​ economy’s efficiencylong dash—have risen​ together, increasing rapidly through the 1950s and​ ’60s and far more slowly in the 1970s and​ ’80s. But in recent​ years, the productivity gains have continued while the pay increases have not kept up.

In real business cycle​ theory, an increase in productivity​ ______ the demand for labor by more than it​ ______ the supply of labor.

increases; increases

In the news​ clip, productivity gains exceed pay increases because the demand for labor​ ______ than the​ ______ in the supply of labor.

increase by less; increase

The analysis of macroeconomic performance in the news clip reflects the​ ______ business cycle theory because it discusses​ ______.

real; factors that change potential GDP

In Keynesian cycle theory​, fluctuations in​ _____ driven by fluctuations in business confidence​ – summarized by the phrase​ "animal spirits"​ – are the main source of fluctuations in​ _____.

investment; aggregate demand

In monetarist cycle theory​, fluctuations in both​ _____, driven by fluctuations in the growth rate of the quantity of​ money, are the main source of fluctuation in aggregate demand.

investment and consumption expenditure

In new classical cycle theory​, the rational expectation of the price​ level, which is determined by potential GDP and expected aggregate​ _____, determines the​ _____ and the position of the SAS curve.

demand; money wage rate

The new Keynesian cycle theory emphasizes the fact that​ today’s money wage rates were negotiated at many past​ dates, which means that​ _____ rational expectations of the​ _____ price level influence the money wage rate and the position of the SAS curve.

past; current

The newest theory of the business​ cycle, known as real business cycle theory ​(or RBC​ theory), regards random fluctuations in​ _____ as the main source of economic fluctuations.

productivity

A​ demand-pull inflation begins with​ _______.

an increase in aggregate demand

A​ cost-push inflation begins with​ ______ as the result of an increase in the money wage rate or an increase in the money prices of raw materials.

a decrease in​ short-run aggregate supply

A​ cost-push rise in the price level will initially move the economy to point​ ______ and to point​ ______

C when the money prices of raw materials rise; D when aggregate demand increases

Stagflation is a combination of a​ ______ in the price level and​ ______ in real GDP.

rise; a decrease

Stagflation occurs when​ _______.

costs increase

An economy is at potential GDP and the price level is 100 in the figure.
If aggregate demand unexpectedly​ increases, the inflation rate is​ ______.

3 percent a year

All of the following events except an increase in​ ______ might cause a​ demand-pull inflation.

the money wage rate

Starting at point A​, the initial effect of a​ demand-pull inflation is a move to point​ ______. As a​ demand-pull inflation spiral​ proceeds, it follows the path​ ______.

C; E, H, I

Which of the following events might cause a​ cost-push inflation?

an increase in the money wage rate or an increase in the money prices of raw materials

Starting at point A​, the initial effect of a​ cost-push inflation is a move to point​ ______. As a​ cost-push inflation spiral​ proceeds, it follows the path​ ______.

B; E, G, I

The economy starts out on the curves AD0 and SAS0. Some events then occur that generate an expected inflation.
Which of the following events would not cause an expected​ inflation?

an expected increase in taxes

Starting at point A​, the initial effects of an expected inflation is a movement to point​ ______. As an expected inflation​ proceeds, it follows the path​ ______.

E; I

​Pakistan: Is it​ Cost-Push Inflation?

With CPI already spiking 11.8 percent for the first ten months of the fiscal​ year, the average CPI inflation for the same period last year stood at 22.35 percent. Some economists insist the current bout of inflationary pressures is spawned by increasing prices of​ fuel, food, raw​ materials,
​transportation, construction​ materials, elimination of energy​ subsidies, etc as indicated by the spike in the wholesale price index​ (WPI), which rose 21.99 per cent in April from a year earlier.

Pakistan is experiencing​ ______ inflation.

cost-push

Tight Money​ Won’t Slay​ Food, Energy Inflation

​It’s important to differentiate between a general increase in priceslong dash—a situation in which aggregate demand exceeds their aggregate supplylong dash—and a relative price shock. For​ example, a specific shock to energy prices can become generalized if producers are able to pass on the higher costs. So​ far, global competition has made that difficult for​ companies, while higher input costs have largely been neutralized by rising labor productivity. Since​ 2003, core inflation has averaged less than 2 percent a year in the 30 major economies. History also suggests the​ Fed’s gamble
that slowing growth will shackle core inflation is a winning wager. The risk is that if U.S. consumers​ don’t believe price increases will​ slow, growing inflation expectations may become​ self-fulfilling.

The news clip refers to​ ______ inflation when it discusses rising production costs.

​"Rising labor​ productivity" can neutralize the effect on the inflation rate of​ "higher input​ costs" because​ ______.

cost-push; it increases​ short-run aggregate supply and​ long-run aggregate supply with no slowdown in aggregate demand growth

Choose the correct statement.

"slowing growth" can reduce inflationary pressure if aggregate demand growth slows

​Official: China May Face Heavy Inflation Pressure

China is expected to face great inflationary pressure in the future due to higher costs and an abundant global money​ supply, a senior Chinese official said in an article published Tuesday.
He said inflation in China is also the result of excessive global liquidity from loose monetary policies adopted by developed​ nations, China’s lending​ expansion, and a​ pile-up of outstanding foreign exchange funds.
​China’s consumer price index​ (CPI), a main gauge of​ inflation, rose 4.9 percent year on year in​ February, the same level as in January. The CPI data for March is scheduled to be released this week and is estimated to show a rise above 5 percent.

China is experiencing a​ ______ inflation caused by​ ______.

demand-pull; loose monetary policy, which increases aggregate demand

Getting a​ Raise: Why​ It’s Not Happening

​Didn’t get a raise this​ year? Blame inflation. American wages​ didn’t budge last​ month, according to Labor Department data released Wednesday. And with inflation remaining at near​ zero, experts say it could be quite a while before many workers see their next raise. While stagnant prices are a boon for consumers on supermarket checkout​ lines, they can be hard on​ workers’ bottom lines. Wages typically track​ inflation, soaring higher when prices take off. In​ fact, some say wages tend to feed inflation. That was the case in the​ 1970s, when wage growth picked up after prices soared. But pricing pressures are weaker​ today, with the consumer price​ index, a measure of​ inflation, unchanged in July from the previous month.

Choose the statement that is incorrect.
Starting from a​ long-run equilibrium,​ _______.

if the percentage change in the money wage rate equals the percentage change in the unemployment rate, the economy remains at full employment

​"Wages typically track​ inflation, soaring higher when prices take​ off." In this​ situation, the economy is experiencing​ _______ inflation.

demand- pull

An economy experiences​ _______ inflation when​ "wages tend to feed​ inflation."

demand- pull

An inflation that starts because​ _____ is called ​demand-pull inflation.

aggregate demand increases

An inflation that is kicked off by an increase in​ _____ is called ​cost-push inflation.

costs

The combination of a rising​ _____ and decreasing​ _____ is called stagflation.

price level; real GDP

A rational expectation is a forecast that results from the use of all the relevant data and​ _____.

economic science

Deflation is​ _______.

a persistently falling price level

Choose the statement that is incorrect.

in a deflation, the inflation rate is positive but decreasing in consequent years

Deflation occurs when​ _______.

aggregate demand increases at a persistantly slower rate than aggregate supply

The quantity theory of money tells us that​ _______.

a change in the money growth rate brings an equal change in the inflation rate

The consequences of deflation include all of the following except​ _______.

falling real wage rates for workers with​ long-term wage contracts

Deflation can be ended by​ _______.

increasing the growth rate of the quantity of money

The ​short-run Phillips curve is a curve that shows the relationship between the​ _____ rate and​ _____ when​ _____ and the​ _____ remain constant.

inflation; the unemployment​ rate; the natural unemployment​ rate; expected inflation rate

The ​long-run Phillips curve is the relationship between​ _____ and​ _____ when the economy is at full employment. The​ long-run Phillips curve is a​ _____ line at the​ _____ unemployment rate.

inflation; unemployment; vertical; natural

An unexpected increase in aggregate demand​ ______ rate, which is shown by​ ______ the​ short-run Phillips curve.

decreases unemployment and increases the​ inflation; a movement up along

A change in the actual inflation rate brings a movement along the​ ______.

A change in the expected inflation rate brings​ ______.

SRPC; a shift of the SRPC

If the natural unemployment rate​ increases, the​ long-run Phillips curve​ _______ and the​ short-run Phillips curve​ ______

shifts rightward; shifts rightward

The expected inflation rate
_____________________

does not change

he U.S.​ short-run Phillips curve​ ______ when the expected inflation rate rises.

The U.S.​ short-run Phillips curve​ ______ when the natural unemployment rate increases.

shifts​ upward; shifts rightward

The U.S.​ long-run Phillips curve​ ______ when the expected inflation rate rises.

The U.S.​ long-run Phillips curve​ ______ when the natural unemployment rate increases.

does not​ shift; shifts rightward

Eurozone Unemployment Hits Record High As Inflation Rises Unexpectedly

Eurozone unemployment rose to 10.7 percent. At the same​ time, Eurozone inflation unexpectedly rose to 2.7 percent a​ year, up from the previous​ month’s 2.6 percent a year

A very high unemployment rate can be accounted for by the Phillips curve model by all of the following except​_______.

a movement up along the​ long-run Phillips curve if the natural unemployment rate increases

Choose the statement that is incorrect about the Eurozone economy.

A rise in the expected inflation rate shifts the​ short-run Phillips curve rightward

From the​ Fed’s Minutes

Members expected real GDP growth to be moderate over coming quarters and then to pick up very​ gradually, with the unemployment rate declining only slowly. With​ longer-term inflation expectations​ stable, members anticipated that inflation over the medium run would be at or below 2 percent a year.

FOMC members are predicting that the U.S. economy​ ______.

is on a​ short-run Phillips curve to the right of the LRPC and will move leftward up along the SRPC

Recession? Maybe.​ Depression? Get Real.

The unemployment rate during the Great Depression peaked at nearly 25 percent in​ 1933, after an initial spike from 3 percent in 1929 to nearly 8.7 percent in 1930. The unemployment rate is just 5​ percent, only up from 4.5 percent a
year ago. Also during the Great Depression there was​ deflation, which is not happening today.

The inflation and unemployment trends during the Great Depression can be explained by a movement along the​ ______ Phillips curve that​ ______.

short run; lowers the inflation rate and increases the unemployment rate

During​ 2008, the inflation rate increased and the unemployment rate increased. These events​ ______.

cannot be explained by a movement along the SRPC because along this curve the inflation rate and unemployment rate move in opposite directions

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