Econ 201

Question 1

Definition of MPC

Answer 1

Marginal Propensity to Consume

The fraction of EXTRA income that households consume rather than save.

Question 2

Formula for MPC

Answer 2

(Increased Consumer Spending)/(Increased Income)

Question 3

Multiplier Effect

Answer 3

The additional shifts in AD that result when fiscal policy increases income and thereby increases consumer spending

Question 4

Formula for the Multiplier

Answer 4

1/(1 - MPC)

Question 5

Functions of Money

Answer 5

a) Medium of Exchange
b) Unit of Account
c) Store of Value

Question 6

Central Bank

Answer 6

An institution designed to oversee the banking system and regulate the quantity of money in the economy

Question 7

When Open Market Sales occur…

Answer 7

The money supply decreases

Question 8

When Open Market Purchases occur…

Answer 8

The money supply increases

Question 9

Money Multiplier

Answer 9

The amount of money the banking system generates with each dollar of reserves

Question 10

Formula for the Money Multiplier

Answer 10

The reciprocal of the reserve ratio. 1/RR

Question 11

In banking the assets and liabilities on a bank’s balance sheet must be…

Answer 11

Equal. Assets include reserves, loans and securities while liabilities & owners’ equity includes deposits, debt, & capital

Question 12

The tools the Fed uses for controlling the money supply

Answer 12

Open Market Operations
The Discount Rate (Fed lending to banks)
Reserve Requirements

Question 13

When the Fed decreases the discount rate, the MS…

Answer 13

Increases

Question 14

When the Fed increases the discount rate, the MS

Answer 14

Decreases

Question 15

When the Fed increases the reserve requirement the MS…

Answer 15

Decreases

Question 16

When the Fed decreases the reserve requirement the MS…

Answer 16

Increases

Question 17

Commodity money vs. fiat money

Answer 17

Commodity money has intrinsic value while fiat money does not

Question 18

In the long run, what adjusts to bring money supply and money demand into equilibrium?

Answer 18

The price level. When the central bank increases the supply of money, it causes the price level to rise. Persistent growth in the quantity of money supplied leads to continuing inflation.

Question 19

What is inflation tax?

Answer 19

When the government prints money in order to pay for things, and this results in the decrease in the value of the money that everyone holds.

Question 20

What are the costs of inflation?

Answer 20

Shoeleather costs associated with reduced money holdings, menu costs associated with more frequent adjustment of price, increased variability of relative prices, unintended changes in tax liabilities, confusion and inconvenience resulting from a changing unit of account and arbitrary redistribution of wealth between debtors and creditors.

Question 21

Quantity Equation

Answer 21

MV = PY

Question 22

In order to achieve zero inflation (assuming velocity is constant) the money supply should…

Answer 22

Be equal to the growth of real GDP in the economy.

Question 23

In the long run, an increase in the money supply results in what changes to P and Y?

Answer 23

Y remains stable while P increases

Question 24

When does the MD curve on the liquidity preference graph shift?

Answer 24

When price level changes.

Question 25

Increasing interest rate causes AD to shift…

Answer 25

Left

Question 26

A decrease in the expected price level shifts the supply curve..

Answer 26

The SRAS shifts right