econ 202 csusm macro final

Question 1

Money Growth

Answer 1

• if the federal reserve sells bonds then the money supply curve shifts left causing the price level to fall
• short-run decision making
• increase in money supply will lower interest rates and promote more investment/ spending (expansionary monetary policy)

Question 2

Open Market Economy

Answer 2

• bonds bought and sold increase and decrease money

Question 3

3 Fed Tools

Answer 3

• increase in money supply causes reserve requirement to decrease
• decrease in money is supply is the increase of reserve requirement
• lower discount rate equals higher money supply
• decrease money supply equals increase in discount rate
• if the fed buys bonds, money supply increases
• if the fed sells bonds, money supply decreases

Question 4

Monetary Policy

Answer 4

• federal reserve lends out money
• shifting the supply curve to the right
• aggregate demand shift to the right
• increase money supply -> decrease interest rates -> increase investment & consumption -> increase AD
  Reserve Requirement: lowered
  Discount Rate: Lowered
  Open Market Operations: buy bonds

Price level rises -> money demand(shift right) rises -> interest rate rises -> cost of borrowing/ return to saving rises -> consumption & investment decrease

Question 5

Fiscal Policy (expansionary & contractionary)

Answer 5

EXPANSIONARY -> government spending/ taxes rises -> aggregate demand increases -> price level & output rise

CONTRACTIONARY: government spending falls -> aggregate demand decrease (sift left) -> price level & output decrease

Question 6

Money appreciation

Answer 6

• Exchange rate rises money appreciates

Question 7

Money Depreciation

Answer 7

• exchange rate falls, a currency is traded less so it depreciates

Question 8

Money Depreciation

Answer 8

• exchange rate falls, a currency is traded less so it depreciates

Question 9

3 Effects of AD Curve

Answer 9

1. Wealth Effect (C)
   - increase in price level -> real value falls -> consumers feel poorer -> AD quantity demanded decreases (vice versa)
2. Interest Rate Effect (I) (RISE, RISE, RISE)
   - price level increase -> people need more $ to buy things -> interest rate increases -> cost of borrowing rises -> investment falls -> AD quantity decreases (vice versa)
3. Exchange Rate Effect (movement, not a shift)
   - price level increase -> interest rate increase -> US real exchange rate appreciates -> US goods are more expensive than foreign -> US exports fall -> US imports rise -> AD quantity falls (vice versa)

Question 10

Real Variable

Answer 10

Not affected by inflation or deflation like nominal variables
Examples:
- relative price
- real interest rate
- GDP

Question 11

Nominal Variable

Answer 11

Adjusted to reflect the changing purchasing power of money over time (inflation/ deflation)
Examples:
- Wages
- Income
- Nominal GDP

Question 12

Money Propensity to Consume (MPC)

Answer 12

• a fraction of extra income a household spends rather than saves
• as MPC rises, money multiplier rises too

Question 13

Money Multiplier

Answer 13

1/ 1-MPC

(initial change in spending)x(spending multiplier) = overall change in AD
* USE IF C I G or NX DECREASES!

Question 14

Tax Multiplier

Answer 14

-mpc/ 1-mpc

(initial change in taxes)x(tax multiplier) = overall change in AD

Question 15

Crowding out effect

Answer 15

opposite of money multiplier; occurs when fiscal policy changes the interest rate and investment

Question 16

Stagflation

Answer 16

shift to the left in SRAS -> stagnant economy with high unemployment and inflation

Question 17

NCO = NX

Answer 17

NX = exports - imports
NCO = what we invest - what foreigners invest

Question 18

Classic Economy (Real vs. Nominal)

Answer 18

• both are separate
• real variables are determined independently o f nominal variables such as money supply

Question 19

Short Run Effect

Answer 19

• firms can only change the price through production adjustment
  -both price level and output decline (aka recession)

Question 20

Long run effect

Answer 20

• firms are able to adjust all costs
• seen solely by a drop in price level
• a nominal change (price level) but not a real change (output stays the same)
• AD SHIFT RIGHT: price level increase

Question 21

Shift factors of Aggregate Demand

Answer 21

• taxes fall -> AD rises
• taxes rise -> AD falls
• expected price level drops -> short-run aggregate supply (SRAS) rises
  -> shift right
• net exports rise -> AD rises -> shift right

Question 22

A decrease in the price level causes interest rates to..?

Answer 22

decrease -> dollar appreciates -> net exports increase

Question 23

If US real exchange rate appreciates, U.S. exports then..?

Answer 23

decrease and US imports increase

Question 24

2 factors that shift money demanded?

Answer 24

• price level & income
• movement caused by interest

Question 25

How to find price level and GDP on AD-AS graph?

Question 26

Exports vs. Imports

Answer 26

- an import is a good bought from another country - an export is when a company provides a good or service for another country

Question 27

When shopping you notice that a pair of jeans costs $20 and that a t-shirt costs $10. You compute the price of jeans relative to t-shirts (find nominal and real variables)

Answer 27

Nominal: dollar price in jeans Real: relative price of jeans

Question 28

If a US shirt maker purchases cotton from Egypt, U.S. net exports..?

Answer 28

decrease, and the U.S. net capital outflow decreases

Question 29

Changes in expected price shift in the SRAS graph?

Answer 29

shifts in actual price level move along SRAS curve

Question 30

An increase in the expected price level shifts short-run aggregate supply to the..?

Answer 30

LEFT, and an increase in the actual price level does not shift short-run aggregate supply

Question 31

Money supply and Interest?

Answer 31

go against each other

Question 32

Money demand and Interest?

Answer 32

goes together

Question 33

How FED controls changes in money supply

Answer 33

MONETARY POLICIES - increase in money supply -> decrease in reserve requirement -> lend out more money - can also change short-term interest rates by lowering or raising the discount rate that banks pay

Question 34

Multiplier Process

Answer 34

1. changes in spending (1/1-MPC) 2. Initial change in spending x Spending multiplier = overall change in AD 3. Initial change in taxes x tax multiplier = overall change in AD (-MPC/1-MPC)

Question 35

Other things the same, an increase in the price level induces people to hold..?

Answer 35

more money, so they lend less, and the interest rate rises

Question 36

Sticky wage theory of short-run aggregate supply curve when the price level rises more than expected..?

Answer 36

production is more profitable and employment rises

Question 37

Decrease in price level causes interest rates to..?

Answer 37

decrease, the dollar depreciates, and net exports increase