exam review topics Flashcards

1
Q

how does an increase in the money supply affect the ad/as model?

A

it first increases consumer spending causing the aggregate demand curve to shift up/right (in the short run). in the long run, the aggregate output (suppy) is only affected by the capital–labor and technology. the supply side adjusts to the price level and the economy return to the same output as before

the long-run output (real variable) is not affected by changes in nominal variables (money supply), but the price level (nominal variable) is affected

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2
Q

difference between real and nominal variables

A

real goods, nominal money

real variables give prices in terms of goods and not money, and reflects the actual purchasing power of money adjusted for inflation

nominal variables are expressed in monetary terms, without adjusting for inflation, representing its face value

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3
Q

what does it mean when net exports are positive?

A

because NX = NCO, net capital outflow is also positive, so foreign assets bought by Americans are greater than American assets bought by foreigners

NCO = domestic residents’ purchases of foreign assets minus foreigners’ purchases of domestic assets

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4
Q

why is it better when NCO is positive?

A

positive NCO means domestic residents are not putting all their eggs in one basket, which offers stability and less dependence on one economy

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5
Q

who controls the money supply?

A

the federal reserve (central bank) controls the money supply by buying and selling government bonds

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6
Q

what do the axes represent on an ad/as graph?

A

Y - axis = price level
X - axis = real output

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7
Q

what are the axes in a money demand (MD) and money supply (MS) model?

A

Y-axis = real interest rates
X-axis = quantity of money

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8
Q

what are the effects of an increase in price level?

A

an increase in price level increases the money demand, which increases the interest rate, then decreases investment and the demand of g&s, so real output decreases

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9
Q

what does a move along the money demand curve indicate?

A

the price level is helf fixed; the graph displays the relationship between the real interest rate and the quantity of money, all else equal, including price level. the interest rate is represented on the y-axis so a change in interest rate (an axis variable) is a movement along the curve, not a shift.

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10
Q

what does the classical dichotomy suggest about changes in the money supply?

A

the money supply (nominal variable) affects only nominal variable, not real variables such as output, employmetn and the long-run real interest rate

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11
Q

what happened to the U.S. real interest rate when Mexico suffered from capital flight in 1994?

A

using the loanable funds, NCO, exchange rate diagram (LNE)

Mexico’s capital flight > more U.S. investors sold their Mexican assets and Mexican investors bought U.S. assets > NCO decreases > demand for loanable funds decreases and demand curve shifts left > interest rate falls

NCO decreases also > reduces amount of U.S. dollars in the foreign exchange market > supply curve in the foreign exchange market shifts left > real exchange rate increases

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12
Q

according to the theory of liquidity preference, the money supply..

A

the money supply is independent of the interest rate as it is set by the central bank, while money demand is negatively related to the interest rate (Law of Demand - money demand decreases as the price of money increases)

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13
Q

how can you find the money multiplier given the reserve ratio? if the ratio is 4%?

A

money multiplier is the inverse of the reserve ratio; if the reserve ratio is 4%, the multiplier is 25 (because the inverse of 4/100 is 100/4 = 25)

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14
Q

what policies could offset a change in ouput caused by an increase in exports?

A

when exports increase,aggregate demand increases. to offset this, policies such as decreasing the money supply and increasing tax hikes will decrease aggregate demand

less money in circulation and more taxes causes consumers to spend less

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15
Q

are reserves of financial institutions assets or liabilities?

A

assets that financial institution’s try to keep at the legal limit; they do not earn a return so banks do not want to hold them. because reserves are safer than other assets, banks are legally required to hold a minimum amount relative to their liabilities, the minimum reserve ratio. thus, banks try to keep their holdings of reserves at this minimum.

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16
Q

a leftward shift of the vertical curve on the quantity theory of money model indicates what?

A

an increase in the money supply, a decrease in the equilibrium value of money, and an increase in the equilibrium price level (as price level is the inverse of the value of money)

17
Q

what happens to the short run phillips curve when money supply increases?

A

increase in money supply > AD curve shifts right, increasing quantity of output and lowering the rate on unemployment through a leftward movement along the curve.

increase in the money supply growth rate increases inflation, prices are higher than expected which causes firms to produce more and hire more workers, reducing unemployment

18
Q

on a phillips curve, what factors cause a shift in the short-run phillips curve and what factors cause a movement along the curve?

A

changes in AD = movement along the curve

changes in AS = shifts the curve

19
Q

what happens in the long run if there is an increase in the money supply?

A

the short run phillips curve will return to the natural rate of unemployment, but inflation rate will be higher as the value of money decays faster. this is because in the long run, output and unemployment are determined by real variables such as technology and factor supply. nominal factors such as interest rates and wages increase so firms have no incentive to change real production decisions (the high wages makes production more expensive, which lowers the AG supply and returns the output back to its natural state)

20
Q

what causes prices and real GDP to rise in the short run?

A

aggregate demand shifting right. if AD increases, prices increase and firms will supply more, increasing GDP. in the long run, wages will adjust and shift the short-run AS curve to the left, until long-run AS is reached.

21
Q

what happens to U.S. goods and net exports when the real exchange rate for the dollar appreciates?

A

U.S. goods become more expensive relative to foreign goods, which makes exports fall and imports rise (appreciating means it is worth more)

22
Q

if the nominal exchange rate in a country declines but prices are unchanged in the country and abroad, then what happens to the real exchange rate?

A

when the nominal exchange rate dclines, the real exchange rate declines because the real exchange rate equals (nominal exchange rate * domestic price)/foreign price

23
Q

what is stagflation and what causes it?

A

stagflation is a decrease in output (slower economic growth) and inflation. in the short run, if AS shifts left, output decreases and prices increase. (a rightward shift of the AD curve although raises prices, also raises output, which is not considered stagflation)

24
Q

what hapens to NCO when a country raises its budget deficit?

A

the supply of loanable funds decreases and shifts left (because national savings go down) > the real interest rate rises and NCO decreases (moves left along the curve) > supply of currency in the market for foreign currency exchange decreases and shifts left

25
Q

what is the interest-rate affect in the contect of the aggregate-demand curve?

A

when price level increases, househols increase their holdings of money; in turn, interest rates increase, which reduces spending on investment goods

26
Q

how do recessions on other countries afffect AD curve?

A

AD curve shifts left as recessions in other countries reduce US exports.

27
Q
A