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Macro Econ > Midterm 2 > Flashcards

Midterm 2 Flashcards

1
Q

How does the federal Reserve regulate the level of investment in an economy?

A

By modifying the interest rates (which affects the aggregate demand)

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1
Q

When the interest rates go down, the money demand goes up

A

True

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2
Q

What is a reserve ratio?

A

A share of deposits that the banks holds aside as “reserves” so they can give out cash deposits at any time.

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3
Q

How does the federal reserve increase money supply?

A

By reserving the reserve ratio (how much they reserve for withdrawals)

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4
Q

What is contractionary monetary policy?

A

aka decrease in money supply, a decrease of money in circulation because of a higher reserve ratio.

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5
Q

What is expansionary monetary policy?

A

When the bank has more money in circulation, because of a lower reserve ratio

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6
Q

What is “discount rate”?

A

The rate of interest that the federal reserve charges commercial banks when commercial banks borrow money from the federal reserve.

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7
Q

What happens when there is a higher discount rate?

A

It’s harder for commercial banks to borrow money from the federal reserve, reducing the supply of money in the economy

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8
Q

What happens when there is a lower discount rate?

A

Commercial banks can borrow money more easily, increasing the money supply

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9
Q

What are open market operations?

A

Mechanism used by the feds to regulate money supply

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10
Q

What are government bonds?

A

Loaning money to the government in which you will receive interest from the government, as well as the payment returned in full

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11
Q

What happens when there’s more government bonds?

A

The level of money in circulation or “money supply” decreases

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12
Q

What happens when the price of a bond goes up?

A

When the federal reserve buys it back, the value of the bond increases, money supply also increases. Because individuals hold more of their wealth in the form of money.

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13
Q

What happens when a reserve requirement or discount rate decreases?

A

The money supply increases

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14
Q

What happens when a reserve requirement or discount rate increases?

A

The money supply decreases

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15
Q

What happens if the gov. gives out stimulus checks?

A

The aggregate demand for goods and services will raise via expansionary fiscal policy (taxes will have to increase eventually)

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16
Q

What is investment demands?

A

The demand for goods and services by firms that are investments in their business. (I need to invest in the service of a plumber to fix the toilets, in order to make it better later on)

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17
Q

If the interest rate is high?

A

Investment demand is low

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18
Q

If the interest rate is low?

A

Investment/aggregate demand rises and businesses can recover from the recession

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19
Q

Pitfalls of monetary policies

A

If the business has to raise their prices because of inflation, they also have to raise the prices enough to make a profit, which may upset consumers and in turn hurt the business

20
Q

Decline in money supply…

A

…will raise equilibrium interest rate

21
Q

If people cut down on their spending…

A

…aggregate demand declines and inflation falls

22
Q

What is commodity money?

A

Refers to any form of money with intrinsic value (valuable without being a medium of exchange) (gold/silver coins)

23
Q

What is fiat money?

A

Refers to money that has NO intrinsic value (not valuable and is not a medium of exchange)

24
Q

What are checkable deposits?

A

Money held in banks in the form of deposits that can easily be used for transactions

25
Q

What happens to velocity of money during a recession?

A

The velocity of money is lower.

26
Q

What is transaction demand?

A

We all need money to buy goods and services when individuals want to hold more money in the for of cash for everyday purchases

27
Q

what is precautionary demand?

A

When people want to save more money for future uncertainties (specifically in the form of cash)

28
Q

What is speculative demand?

A

If you own your wealth in real estate, and you speculate it’s going to crash-you would rather hold your wealth in the form of money and not an asset

29
Q

Factors the shift the money demand curve:

A

changes in aggregate price level: when the price level rises, all goods and services are more valuable. That causes the money demand curve to shift right

30
Q

Changes in real GDP:

A

if GDP increases, that implies that the economy is growing and expanding. The money demand curve shifts right

31
Q

Due to an oil price shock, the price of gas increases which raises the autonomous component of consumption. How does this affect equilibrium GDP?

A

It increases?

32
Q

If the Government hands out stimulus checks, according to the
Aggregate Expenditure Model, equilibrium GDP will…?

A

Increases

33
Q

If the Federal Reserve raises money supply by reducing the reserve
requirement, how will this affect GDP in the Aggregate
Expenditures Model

A

Increases

34
Q

A new social media trend emerges that encourages people to save
more of their income leading to a lower Marginal Propensity to
consume. How does this affect equilibrium GDP ?

A

Decreases

35
Q

Suppose American goods became very popular in Australia,
thereby raises the exports of the US. How will this affect the
equilibrium GDP under the Aggregate Expenditures Model?

A

Increases

36
Q

Which of these will cause the Aggregate Expenditure curve to shift
upwards?

A

Increase in Government spending on highways, decrease in the reserve requirement set by the Federal
Reserve, increase in exports overseas

37
Q

If Aggregate Expenditure fall short of output/GDP, this causes
inventories to?

A

Increase

38
Q

American products become very popular in Cuba, how does this
affect the GDP of the US according to the Aggregate Expenditures
Model?

A

It increases

39
Q

When Aggregate Expenditure exceeds output…

A

Inventories decline

40
Q

Imagine a scenario of hyperinflation where the prices of all goods
and services have skyrocketed. Which of these is a tool that the
Government can use to reduce inflation?

A

The fed. reserve increases reserve requirement

41
Q

Which of these is an example of commodity money?

A

Using gold, titanium, chickens, etc. as a medium of exchange

42
Q

Which of these is an example of inelastic demand?

A

Addictive substances for someone with clinical addiction and essential medications

43
Q

Which of these is a disadvantage of the barter system?

A

Bartered goods cannot always be used as a medium of
exchange as both parties may not always want each has to
offer, Bartered goods cannot be divided into smaller units, Bartered goods may depreciate in value, which may make
it harder to exchange in the future.

44
Q

The Federal Reserve has decided to reduce the reserve requirement
for commercial banks. This will cause Aggregate
Demand/Expenditure to…

A

Increase

45
Q

The Federal Reserve decides to sell more Government bonds in the
open market to citizens. This causes investment demand to…

A

Decrease

46
Q

Facebook, Apple and Google all decide to open new offices in
Bloomington-Normal leading to many workers from around the
country relocating. How does this affect the Velocity of money in
Bloomington-Normal, IL?

A

Velocity increases

47
Q
A

Macro Econ (1 decks)

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