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AP Macroeconomics > Unit 05: Long-Run Consequences of Stabilization Policies > Flashcards

Unit 05: Long-Run Consequences of Stabilization Policies Flashcards

1
Q

05.01 The Money Supply

05.01 The Money Supply

A
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2
Q

05.01 The Money Supply

What three values of money makes it valuable?

A
  1. Medium of exchange
  2. Standard of Value
  3. Store of value
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3
Q

05.01 The Money Supply

How is mone

A
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4
Q

05.01 The Money Supply

What are the 4 characteristics of money?

A
  1. Durable
  2. Widely Accepted
  3. Scarce
  4. Conveniet Form
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5
Q

05.01 The Money Supply

What is fiat money?

A

Money that has value because it is backed by the word of federal government and not by gold or other valuable resources

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6
Q

05.01 The Money Supply

What are the three official measures of money?

A
  1. M0
    • monetary base
    • counts: cash & coins circulating in economy and excess reserves in central bank
  2. M1
    • smallest liquid form of money
    • checkable or demand deposits, traveler’s checks, coins, currency
    • Vaut cash: not counted because it is already counted in the deposited bank (Not in circulation)
    • largest percentage
  3. M2
    • M1 + savings + small (less than $100,000) time deposits
    • Time deposits:
      • certificate of deposit with amount time must wait before withdrawing money
        *
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7
Q

05.01 The Money Supply

What two factors causes the demand for cash to rise the past few years?

A
  1. Rise underground econonmy
  2. use of US $100 bills around the world as a form of international currency
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8
Q

05.01 The Money Supply

What is the difference between financial assests and investment spending?

A
  • investment spending that is counted as part of GDP.
  • Financial investment is not counted in GDP.

In general, when you purchase a financial asset, you expect to gain some return on your investment. In many cases, you would earn interest and that increases your overall wealth.

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9
Q

05.01 The Money Supply

Whhat are the 4 types of Financial Assets?

A
  1. Money
    • invest in higher interest rates for higher returns on investment
  2. Bonds
    • promise to pay the holder an amount equal to cost of bond + interest
  3. Securities
    • Isssues securities in form of Treasury bills of T-bills
    • issured by Treasury Department
    • more short-term than bond
  4. Stocks
    • partial ownership in a company
    • ways to raise money for capital investment
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10
Q

05.01 The Money Supply

What is the effect on the money supply when you transfer money from your checking account to your savings account?

  1. Increase M1; decrease M2
  2. Decrease M1; increase M2
  3. No effect on M1; increase M2
  4. No effect on M1; decrease M2
  5. Decrease M1; no effect on M2
A

5. Decrease M1; no effect on M2

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11
Q

05.01 The Money Supply

M2 would include all of the following except

  1. $10,000 in checkable deposits.
  2. a $5,000 certificate of deposit (CD).
  3. $3,000 debt on a credit card.
  4. $1,000 in Traveler’s checks.
  5. $25,000 in savings deposits.
A

3. $3,000 debt on a credit card

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12
Q

05.01 The Money Supply

Which of the following is considered currency in circulation?

  1. The money in the vault at the Second Federal Bank
  2. The dime that you have in your piggy bank
  3. The interest owed on your credit card
  4. The balance on your lunch meal card
  5. The available credit on your credit card
A

2. The dime that you have in your piggy bank

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13
Q

05.01 The Money Supply

When you compare prices for high definition televisions at various stores, you are using money as a(n)

  1. medium of exchange.
  2. standard of value.
  3. store of value.
  4. payment method.
  5. unit of currency.
A

2. standard of value

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14
Q

05.01 The Money Supply

Which of the following are considered characteristics of money?

I. Portable

II. Uniform

III. Divisible

IV. Acceptable

  1. I and III
  2. I, II, and III
  3. I, II, and IV
  4. II, III, and IV
  5. I, II, III, and IV
A

5. I, II, III, and IV

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15
Q

05.01 The Money Supply

Which of the following is a chief characteristic of money?

  1. Not very durable
  2. Accepted at only select markets within a country
  3. Extremely abundant
  4. Difficult to sub-divide
  5. Convenient in form for exchange
A

5. Convenient in form for exchange

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16
Q

05.01 The Money Supply

Most economists think that the rise in the demand for cash is caused by the rise of the underground economy and the use of

  1. U.S. currency as a medium of exchange.
  2. U.S. currency as a standard of value.
  3. U.S. currency as a store of value.
  4. U.S. currency as a form of international currency.
  5. U.S. currency as a unit of account.
A

4. U.S. currency as a form of international currency

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17
Q

05.01 The Money Supply

Which of the following would be counted in M2?

  1. The value of a home if the owner has placed it for sale
  2. The balance due on a credit card
  3. Travelers’ checks
  4. Long-term investment accounts worth more than $100,000
  5. The market value of precious metals
A

3. Travelers’ checks

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18
Q

05.01 The Money Supply

If you use money as a unit of account, you would be

  1. buying a new pair of shoes.
  2. putting money in your college savings account.
  3. comparing tuition costs for Princeton and Yale.
  4. charging a new book on your credit card.
  5. withdrawing $500 from your checking account.
A

3. comparing tuition costs for Princeton and Yale

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19
Q

05.01 The Money Supply

The Money Supply

Demand Deposits

$1,013

Currency and Coins

$425

Savings Deposits

$604

Large Corporate Deposits

$1,000,000

Small Certificate of Deposits

$1,985

Using the table above, M2 would equal

  1. $1,013
  2. $1,438.
  3. $2,042
  4. $3,423
  5. $4,027
A

5. $4,027

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20
Q

05.01 The Money Supply

$10,000 cash in the vault at the First National Bank is

  1. counted in M1.
  2. counted in M2.
  3. counted in both M1 and M2.
  4. not counted in the money supply because it has already been counted as checkable deposits.
  5. not counted in the money supply because it is fiat money.
A

4. not counted in the money supply because it has already been counted as checkable deposits

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21
Q

05.01 The Money Supply

What is the effect on the money supply when you transfer $15,000 from your checking account to your savings account?

  1. Decrease M1; increase M2
  2. Decrease M1; decrease M2
  3. No effect on M1; increase M2
  4. No effect on M1; no effect on M2
  5. Decrease M1; no effect on M2
A

5. Decrease M1; no effect on M2

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22
Q

05.01 The Money Supply

Which of the following are considered functions of money?

Medium of exchange

Standard of value

Store of debt

Standard of credit

  1. I and II only
  2. I and III only
  3. I and IV only
  4. I, II, and III only
  5. I, II, and IV only
A

1. I and II only

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23
Q

05.01 The Money Supply

M2 would include all of the following except

  1. $5,000 in checkable deposits.
  2. a $15,000 money market deposit.
  3. $2,000 in Traveler’s checks.
  4. $200 in your piggy bank.
  5. a $125,000 money market deposit.
A

5. a $125,000 money market deposit.

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24
Q

05.01 The Money Supply

If you put $100 in your college savings account, the function of money is as a

  1. standard of value.
  2. store of value.
  3. medium of exchange.
  4. unit of value.
  5. standard of currency.
A

2. store of value

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25
Q

05.01 The Money Supply

If you pay $3.00 for a gallon of gas, the function of money is as a

  1. standard of value.
  2. store of value.
  3. medium of exchange.
  4. unit of value.
  5. standard of currency.
A

3. medium of exchange

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26
Q

05.01 The Money Supply

If you withdraw $100 from your checking account and put it in your savings account,

  1. M1 decreases by $100.
  2. M2 increases by $100.
  3. M1 decreases by $100 and M2 increases by $100.
  4. M2 decreases by $100 and M1 increases by $100.
  5. there is no immediate change in the money supply.
A

1. M1 decreases by $100

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27
Q

If you withdraw $100 from your checking account and put it in your wallet,

  1. M1 decreases by $100.
  2. M2 increases by $100.
  3. M1 decreases by $100 and M2 increases by $100.
  4. M2 decreases by $100 and M1 increases by $100.
  5. there is no immediate change in the money supply.
A

5. there is no immediate change in the money supply

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28
Q

05.02 Money Creation and The Money Multiplier

♣ 05.02 Money Creation and the Money Multiplier ♣

A
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29
Q

05.02 Money Creation and The Money Multiplier

What are bank balance sheets and what is the purpose?

A
  • Assets: what the bank owns
  • Liabilities: what the bank owes
  • Must always balance out*
  • reserve ratio of 10%
30
Q

05.02 Money Creation and The Money Multiplier

What is the required reserve?

A

Amount of currency the bank must keep in the vault

  • (Since Great Depression) banks required keep certain amount at hand in case of an emergency and prevent panics
  • Vault cash: assets the bank must keep

Money beyond required reserve: loaned out → excess reserve

31
Q

05.02 Money Creation and The Money Multiplier

What is excess reserve?

A

Money beyond required reserve: loaned out → excess reserve

32
Q

05.02 Money Creation and The Money Multiplier

What is the formula for the money multiplier?

A

1 ÷ (Required Reserve Ratio)

  • multiply tax multiplier by excess reserves
33
Q

What are the three reasons that the maximum amount of money might not be created from a new deposit (leakages)?

A
  1. Banks hold excess reserves
  2. People hold cash rather than re-deposit it in bank
  3. No investment demand
34
Q

05.03 The Time Value of Money

♣ 05.03 The Time Value of Money ♣

A
35
Q

05.03 The Time Value of Money

Why is investment spending important to AD and capital creation?

A

One determinant of long run economic growth in a nation

  • before investment: determine if there is future revenue to be earned
  • How: evaluating present value of investment versus future value of investment
36
Q

05.03 The Time Value of Money

How do interest rates play into the decision to borrow money?

A
  1. Higher interest rates:
    • more difficult recover in future
    • borrowing less attractive
  2. Lower interest rates:
    • stimulate investment
37
Q

05.03 The Time Value of Money

What factors go into deciding whether to invest?

A
  1. interest rates
  2. length of time before investment generates money
38
Q

05.03 The Time Value of Money

How does time play into the investment decision?

A
  1. Longer Time: less attractive
  2. Less time: more attractive
39
Q

05.03 The Time Value of Money

What is the fomula to calculate the future value of money?

A

Future Value (FV) = Present Value (PV) x (1 + interest rate (r))

40
Q

05.03 The Time Value of Money

What is the formula for the present value of money?

A

Present Value (PV) = Future Value (FV) / (1 + interest rate (r))

41
Q

05.04 The Loanable Funds Market

♣ 05.04 The Loanable Funds Market ♣

A
42
Q

05.04 The Loanable Funds Market

What is the loanable funds market?

A

Where investment spending and public and private saving come together

43
Q

05.04 The Loanable Funds Market

What changes the demand for loanable funds?

A
  1. Changes in demand from borrowing by businesses consumers, government
  2. Increase aggregate income (Y) in economy
  3. Financial investors cash in investment holdings = increaes demand
44
Q

05.04 The Loanable Funds Market

What changes the supply of loanable funds?

A
  1. Increase in consumer/business savings
  2. Increase in money supply (result of monetary policy)
45
Q

05.04 The Loanable Funds Market

What is the loanable funds graph?

A

Relationship between real interest rates and quantity of loanable funds in money supply.

Businesses & Government: want lowest price or interest rates to borrow from

  • lower interest rates: higher quantity of investment spending
  • higher interest rates: lower quantity of investment spending
46
Q

05.04 The Loanable Funds Market

What is the difference in investment spending and financial investment?

A
  1. Investment spending is borrowing money, hopefully at the lowest interest rates.
  2. Financial investment is buying securities, bonds, or other financial assets with hopes of making a high return on your investment.
47
Q

05.04 The Loanable Funds Market

What causes a shift in the investment demand curve?

A

change expected rates of return on capital

  • except higher rates on return:
    • investment demand move right
    • more willing to borrow loanable funds at higher interest rates
  • excepted rates of return in low:
    • decrease demand (left) at every interest rate
48
Q

05.04 The Loanable Funds Market

What is the exception to the change in demand for investment curve rule?

A
  • Financial Capital*
  • foreign investors look for high interst rates → better rate on return in their financial (money) investments
49
Q

05.04 The Loanable Funds Market

What is the difference between nominal and real interest rates?

A
  • Nominal: current investment rates (without adjustments for inflation)
    • inflation increases → nominal increases
  • Real: Interest rate when adjusted for inflation

Real Interest Rates = Nominal Interest Rates – Inflation

50
Q

05.04 The Loanable Funds Market

What are possible unintentional consequences if the government’s demand for money changes?

A
  • Congress wants correct recession: enact expansionary fiscal policy
    • increase spending or reduce personal income tax
  • When enacted: government’s demand for loanable funds increase
  • increase demand loanable funds → increase interest rates

Interest rates increase: borrowing less desirable

  1. stop borrowing money
  2. investment spending decreases

(1) Result (if Congress uses a expansionary policy): decrease investment spending make policy less effective

  • private investment is crowded out by increased interest rates

(2) Result (if Congress uses a contractionary policy):private investment encouraged → interest rates decrease

  • private investment would be crowded in by the change in interest rates,
  • causing contractionary policy to be less effective than Congress would desire.
51
Q

05.04 The Loanable Funds Market

A business will borrow money to complete a project when

  1. the interest rate is greater than the rate of return on the project.
  2. the interest rate is less than the rate of return on the project.
  3. the interest paid is more than the cost of the project.
  4. the interest rate is less than the cost of the project.
  5. the interest rate is variable over the course of the project.
A

2. the interest rate is less than the rate of return on the project

52
Q

05.04 The Loanable Funds Market

Which of the following is true when the government is deficit spending?

I. The government is saving money.
II. Tax revenue is greater than government spending.
III. Spending is greater than tax revenue.

  1. I only.
  2. II only.
  3. III only.
  4. I and II only.
  5. I and III only.
A

3. III only

53
Q

05.04 The Loanable Funds Market

Which of the following is the most likely effect of deficit spending by the government?

  1. Private investment spending increases.
  2. Private investment spending is crowded out.
  3. Private investment spending is crowded in.
  4. The government provides fewer services.
  5. The government is collecting more taxes to offset spending.
A

2. Private investment spending is crowded out

54
Q

05.04 The Loanable Funds Market

Given the loanable funds market illustrated above, which of the following is most likely to be true of quantity demanded and quantity supplied of loanable funds if the government imposes an effective interest ceiling of 6%?

Quantity Demanded / Quantity Supplied

  1. Decrease / Decrease
  2. Decrease / Increase
  3. Increase / No change
  4. Increase / Decrease
  5. Increase / Increase
A

4. Increase / Decrease

55
Q

05.04 The Loanable Funds Market

An increase in savings by Americans

  1. would most likely increase the supply of loanable funds.
  2. would most likely increase the interest rate.
  3. would most likely decrease the demand for loanable funds.
  4. would most likely decrease the supply of loanable funds.
  5. would most likely decrease the quantity demanded of loanable funds.
A

1. would most likely increase the supply of loanable funds

56
Q

05.04 The Loanable Funds Market

A recession which causes people to use their savings to pay for day to day expenses would most likely

  1. increase the supply of loanable funds.
  2. decrease the interest rate.
  3. decrease the demand for loanable funds.
  4. decrease the supply of loanable funds.
  5. increase the quantity demanded of loanable funds.
A

4. decrease the supply of loanable funds

57
Q

05.04 The Loanable Funds Market

If factories in a nation were operating at less than full capacity, this would most likely

  1. increase the supply of loanable funds.
  2. increase the demand for loanable funds.
  3. decrease the demand for loanable funds.
  4. decrease the supply of loanable funds.
  5. increase the quantity demanded of loanable funds.
A

3. decrease the demand for loanable funds

58
Q

05.04 The Loanable Funds Market

Suppose households lose confidence in the economy so consumer spending decreases. Which of the following best describes the impact of this belief on supply of loanable funds and interest rates?

Loanable Funds / Interest Rate

  1. Increase / Increase
  2. Increase / Decrease
  3. No change / Increase
  4. Decrease / Increase
  5. Decrease / Decrease
A

2. Increase / Decrease

59
Q

05.04 The Loanable Funds Market

If the demand for loanable funds increases, what will happen to real interest rates and the economic growth?

Real Interest Rates / Economic Growth

  1. Increase / Increase
  2. Increase / Decrease
  3. Decrease / No Change
  4. Decrease / Decrease
  5. Decrease / Increase
A

2. Increase / Decrease

60
Q

05.04 The Loanable Funds Market

If nominal interest rate equals 5 percent and expected inflation is 3 percent, then nominal and real interest rates are respectively

  1. 3% and 5%.
  2. 8% and 5%.
  3. 5% and 2%.
  4. 5% and 7%.
  5. 7% and 5%.
A

3. 5% and 2%.

61
Q

05.04 The Loanable Funds Market

If interest rates are high, business investment spending decreases.

true

false

A

true

62
Q

05.04 The Loanable Funds Market

Which of the following is true when the government is deficit spending?

I. The government becomes a borrower in the loanable funds market.
II. Real interest rates rise.
III. Private investment spending is crowded out.
IV. The total amount of borrowing is decreased.

  1. I and II only.
  2. I and III only.
  3. I, II and III only.
  4. I, III and IV only.
  5. I, II, III and IV.
A

3. I, II and III only.

63
Q

05.04 The Loanable Funds Market

Suppose investors believe they will not recover their investment in any future projects. Which of the following best describes the impact of this belief on demand for loanable funds and interest rates?

Loanable Funds / Interest Rate

  1. Increase / Increase
  2. Increase / Decrease
  3. No change / Increase
  4. Decrease / Increase
  5. Decrease / Decrease
A

5. Decrease / Decrease

64
Q

05.04 The Loanable Funds Market

Given the loanable funds market illustrated above, which of the following is most likely to be true of quantity demanded and quantity supplied of loanable funds, if the government imposes an effective interest floor of 12%?

Quantity Demanded / Quantity Supplied

  1. Decrease / Decrease
  2. Decrease / Increase
  3. Increase / No change
  4. Increase / Decrease
  5. Increase / Increase
A

2.Decrease / Increase

65
Q

05.04 The Loanable Funds Market

One of the reasons the demand curve for the loanable funds graph is down-sloping is that

  1. more investors are willing to supply funds when interest rates are high.
  2. when the interest rate is low, the quantity demanded of loanable funds will be less.
  3. when the interest rate is low, the quantity demanded of loanable funds will be greater.
  4. when the interest rate is high, the quantity supplied of loanable funds will be less.
  5. when the interest rate is high, the quantity demanded of loanable funds will be greater.
A

3. when the interest rate is low, the quantity demanded of loanable funds will be greater

66
Q

05.04 The Loanable Funds Market

A slowdown in the economy increases unemployment and decreases output. As a result of this action, there will be

  1. an increase in the quantity supplied of loanable funds.
  2. an increase in supply the of loanable funds.
  3. a decrease in the supply of loanable funds.
  4. an increase in the demand for loanable funds.
  5. a decrease in the demand for loanable funds.
A

5. a decrease in the demand for loanable funds.

67
Q

05.04 The Loanable Funds Market

An increase in the rate of return on an investment

  1. would most likely increase the supply of loanable funds.
  2. would most likely increase the interest rate.
  3. would most likely decrease the interest rate.
  4. would most likely decrease the supply of loanable funds.
  5. would most likely decrease the quantity demanded of loanable funds.
A

2. would most likely increase the interest rate

68
Q

05.04 The Loanable Funds Market

Suppose households lose confidence in the economy so consumer spending decreases. Which of the following best describes the impact of this belief on supply of loanable funds and interest rates?

Loanable Funds / Interest Rate

  1. Increase / Increase
  2. Increase / Decrease
  3. No change / Increase
  4. Decrease / Increase
  5. Decrease / Decrease
A

5. Decrease / Decrease

69
Q

**If the demand for loanable funds increases, what will happen to real interest rates and the international value of the U.S. dollar (USD)?

Real Interest Rates / International Value of USD**

  1. Increase / Increase
  2. Increase / Decrease
  3. Decrease / No Change
  4. Decrease / Decrease
  5. Decrease / Increase
A

1. Increase / Increase

70
Q

05.05 The Equation of Exchange

♣

05.05

The Equation of Exchange

♣

A
71
Q

What is the equation for exchange?

A

MV = PY

M = The stock of money, M1, currency in circulation.

V = Income (GDP) velocity of circulation, the average number of times a dollar is spent on final goods and services per time period (usually one year).

P = The average price level of the final goods and services in GDP.

Y = Real output, the quantity of goods and services in GDP; real GDP in dollars of the base year.

  • The amount of money in the economy (M) multiplied by the average number of times it will be spent on goods and services (V) is equal to consumer spending in the economy. (PY)*
  • The number you arrive at should equal the same number you derive when you take the average price level (P) times the real output (Y). (PY reflects nominal GDP in an economy.)*

AP Macroeconomics (6 decks)

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