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Macroeconomics > Unit 3 Exam > Flashcards

Unit 3 Exam Flashcards

1
Q

The price level in the economy depends on the relationship between the quantity of __________ spent and the quantity of __________ purchased.

A

money, products

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2
Q

The ________ ________ is the sum of the number of people employed plus the number unemployed.

A

labor force

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3
Q

__________ unemployment is due to the time required to match workers with jobs.

A

Frictional

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4
Q

__________ unemployment is where workers do NOT have the skills required in the available jobs.

A

Structural

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5
Q

__________ unemployment is due to downturns in the business cycle.

A

Cyclical

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6
Q

Which of the following is not one of the macroeconomic goals.

a. full employment
b. money supply growth
c. economic growth
d. price level stability

A

b. money supply growth

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7
Q

If the quantity of money spent decreases relative to the quantity of products purchased:

a. the price level will increase
b. the price level will decrease
c. the price level will stay the same
d. all of the above are possible

A

b. the price level will decrease

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8
Q

The largest category in the market basket of goods and services purchased by typical households is:

a. medical care
b. transportation
c. housing
d. food and beverage

A

c. housing

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9
Q

A period of unemployment typically lasts:

a. less than 6months
b. from 6 months to one year
c. from one year to two years
d. more than two years

A

a. less than 6 months

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10
Q

Anyone 16 and older who does NOT have a paying job and is actively seeking employment is:

a. employed
b. unemployed
c. not in the labor force
d. All of the above are possible

A

b. unemployed

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11
Q

__________ is an increase in the price level.

A

Inflation

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12
Q

Out of 227 million persons 16 and older, 145 million had paying jobs, 12 million did not have paying jobs but were actively seeking employment, 4 million wanted to work but had given up seeking employment and 66 million were retired or were otherwise not interested in employment. What is the size of the labor force?

a. 149 million
b. 157 million
c. 161 million
d. 227 million

A

b. 157 million

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13
Q

When the economy is at “full employment”:

a. the unemployment rate will be zero
b. there will still be some unemployment
c. the unemployment rate will be at the natural unemployment rate
d. Both b. and c.

A

d. Both b. and c.

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14
Q

Cheryl graduates with an accounting degree in May. After searching for two months, she lands a job as an accountant in July. While Cheryl was looking for work, she was:

a. frictionally unemployed
b. structurally unemployed
c. cyclically unemployed
d. not in the labor force

A

a. frictionally unemployed

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15
Q

Cheryl is laid off from her job as an accountant due to a recession. She searches for a job for six months and then is rehired by her old employer when the economy begins to recover. While Cheryl was looking for work, she was:

a. frictionally unemployed
b. structurally unemployed
c. cyclically unemployed
d. Not in the labor force.

A

c. cyclically unemployed

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16
Q

The natural unemployment rate is:

a. the sum of frictional and stuctural unemployment
b. the lowest unemployment rate that can be sustained without causing increasing inflation
c. the rate associated with full employment
d. all of the above

A

d. All of the above

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17
Q 
Technological advance:
a. is the ability to produce more output per resource
b. destroys jobs
c. both of the above
d Neither of the above
A

c. both of the above

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18
Q

Job destruction caused by technological advance:

a. is an economic disaster that must be prevented by job preservation legislation
b. allows the newly unemployed labor to be re-allocated to more valuable production
c. makes economic growth possible
d. both b. and c.

A

d. both b and c

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19
Q

During the Great Depression, the U.S. economy:

a. failed to achieve any of the three macroeconomic goals
b. suffered from unemployment rates which averaged almost 10% for the 1930’s
c. suffered from high inflation from 1929 to 1933.
d. All of the above

A

a. failed to achieve any of the three macroeconomic goals

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20
Q

__________ demand is the quantity demanded of all goods and services at different price levels.

A

Aggregate

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21
Q

__________ supply is the quantity supplied of all goods and services at different price levels.

A

Aggregate

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22
Q

__________ is measured by the output produced per unit of input.

A

Productivity

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23
Q

Consumption will increase if:

a. household wealth increases
b. interest rates decrease
c. taxes are decreased
d. All of the above

A

d. All of the above

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24
Q

An investment will be made:

a. if the expected rate of return equals the interest rate
b. if the expected rate of return is less than the interest rate
c. if the expected rate of return is greater than the interest rate.

A

c. if the expected rate of return is greater than the interest rate

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25
Q

Investment spending will increase if:

a. businesses become more optimistic about future returns
b. interest rates increase
c. both of the above
d. neither of the above

A

a. businesses become more optimistic about future returns.

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26
Q

The short-run aggregate supply curve shifts in response to a change in:

a. wage rates
b. consumption
c. net exports
d. all of the above

A

a. wage rates

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27
Q

A decrease in short-run aggregate supply could be caused by

a. an increase in wage rates
b. a decrease in the prices of nonlabor inputs
c. an increase in productivity
d. all of the above

A

a. an increase in wage rates

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28
Q

As labor productivity in the U.S. has increased in recent decades:

a. the price level has decreased
b. goods have become more affordable to the average American
c. Both of the above
d. Neither of the above

A

b. goods have become more affordable to the average American

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29
Q

As the price level decreases:

a. the demand for money will decrease
b. interest rates will decrease
c. consumption and investment will increase
d. All of the above

A

d. All of the above

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30
Q

When the price level decreases,

a. wages will always adjust quickly downward to maintain full employment
b. nominal wages may NOT adjust downward causing real wage rates to increase
c. producers will always realize that their real prices have NOT fallen, and thus they will continur to produce the same amount of output
d. all of the above

A

b. nominal wages may NOT adjust downward causing real wage rates to increase

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31
Q

According to ________ Law, supply creates its own demand.

A

Say’s

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32
Q

Classical economic theory began with the book:

a. “Das Kapital” by Karl Marx
b. “An Inquiry into the Nature and Causes of the Wealth of Nations” by Adam Smith
c. “The General Theory of Employment, Interest, and Money” by John Maynard Keynes
d. “Market Economies are Like, You Know, Classical” by Jeff Holt

A

b. “An Inquiry into the Nature and Causes of the Wealth of Nations” by Adam Smith

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33
Q

According to classical economic theory:

a. Real GDP never deviates from Natural Real GDP
b. a market economy is self-regulating
c. with proper government policy, full employment can be maintained at all times
d. All of the above

A

b. a market economy is self- regulating

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34
Q

According to Say’s law:

a. supply creates its own demand
b. demand creates its own supply
c. the act of production leads to equivalent income to resource owners.
d. both a. and c.

A

d. both a. and c.

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35
Q

According to classical economic theory:

a. a market economy will automatically adjust to Natural Real GDP
b. supply creates its own demand
c. flexible interest rates assure that any consumer savings will be exactly offset by business investment.
d. all of the above

A

d. all of the above

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36
Q

According to classical economic theory:

a. government intervention is necessary to maintain adequate demand
b. interest rates, wages, and prices are inflexible
c. the proper economic policy is laissez-faire
d. all fo the above

A

c. the proper economic policy is laissez-faire

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37
Q

According to classical economic theory, savings and investment will be equal because:

a. demand creates its own supply
b. interest rates are flexible
c. wages rise in a recessionary gap
d. all of the above

A

b. interest rates are flexible

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38
Q

According to classical economic theory, if the desire to save increases:

a. the interest rate will fall
b. the savings supply curve will shift right
c. the quantity of savings and investment will be equal
d. all of the above

A

d. all of the above

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39
Q

According to classical economic theory, a market economy will automatically close an inflationary gap by:

a. the shortage of labor will cause wage rates to rise
b. the increase in wage rates will shift the SRAS curve to the left
c. the SRAS curve will shift to the left until Real GDP equals Natural Real GDP
d. All of the above

A

d. all of the above

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40
Q

According to classical economic theory:

a. the LRAS curve is vertical at Natural Real GDP
b. changes in AD affect only the output level in the long run
c. since the economy is self-regulating, the proper economic policy is laissez-faire
d. both a. and c.

A

d. both a. and c.

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41
Q

Explain the effect of an increase in household desire to save, according to classical economic theory.

A

An increase in household desire to save will cause savings to increase. The increase in savings will cause the interest rat to fall and equilibrium will be restored with the quantity of savings equal to the quantity of investment.

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42
Q

According to Keynsian theory:

a. expectations of future returns affect business investment
b. if investors are pessimistic about future rates of return, they may NOT invest more as interest rates decrease
c. both of the above
d. neither of the above

A

c. both of the above

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43
Q

According to Keynesian theory:

a. excessive savings could lead to inadequate Total Expenditures
b. wages and prices are NOT flexible downward
c. the economy can get stuck in a recessionary gap for an extended period of time
d. all of the above

A

d. all of the above

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44
Q

According to Keynesian theory:

a. the economy is self-regulating
b. spending is the driving force in the economy
c. supply creates its own demand
d. all of the above

A

b. spending is the driving force in the economy

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45
Q

According to Keynesian theory:

a. the level of Total Expenditures determines the level of Real GDP
b. as Real GDP increases, investment will increase
c. as Real GDP increases, consumption will stay the same
d. all of the above

A

a. the level of Total Expenditures determines the level of Real GDP

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46
Q

According to Keynesian theory:

a. as Real GDP increases , government purchases will increase
b. a change in the current level of Real GDP will NOT change the level of net exports
c. Both of the above
d. Neither of the above

A

b. a change in the current level of Real GDP will NOT change the level of net exports

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47
Q

According to Keynesian theory, equilibrium Real GDP occurs where:

a. Total Expenditures equals Real GDP
b. the Total Expenditures curve intersects the 45 degree angle line
c. both of the above
d. neither of the above

A

c. both of the above

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48
Q

According to Keynesian theory, if Total Expenditures is greater than Real GDP;

a. the economy is in an inflationary gap
b. inventories will increase
c. production will increase
d. all of the above

A

c. production will increase

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49
Q

According to Keynesian theory, the multiplier effect occurs because:

a. the intial change in Total Expenditures triggers a chain reaction
b. any change in production causes a change in consumption
c. both of the above
d. neither of the above

A

c. both of the above

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50
Q

_______ policy is changes in government expenditures and taxation to achieve macro economic goals.

A

Fiscal

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51
Q

A budget _________ occurs when government expenditures are greater than tax revenues.

A

deficit

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52
Q

A budget _______ occurs when tax revenues are greater than government expenditures.

A

surplus

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53
Q

________ ________ occurs when increases in government spending lead to decreases in private spending.

A

Crowding out

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54
Q

According to Keynesian theory:

a. fiscal policy can be used to move the economy toward Natural Real GDP
b. to close a recessionary gap, contractionary fiscal policy should be used
c. to close an inflationary gap, expansionary fiscal policy should be used.
d. all of the above

A

a. fiscal policy can be used to move the economy toward Natural Real GDP

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55
Q

Which of the following would be expansionary fiscal policy?

a. an increase in taxation
b. an increase in government expenditures
c. an increase in the money supply
d. all of the above

A

b. an increase in government expenditures

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56
Q

According to Keynesian theory, during a recessionary gap the government’s budget:

a. should be balanced
b. should be in deficit
c. should be in surplus

A

b. should be in deficit

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57
Q

A decrease in government expenditures:

a. would tend to cause a budget deficit
b. would be expansionary fiscal policy
c. would be proper fiscal policy during an inflationary gap, according to Keynesian theory
d. all of the above

A

c. would be proper fiscal policy during an inflationary gap, according to Keynesian theory.

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58
Q

During a recessionary gap:

a. unemployment compensation payments will increase, acting as an automatic stabilizer.
b. corporate income tax payments will increase, acting as an automatic stabilizer
c. both of the above
d. neither of the above

A

a. unemployment payments will increase, acting as an automatic stabilizer

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59
Q

Crowding out:

a. occurs when increases in government spending lead to decreases in private spending
b. can be caused by a decrease in the money supply
c. does NOT occur when the government deficit spends
d. All of the above

A

a. occurs when increases in government spending lead to decreases in private spending

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60
Q

Fiscal policy may be mistimed because of:

a. the jet lag
b. the putting lag
c. the impact lag.
d. all of the above

A

c. the impact lag

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61
Q

Since World War II:

a. recessions have been eliminated by proper use of Keynesian fiscal plicy
b. recessions have occurred predictably every five years
c. recessions have lasted on average a little more than ten months.
d. none of the above

A

c. recessions have lasted on average a little more than 10 monts

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62
Q

Which of the following is a potential problem with fiscal policy?

a. crowding out may cause an increase in private spending
b. there may a political bias toward contractionary fiscal policy
c. fiscal policy may be miscalculated
d. all of the above

A

c. fiscal policy may be miscalculated

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63
Q

Since Keynesian theory was introduced in 1936, the federal goverment :

a. has had budget deficits in most years
b. has grown relative to the size of the economy
c. both of the above
d. neither of the above

A

c. both of the above

64
Q

Supply-side economists argue that Keynesian fiscal policy:

a. has had a beneficial effect on the supply side of the economy
b. has made deficit spending politically acceptable
c. has led to a shrinking federal government
d. all of the above

A

b. has made deficit spending politically acceptable

65
Q

Supply side economists:

a. believe Keynesian fiscal policy harms the economy
b. favor lower marginal tax rates
c. favor a smaller government
d. all of the above

A

d. all of the above

66
Q

________ is whatever is generally accepted as a medium of exchange.

A

money

67
Q

________money is money by government decree.

A

fiat

68
Q

________ is the direct exchange of goods.

A

barter

69
Q

money ________ is increases in checkable deposits made possible by fractional reserve banking.

A

creation

70
Q

________ reserves is the minimum amount of reserves that a bank is legally required to hold agains its deposits.

A

Required

71
Q

Reserves consist of vault cash plus bank ________ with the ________

A

deposits, Fed

72
Q

________ reserves is the excess of reserves over required reserves.

A

excess

73
Q

A ________ asset is an asset that can be converted quickly into cash at a low transaction cost.

A

liquid

74
Q

Money is:

a. a valuable good
b. a valuable resource
c. valuable because it can be used for making exchanges
d. all of the above

A

c. valuable because it can be used for making exchanges

75
Q

The direct exchange of goods:

a: is barter
b. requires a double coincidence of wants
c. is harder than making a trade through the use of money
d. all of the above

A

d. all of the above

76
Q

Compared to barter, money:

a. increases transaction costs
b. requires a double coincidence of wants
c. increases specialization
d. all of the above

A

c. increases specialization

77
Q

The most important function of money is:

a. measure of value
b. medium of exchange
c. store of value
d. makes goods valuable

A

b. medium of exchange

78
Q

When we hold onto money instead of spending it immediately:

a. we are using money as a store of value
b. we can use our buying power when it is most valuable to us
c. we may lose buying power if there is inflation
d. all of the above

A

d. all of the above

79
Q

Money has value because:

a. it is backed by gold
b. it is backed by the full faith and credit of the U.S. government
c. it is generally accepted as a medium of exchange
d. all of the above

A

c. it is generally accepted as a medium of exchange

80
Q

Which of the following is money?

a. a check
b. a credit card
c. both of the above
d. neither of the above

A

c. both of the above

81
Q

In our fractional reserve banking system:

a. banks hold reserves equal to only a fraction of thier deposits
b. the fraction of deposits that must be held is determined by the required-reserve ration
c. the required-reserve ratio is set by the Federal Reserve System
d. all of the above

A

d. all of the above

82
Q

If checkable deposits in 1st bank total $500 millionand the required-reserve ratio is 10% then required reserves for 1st Bank equal:

a. $5 million
b. $10 million
c. $50 million
d. $ 450 million

A

c. $50 million

83
Q

To meet its reserve requirement, a bank may count which of the following assets?

a. business loans
b. US government securities
c. Deposit with the Fed
d. All of the above

A

c. Deposit with the Fed

84
Q

If the required-reserve ratio is 12% , and a bank recieves a deposit of $1,000 how much may the bank loan out?

a. $120
b. $760
c. $880
d. $1000

A

a. $120

85
Q

Excess reserves:

a. is the excess of reserves over required reserves
b. may be loaned out
c. earn little or no revenue for the bank
d. all of the above

A

d. all of the above

86
Q

US government securities:

a. are debt instruments issued by the federal goverment
b. pay a high rate of interest since they are high risk
c. must be held by the original buyer until maturity
d. all of the above

A

a. are debt instruments issued by the federal government

87
Q

US government securities are an attractive investment for a bank because they:

a. pay interest
b. are highly liquid
c. are low risk
d. all of the above

A

d. all of the above

88
Q

If the required-reserve ratio is 10% the potential deposit multiplier is:

a. 10
b. 8
c. 5
d. 4

A

a. 10

89
Q

One-shot inflation can be caused by:

a. an increase in AD
b. an increase in SRAS
c. continued increases in AD
d. Both a. and b.

A

a. an increase in AD

90
Q

If the price level increases at a high rate year after year:

a. this is continued inflation
b. this is caused by continued increases in AD
c. the money supply must be increasing rapidly
d. all of the above

A

d. all of the above

91
Q

An increase in the rate of inflation:

a. increases the buying power of people who hold money
b. increases the real interest rate earned on savings
c. benefits lenders and hurts borrowers
d. none of the above

A

d. none of the above

92
Q

When a government pays for government spending by issuing new currency:

a. the increase in the money supply will cause inflation
b. this is an indirect tax on the holders of money
c. both of the above
d. neither of the above

A

c. both of the above

93
Q

What is barter? What is the problem with barter as a means of exchange?

A

Barter is the direct exchange of goods. The problem with barter as a means of exchange is that to make a trade by barter requires a double coincidence of wants. You must find someone who has what you want and who wants what you have.

94
Q

List the three functions of money.

A

1) medium of exchange
2) measure of value
3) store of value

95
Q

List three reasons that U.S. government securities are an attractive asset for a bank to hold.

A

US government securities are an attractive asset for a bank to hold because:

1) US government securities pay interest
2) US government securities are low risk
3) US government securities are highly liquid

96
Q

List the effects of inflation

A

The effects of inflation

1) Inflation decreases the buying power of people who hold money.
2) Inflation reduces the real interest rate earned on savings
3) Increasing inflation benefits borrowers and hurts lenders.
4) Inflation increases uncertainty and can thus discourage investment.

97
Q

________ policy is changes in the money supply to achieve macroeconomic goals.

A

monetary

98
Q

________ is a decrease in the price level.

A

deflation

99
Q

According to classical monetary theory:

a. the velocity of money is constant
b. there is no relationship between the money supply and the price level
c. both of the above
d. neither of the above

A

c. both of the above

100
Q

How did nations grow their economy before 1776?

A

War. To obtain control over their resources - this is called mercantilism

101
Q

Adam Smith believed in LRAS but Keynsian believed in SRAS because

A

in the long run we will all be dead

102
Q

7 step process to Classical Economics

A

1) Each individual has inherent right to obtain and control property.
2) Each individual is materialistic and wants property
3) Left alone each individual will seek to maximize well being
4) With no interference (gov or other) each individual will maximize well being
5) Since resources are scarce this will cause competition
6) This competition will cause better use and development of these scarce resources
7) The better use of resources will in turn increase total output.

103
Q

Classical versus Keynesian

A 
Classical - 
1 - self correcting
2 - long run
3 - achieve economic stability of full employment
4 - free markets regulate themselves
5 - Say's Law - Supply creates its own demand
6 - prices and wages are flexible
7 - Adam Smith father of economics
8 - economy tends towards full employment
9 - minimum government interference
Keynesian - 
1) prices and wages are slow
2) Gov't intervenes or is involved
3) surpluses are held in inventory
4) Market is not self correcting
5) The Free Market has flaws
6) Focus on the short term
7) Great Depression
8) Economy can be stuck in less than full employment
9) Savings and investments are equal
10) wages are not down wardly flexible
104
Q

Keynes points were not against or to challenge Classical economics his point was simply that…

A

the free market has flaws and from time to time it needs government intervention

105
Q

Since the Great Depression __________ economics has dominated the economic philosphy of the industrialized world.

A

Keynesian

106
Q

GOAL: ECONOMIC GROWTH
PROBLEM: RECESSION
INDICATOR: ?

A

REAL GDP

107
Q

GOAL: FULL EMPLOYMENT
PROBLEM: UNEMPLOYMENT
INDICATOR: ?

A

UNEMPLOYMENT RATE

108
Q

recession/contraction are the same thing and when that comes to an end/low its called a trough. Then when it starts to go back up that is called recovery/expansion. Then we reach a peak. If we continue to grow upward hight than the previous recovery its called prosperity.
These are all parts of what?

A

The Business Cycle

Be able to draw it!

109
Q

List some facts about our periods of recession.

A

1) A whole lot more years of growth than weve had recession
2) The periods of recession have been short compared to the periods of expansion
3) They are unpredictable (the periods of recession)
* We all know they can happen but we never know when
- In the 50’s people returning from war with no work
- 60’s were a large area of growth
- 80’s were gov’t induced through contracting money supply and cutting the fat. It also got inflation under control.
- 90’s huge growth technological

110
Q

2 quarters of declining Real GDP back to back is what?

A

Recession

111
Q

Who determines its a recession

A

The national bureau of economic research

112
Q

What are two ways to measure your economic cycle?

A

Peak to peak and trough to trough

113
Q

define unemployment

A

people in the labor force who are willing and able to who are not working.

114
Q

define unemployed

A

those without paying jobs who are actively seeking work

115
Q

What is the definition and formula for the unemployment rate?

A

Percentage of the labor force that is unemployed

UR = number of unemployed divided by labor force(employed and unemployed

116
Q

List 3 problems with our unemployment rate formula?

A

1) discouraged worker - someone who is no longer willing to look for a job/ able but not willing
2) underemployment - you didnt work as much as you were willing and able to.
3) seasonal employment

117
Q

define structural employment

A

most serious and/or dangerous. This is long periods of unemployement - 2 years or more.
It means workers do not have the skills or access to technology that are required in the available jobs.

118
Q

If you give the economy full benefits without working you __________ your work force.

A

dis insentivise

119
Q

Define Consumer Price Index

A

The price level in the economy is measured by constructing a price index. Consumer Price index is very accurate and it is measured monthly. It is based on the price of a market basket of goods and services. The market basket consists of a wide variety of goods and services purchased by typical households.

120
Q

define dis - inflation

A

decrease in the rate of inflation: meaning: rather that 3 or 4% than the following year 1-2%. Its still inflated but lower than it was the previous year. Not the opposite its just lower than it has been

121
Q

hyper inflation

A

skyrocketing inflation - Chile is the best example of hyper-inflation

122
Q

deflation

A

overall decrease in prices. this IS the opposite of inflation. Its also the worse case scenario because there is no way to correct it.

123
Q

demand pull inflation

A

excess demand for goods and services = economy is operating @ full capacity. “Too many dollars chasing too few goods”

124
Q

Cost push inflation

A

supply side ex: oil in the 1970’s

This is also know as cost shock

125
Q

Wage/Price spiral

A

If the economy is in an employees market and your company is increasing your pay then your going to buy more and ultimately prices will go up

126
Q

Profit push inflation

A

“Im going to increase my prices because I can”

127
Q

List the 10 leading economic indicators

A

1) Average work week of production workers in manufacturing.
2) average initial weekly claims for state unemployment ins.
3) New orders for consumer goods and materials
4) vendor performance (companies recieving slower deliveries from suppliers)
5) New orders for capital goods
6) New building permits issued
7) Index of stock prices
8) money supply
9) Spread between rates on 10 year treasury
10) index of consumer expectations

128
Q

________ Policy attempts to stabilize the economy by changing the rate of gov. spending and taxes.

A

Fiscal

129
Q

Keynesian economic philosophy wants ________ ________ to fine tune te economy.

A

fiscal policy

130
Q

________ ________ wants fiscal policy to stimulate the supply side of the economy.

A

classical theory

131
Q

The fact that government spending ________ _____ private spending has a detreimental effect on fiscal policy. With the exception of National Defense and Parks.

A

Crowds Out

132
Q

define deficit

A

Total Expenditures are greater than total revenue. TE>TR

133
Q

define surplus

A

Total revenue is greater than total expenditures TR>TE

134
Q

Define debt

A

accumulate of deficits - debt is a static #

135
Q

Government finances ________ by selling bonds.

A

debt

136
Q

What makes money valuable and why is it efficient?

A

The goods and services we want make money valuable, not the other way around. It’s efficient because it is only portable and divisible.

137
Q

Who is the Fed

A

Federal Reserve System

138
Q

Who is the Fed’s chair?

A

Ben Bernenke

139
Q

List the 6 functions of the Fed

A

1) Control the money supply
2) Supervise and regulate banking institutions
3) serve as lenders of last resort
4) Hold bank reserves
5) Supply the economy with currency distributing it through the district.
6) Provide check clearing services.

140
Q

Currency in circulation + bank reserves =

A

monetary base

141
Q

List 3 things about government bonds

A

1) highly liquid
2) virtually risk free
3) They pay interest

142
Q

3 tools for controlling the money supply

A

1) Open market operations
2) Changing the reserve requirement
3) Changing the discount rate

143
Q

Explain open market operations

A

The Fed buying and selling U.S gov securities on the open market. most important
The Government issues the bonds and changes the rates because they need money.
A) If the Fed BUYS security bonds in the open market (banks). bank reserves increase, banks have excess reserves and more money is loaned out, money is created.

B) If the Fed sells the exact opposite happens (contracted)

144
Q

Explain changing the reserve requirement

A

lowering the reserve ratio will give banks more $ increasing the money supply, increasing the reserve ratio, will decrease the money supply.

145
Q

Changing the discount rate

A

A bank can borrow from the Fed. the interest rate charged is the federal funds rate.

146
Q

If the fed increases the money supply too quickly it will cause ________.

A

inflation

147
Q

Classical Economic Theory:

a. was introduced by Adam Smith in the book “An Introduction to Classical Economic Theory”
b. was the predominant theory in industrialized nations from the time of Adam Smith until the Great Depression of the 1930’s.
c. Both of the above
d. Neither of the above

A

b. was the predominant theory in industrialized nations from the time of Adam Smith until the Great Depression of the 1930’s.

148
Q

The ideal quantity of total output:

a. is called natural Real GDP
b. is the quantity that will yield full employment of labor
c. both of the above
d. neither of the above

A

c. both of the above

149
Q

According to classical theory:

a. a market economy is self-regulating
b. the focus should be on the long-run
c. both of the above
d. neither of the above

A

c. both of the above

150
Q

Unemployment is a major problem

a. for the overall economy
b. for the households suffering from unemployment
c. both of the above
d. neither of the above

A

c. both of the above

151
Q

According to classical theory:

a. inadequate demand cannot be a problem in a market economy
b. Say’s Law ensures that resource owners will have income equivalent to the value of their production
c. both of the above
d. neither of the above

A

a. inadequate demand cannot be a problem in a market economy

152
Q

The goal for the unemployment rate:

a. is to achieve full employment
b. is to achieve and unemployment rate of zero
c. both of the above
d. neither of the above

A

a. is to achieve full employment

153
Q

According to classical economic theory

a. interest rates are flexible
b. wages and prices are flexible
c. flexible interest rates, wages, and prices cause the economy to be self regulating
d. all of the above

A

d. all of the above

154
Q

True or False

The unemployment rate is the number of employed divided by the number of unemployed.

A

False

155
Q

True or False

Keynesian economics has been the prevalent economic philosophy since the Great Depression

A

True.

156
Q

________ is the increase in price level

A

Inflation

Macroeconomics (2 decks)

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