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Questions and Answers of Economics

Why can't an economy with an MPC greater than one reach a stable equilibrium in the aggregate expenditure model?
Why are unplanned inventory changes the key to predicting future changes in real GDP in the aggregate expenditure model?
Why would an increase in planned investment increase real GDP, but an unplanned increase in inventory investment decrease real GDP, in the aggregate expenditure model?
Why are planned and unplanned investment unlikely to both increase over the same period of time?
Why do the aggregate expenditure function and the aggregate demand curve both shift upward at the same time?
Evaluate the following statement: The Keynesian assumption of wage and price rigidity best corresponds to the steepest portion of the aggregate supply curve where factories are operating below
Visit the Economy at a Glance page at the Bureau of Economic Analysis, www.bea.gov/bea/glance.htm. Locate information about recent changes in inventory levels as well as the ratio of inventory to
True or False:1. In the aggregate expenditure model, when total spending increases, firms increase their output and hire more workers.2. When we assume the price level is constant, we do not have to
True or False:1. If your disposable income increased by $10,000 and as a result, your consumption spending increased by $8,000, you would have a marginal propensity to consume of 0.8.2. The higher is
True or False:1. In the aggregate expenditure model, when inventories fall below desired levels, output will rise.2. When output is less than aggregate expenditures, output will fall.3. The greater
True or False:1. The expenditure multiplier applies to any increase in autonomous expenditures.2. An increase of $10 million in autonomous consumption has the same effect on output as a $10 million
True or False:1. The aggregate expenditure model is best seen as a model of aggregate demand, and not a complete model of the economy.2. The components of aggregate demand depend on the price
Multiple Choice Questions:1. Traditionally, government has used _____________ to influence _____________.a. Taxing and spending; the demand side of the economy.b. Spending; the supply side of the
Multiple Choice Questions:1. If the government wanted to offset the effect of a boom in consumer and investor confidence on AD, it might?a. Decrease government purchases.b. Decrease taxes.c. Increase
Multiple Choice Questions:1. The federal government buys $20 million worth of computers from Dell. If the MPC is 0.60, what will be the impact on aggregate demand, other things being equal?a.
Multiple Choice Questions:1. According to the crowding-out effect, if the federal government borrows to finance deficit spending,a. The demand for loanable funds will decrease, driving interest rates
Multiple Choice Questions:1. After briefly running federal surpluses, in 2001 the budget returned to deficits because of?a. A recession.b. The war on terrorism.c. A tax cut.d. All of the above.2.
Why are federal government actions that increase deficits considered expansionary fiscal policy and those that decrease deficits considered contractionary fiscal policy?
Are increases in both government purchases and net taxes at the same time expansionary or contractionary? Would both changes together increase or decrease the federal government deficit?
Answer the following questions:a. If the current budget shows a surplus, what would an increase in government purchases do to it?b. What would that increase in government purchases do to aggregate
Answer the following questions:a. If the current budget shows a deficit, what would an increase in taxes do to it?b. What would that increase in taxes do to aggregate demand?c. When would an increase
Use the accompanying diagram to answer questions a-f.a. At what short-run equilibrium point might expansionary fiscal policy make sense to help stabilize the economy?b. What would be the result of
What is a recessionary gap? What would be the appropriate fiscal policy to combat or offset one? What is an inflationary gap? What would be the appropriate fiscal policy to combat or offset one?
What would the multiplier be if the marginal propensity to consume wasa. 1/3?b. 1/2?c. 3/4?
If government purchases increased by $20 billion, other things being equal, what would be the resulting change in aggregate demand, and how much of that change would be a change in consumption, if
Could the multiplier be written as 1 divided by the marginal propensity to save (MPS)?
Why does it take a larger reduction in taxes to create the same increase in AD as a given increase in government purchases?
Explain why an equal dollar increase in both government purchases and net taxes would increase aggregate demand.
Use the accompanying diagram to answer questions a and b.a. Starting from the initial equilibrium in the diagram, illustrate the case of a supply-side fiscal policy that left the price level
Why can a decrease in tax rates increase AS as well as AD, whereas an increase in government purchases will increase AD but not AS?
How do automatic stabilizers affect budget deficits and surpluses? How would automatic stabilizers be affected by an annually balanced budget rule?
Why do automatic stabilizers minimize the lag problem with fiscal policy?
Answer the following questions:a. Describe the crowding-out effect of an increase in government purchases.b. Why does the magnitude of the crowding-out effect depend on how responsive interest rates
Illustrate diagrammatically the short-run and long-run effects of a government budget deficit. Describe the mechanism that makes these effects different.
True or False:1. The government can use fiscal policy to stimulate the economy out of a recession or to try to bring inflation under control.2. When tax revenues are greater than government spending,
True or False:1. Starting from an initial recession equilibrium, expansionary fiscal policy could potentially increase employment toRGDPNR.2. Starting from an initial recession equilibrium, a
True or False:1. The multiplier would be smaller if the marginal propensity to consume were smaller.2. If the MPC were equal to two-thirds, the multiplier would be equal to 3.3. The multiplier may be
True or False:1. Savings and money spent on imported goods will each reduce the size of the multiplier because each reduces the fraction of a given increase in income that will go to additional
True or False:1. Unemployment compensation and public assistance payments act as automatic stabilizers, stimulating aggregate demand during recessions and reducing aggregate demand during booms.2.
True or False:1. Expansionary U.S. fiscal policy will tend to move funds out of the United States.2. Expansionary fiscal policy will tend to be partly crowded out by a reduction in net exports.3.
True or False:1. If the U.S. government has a large current federal debt, it must be running a current year deficit.2. One way the federal government can finance deficits is to print money.3. When
Multiple Choice Questions:1. Money's principal role is to serve as?a. A standard for credit transactions.b. A medium of exchange.c. A standard for making bank loans.d. A standard for the real bills
Multiple Choice Questions:1. An increase in demand deposits combined with an equal decrease in currency in circulation would?a. Have no direct effect on M1 or M2.b. Increase both M1 and M2.c.
Explain the difficulties that an economics professor might face in purchasing a new car under a barter system.
Why do people who live in countries experiencing rapid inflation often prefer to hold American dollars rather than their own country's currency? Explain.
An alternative version of Gresham's Law is that "Bad money drives out good money." Why is it true that, in choosing between different currencies to transact in, good money drives out bad money?
Which one of each of the following pairs of assets is most liquid?a. Microsoft stock or a traveler's checkb. A 30-year bond or a six-month Treasury billc. A certificate of deposit or a demand
Indicate whether each of the following belongs on the asset or liability side of a bank's balance sheet:a. Loansb. Holdings of government securitiesc. Demand depositsd. Vault cashe. Deposits at the
Why do you think asking whether money is an asset or a liability is a trick question in economics?
Why have ATMs and online banking made savings accounts more liquid than they used to be?
Why would the increasing liquidity of savings accounts make some monetary economists track the size of M1 plus savings account balances (called MZM) over time?
What would each of the following changes do to M1 andM2?
Given that the Fed currently imposes reserve requirements on checking deposits, but not on savings deposits, why would banks prefer to hold deposits as savings accounts rather than checking accounts,
If the Fed paid interest on bank reserves at the Fed, would banks still want to avoid holding excess reserves?
What would the money multiplier be if the required reserve ratio were5 percent? _____________10 percent? _____________20 percent? _____________25 percent? _____________50 percent? _____________
Assume there was a new $100,000 deposit into a checking account at a bank.a. What would be the resulting excess reserves created by that deposit if banks faced a reserve requirement of10 percent?
If the required reserve ratio is 10 percent, calculate the potential change in demand deposits under the following circumstances:a. You take $5,000 from under your mattress and deposit it in your
Calculate the magnitude of the money multiplier if banks were to hold 100 percent of deposits in reserve. Would banks be able to create money in such a case? Explain.
Answer questions a and b.a. If a bank had reserves of $30,000 and demand deposits of $200,000 (and no other deposits), how much could it lend out if it faced a required reserve ratio of10 percent?
True or False:1. Money is anything that is generally accepted in exchange for goods or services.2. In the United States, the Federal Reserve System issues paper currency.3. Checks provide the basis
True or False:1. Economists are not completely in agreement on what constitutes money for all purposes.2. People use nontransaction accounts primarily because they generally pay higher interest rates
True or False:1. When the United States was on an internal gold standard, the dollar was defined as equivalent in value to a certain amount of gold.2. When two forms of money are available, people
True or False:1. Financial institutions can create money by making loans.2. If you go into a bank and borrow $1,000, the bank probably will simply add $1,000 to your checking account at the bank, but
True or False:1. Banks earn no interest on reserves, whether kept as cash on hand or in accounts with the Federal Reserve.2. If a bank lends out its excess reserves of $90,000, at the time the loan
Multiple Choice Questions:1. The most important role of the Federal Reserve System isa. Raising or lowering taxes.b. Regulating the supply of money.c. Increasing or reducing government spending.d.
Multiple Choice Questions:1. If the Fed sells a U.S. government bond from a member of the public,a. The banking system has more reserves, and the money supply tends to grow.b. The banking system has
Multiple Choice Questions:1. What will happen to the demand for money if real GDP rises?a. It will decrease.b. It will be unchanged.c. It will increase.d. It depends on what happens to interest
Multiple Choice Questions:1. In a recession, appropriate monetary policy would tend to be for the Fed to _______________ bonds to _______________AD.a. Buy; increase.b. Buy; decrease.c. Sell;
Multiple Choice Questions:1. The P in the equation of exchange represents thea. Profit earned in the economy.b. Average level of prices of final goods and services in the economy.c. Marginal level of
Why is the private ownership of the Federal Reserve System essentially meaningless?
How is central bank independence related to average inflation rates across countries? How is the Fed insulated from executive branch pressures?
How does an open market purchase by the Fed increase bank reserves? How does it increase the money supply?
Why would the Fed seldom do an open market purchase of government securities at the same time that it raises the discount rate or the required reserve ratio?
Why is a reduction in the required reserve ratio such a powerful monetary policy tool? Why is it so seldom used?
Why would a reduction in the required reserve ratio not be a powerful tool when banks choose to hold substantial quantities of excess reserves?
In which direction would the money supply change if?a. The Fed raised the reserve requirement?b. The Fed conducted an open market sale of government bonds?c. The Fed raised the discount rate?d. The
Why would the transactions motive and the precautionary motive for holding money both tend to vary directly with the price level? Why would the quantity of money people desire to hold for both
In the move from a below equilibrium interest rate to the equilibrium interest rate, what happens in the bond market and the loan market? In the move from an above equilibrium interest rate to the
How does a higher price level affect the money market? How does it affect aggregate demand?
Why can't the Fed target both the money supply and the interest rate at the same time?
Answer questions a-e.a. What is the equation of exchange?b. In the equation of exchange, if V doubled, what would happen to nominal GDP as a result?c. In the equation of exchange, if V doubled and Q
Why have ATMs and online banking made savings accounts more liquid than they used to be? Discuss.
Given that the Fed currently imposes reserve requirements on checking deposits, but not on savings deposits, why would banks prefer to hold deposits as savings accounts rather than checking accounts,
True or False:1. A central bank has only one function-controlling the supply of money in a country.2. The central bank typically serves as the major bank for the central government.3. The central
True or False:1. The Fed controls the supply of money, even though privately owned commercial banks actually create and destroy money by making loans.2. Open market purchases or sales of bonds by the
True or False:1. If the Fed raises the discount rate, the money supply will tend to increase.2. The discount rate is a relatively unimportant monetary policy tool, mainly because member banks do
True or False:1. The demand for money, particularly for transactions purposes, is highly dependent on income levels because the transaction volume varies directly with income.2. At lower interest
True or False:1. An expansionary policy can be thought of as an increase in the money supply or an increase in the interest rate.2. A change in the nominal interest rate tends to change the real
True or False:1. The magnitude of velocity does not depend on the definition of money that is used.2. If the money supply increases and the velocity of money does not change, the result will be
True or False:1. The length and variability of the impact lag before the effects of monetary policy on output and employment are felt longer and are more variable than for fiscal policy.2. The Fed
True or False:1. A macroeconomic problem arises if the federal government's fiscal decision makers differ with the Fed's monetary decision makers on policy objectives or targets.2. The Fed
Multiple Choice Questions:1. If output prices rise faster than money wages, the likely result will be that?a. Real wages will fall, as will the unemployment rate.b. Real wages will fall, and the
Multiple Choice Questions:1. Most economists today believe that the Phillips curve isa. Downward sloping in the short run but vertical in the long run.b. Vertical in the short run but downward
Multiple Choice Questions:1. As the economy moves up and to the right along a short-run aggregate supply curve, ita. Moves up and to the right along the short-run Phillips curve.b. Moves up and to
Multiple Choice Questions:1. If expectations are rational?a. A predictable change in inflation can make the expected inflation rate deviate from the actual inflation rate.b. Unemployment can exceed
Multiple Choice Questions:1. If an increase in the growth rate of AD leads to an increase in real GDP in the short run,a. The increase in AD could have been correctly anticipated.b. The increase in
Multiple Choice Questions:1. Under rational expectations, a fully anticipated decrease in the inflation rate from 6 percent to 2 percent will?a. Lower unemployment at first, but then unemployment
Use the following diagrams anda. Show what would happen in both diagrams if government purchases increase in the short run.b. Show what would happen in both diagrams if the growth rate of the money
Use the diagram to answer the following questions:a. At which point might expansionary government policy help stabilize the economy?b. At which point might contractionary government policy help
Use the diagram from problem 2 anda. Indicate which movement would correspond to an unanticipated expansionary government policy in the short run.b. Indicate which movement would correspond to an

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