Answer all the questions clearly.

9. (5 pts.) Show on the axes below how the presence of trade unions can impact the structural rate of unemployment in a country:

Wage

(3 pts.) Considering the process of fractional reserve banking, which reserve ratio would allow the smallest ultimate impact on the money supply, 17% or 6%? Why?

(4 pts.) An initial $3 billion increase in the money supply by the Federal Reserve resulted in an overall increase of $18 billion in the money supply.

What is the size of money multiplier?

What is the reserve ratio %?

Quantity of Labor

12.

(3 pts.) What is the method the Fed uses most frequently to change the money supply?

(4 pts.) Describe how this process alters the money supply:

13.

a. (3 pts.) Define each of the variables in the following equation: M V = P Y

b. (4 pts.) Applying the Quantity Equation and assuming that velocity is constant, what will be the rate of inflation if real GDP grows 4.5% in a given year and the money supply only increases 2.2%?

14. The figure below shows the market for loanable funds (in an open economy), net capital outflow and the market for foreign currency exchange.

(5 pts) Show how the graphs would be affected if a new tax increase on dividend income from stocks incentivizes people to save less.

(3 pts) How would this affect the real interest rate?

(3 pts) How would it affect the real exchange rate?

Real Interest Rate

Real Interest Rate

Quantity of Loanable Funds

Quantity

Real Exchange Rate

Quantity of Dollars

15. The figure below shows the market for loanable funds (in an open economy), net capital outflow and the market for foreign currency exchange.

(5 pts) Show how the graphs would be affected if China experienced an unexpectedly large crop of soybean one year and so decided to import less soybean from the United States (ie. US exports of soybean decreased significantly).

(3 pts) How would this affect the real interest rate?

(3 pts) How would it affect the real exchange rate?

Real Interest Rate

Real Interest Rate

Quantity of Loanable Funds

Quantity

Real Exchange Rate

Quantity of Dollars

16.

a. (3 pts.) Draw the Model of Aggregate Demand and Aggregate Supply you would use for

analyzing short and long-run fluctuations in the U.S. economy.

Price

(3 pts.) Use the graph to show the impact of the following event:

A large drop in the stock market causes businesses to become more pessimistic and reduce their level of investment.

(4 pts.) What happens to the price level in the short-run and long-run? (describe what happens in both cases)

(4 pts.) What happens to output in the short-run and long-run? (describe what happens in both cases)

Income, Output (Y)

e. (4 pts.) If the government wished to avoid the negative effects of a recession following the fall in investment, what could it do? How would this impact the AD-AS model? (just describe in words, there is no need to illustrate on the graph)

17. (4 pts.) If the initial impact on Aggregate Demand of a new airport security program amounts to $42 billion and the Marginal Propensity to Consume is 0.75, what would be the total impact on Aggregate Demand if a crowding out effect of $14 billion also occurs?

18.

a. (4 pts.) How does the Theory of Liquidity Preference explain the downward slope of the

AD curve?

b. (4 pts.) How does the Theory of Liquidity Preference explain why the AD curve shifts inward when the Fed decreases the money supply (M)?

19.

a. (3 pts.) Draw a graph showing the long-run and short-run Phillips curves (draw both

curves on the same axes below).

Inflation Rate

(3 pts.) Show a point on the short-run Phillips curve and indicate what would happen to that point in the short run if the Federal Government significantly increased its expenditures in an effort to stimulate the economy.

(4 pts.) If a newly invented mathematical algorithm was widely rolled out which can match unemployed people to their ideal job much more quickly, would this shift the long or short run Phillips curve? In which direction would the curve shift? (just describe, there is no need to show on the graph)

(3 pts.) How would the situation described in question 19c above affect the long-run aggregate supply curve?

Unemployment Rate

(4 pts.) If oil prices fell causing a positive supply shock, would this shift the long or short run Phillips curve? In which direction would the curve shift? (just describe, there is no need to show on the graph)

(4 pts.) In the AS-AD Model, would the situation described in question 19e above shift the SRAS, the LRAS or the AD curve? In which direct would the curve shift?

(3 pts.) Would the situation described in question 19e above cause 'stagflation'?

20. (5 pts.) Provide two examples of events that could shift the LRAS curve. Say in which direction the curve would shift, and also how the event would affect the long-run Phillips curve.

21. (5 pts.) What are three key lessons you will remember from taking ECON 204 Principles of Macroeconomics?

Two.

The equation of exchange is an ________ while the quantity theory of money is a theory that ________.

Question 1 options:

A) accounting theory; assumes the price level is constant

B) accounting theory; economists use to explain changes in real GDP

C) accounting identity; assumes the money supply is constant

D) accounting identity; assumes velocity is held constant

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Question 2 (5 points)

Question 2 Unsaved

Suppose the actual federal funds rate is equal to the rate implied by a particular inflation goal. In this situation, the Taylor rule implies that

Question 2 options:

A) monetary policy is contractionary.

B) monetary policy will tend to produce that inflation rate.

C) fiscal policy will result in a balanced budget.

D) monetary policy is expansionary.

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Question 3 (5 points)

Question 3 Unsaved

The demand for money curve is drawn

Question 3 options:

A) holding several things constant, including GDP and interest rates.

B) with interest rates on the vertical axis and the curve sloping down since lower interest rates mean the "price" of holding money has fallen.

C) with interest rates on the horizontal axis, and the curve sloping up since the "price" of holding money varies directly with the interest rate.

D) holding several things constant, including the price level and interest rates.

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Question 4 (5 points)

Question 4 Unsaved

If the Fed has announced that it plans on increasing the interest rate it will

Question 4 options:

A) engage in expansionary open market operations, thereby increasing the money supply.

B) engage in contractionary open market operations, thereby increasing the money supply.

C) engage in contractionary open market operations, thereby decreasing the money supply.

D) engage in expansionary open market operations, thereby decreasing the money supply.

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Question 5 (5 points)

Question 5 Unsaved

Suppose the economy currently has an inflationary gap. The Fed engages in contractionary monetary policy. The impact of contractionary monetary policy will be to

Question 5 options:

A) increase short-run aggregate supply, decrease in prices and decrease in real GDP.

B) increase short-run aggregate supply, decrease prices and increase real GDP.

C) decrease aggregate demand, decrease prices, and increase real GDP.

D) decrease aggregate demand, decrease prices, and decrease real GDP.

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Question 6 (5 points)

Question 6 Unsaved

Refer to the above figure. Suppose point A is the original equilibrium. If there is an increase in the money supply, the new long-run equilibrium is given by point

Question 6 options:

A) D.

B) A.

C) B.

D) C.

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Question 7 (5 points)

Question 7 Unsaved

Which of the following will NOT occur in the short run when the money supply decreases?

Question 7 options:

A) The price level decreases.

B) The interest rate will increase.

C) Aggregate supply decreases.

D) People will buy fewer goods and services.

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Question 8 (5 points)

Question 8 Unsaved

Holding money as a medium of exchange to make payments is

Question 8 options:

A) the capital demand for money.

B) the precautionary demand for money.

C) the transactions demand for money.

D) the asset demand for money.

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Question 9 (5 points)

Question 9 Unsaved

A key causal link in the interest-rate-based transmission mechanism for monetary policy is from

Question 9 options:

A) real GDP to investment.

B) investment to the interest rate.

C) a monetary policy action to excess reserves.

D) the money supply to excess reserves.

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Question 10 (5 points)

Question 10 Unsaved

The number of times per year that a dollar is spent on final goods and services defines

Question 10 options:

A) the price index.

B) GDP.

C) the income velocity of money.

D) the money supply.

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Question 11 (5 points)

Question 11 Unsaved

Suppose that the Fed has decided to utilize the Taylor rule to implement monetary policy. If the actual federal funds rate target is presently below the level specified by the Taylor rule and has been lower then this level for several weeks, then this would be a signal that

Question 11 options:

A) monetary policy is very expansionary.

B) monetary policy is very contractionary.

C) the Fed should switch to targeting the money supply instead of the federal funds rate.

D) the Fed should halt efforts to target the money supply.

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Question 12 (5 points)

Question 12 Unsaved

The interest-rate-based monetary policy transmission mechanism emphasizes the

Question 12 options:

A) indirect effect of a change in the money supply that operates via a change in total planned expenditures generated by a change in the interest rate.

B) direct effect of a change in the money supply that operates via a change in total planned expenditures generated by a change in the interest rate.

C) direct effect of a change in the money supply that operates via a change in total planned production generated by a change in the price level.

D) indirect effect of a change in the money supply that operates via a change in total planned production generated by a change in the price level.

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Question 13 (5 points)

Question 13 Unsaved

Suppose the Fed increases the money supply. As a result of this, people deposit excess funds into their bank accounts, causing banks to have excess reserves. As a result, the banks lower the interest rates that they charge on loans, and investment rises, causing an increase in aggregate spending. This is known as a(n)

Question 13 options:

A) direct effect of fiscal policy.

B) indirect effect of monetary policy.

C) direct effect of monetary policy.

D) indirect effect of fiscal policy.

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Question 14 (5 points)

Question 14 Unsaved

Which of the following is a TRUE statement about the relationship between the price of bonds and the interest rate?

Question 14 options:

A) The prices of bonds are inversely related to the interest rate.

B) The prices of bonds are unrelated to the interest rate.

C) The prices of bonds increase when the interest rates rise.

D) The prices of bonds are directly related to the interest rate.

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Question 15 (5 points)

Question 15 Unsaved

Suppose the actual federal funds rate is above the rate implied by a particular inflation goal. In this situation, the Taylor rule implies that

Question 15 options:

A) monetary policy is expansionary.

B) monetary policy is contractionary.

C) monetary policy is Neither expansionary or contractionary.

D) fiscal policy is expansionary.

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Question 16 (5 points)

Question 16 Unsaved

Suppose the typical household holds $1,000 when the interest rate is 5 percent. When the interest rate rises to 6 percent, the typical household would most likely hold

Question 16 options:

A) less money because the opportunity cost of holding money is higher.

B) more money because the opportunity cost of holding money is higher.

C) more money because the opportunity cost of holding money is lower.

D) less money because the opportunity cost of holding money is lower.

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Question 17 (5 points)

Question 17 Unsaved

The transactions demand for money is the demand to hold money to

Question 17 options:

A) make regular, expected purchases.

B) purchase bonds when interest rates increase.

C) meet unplanned expenditures.

D) store one's wealth.

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Question 18 (5 points)

Question 18 Unsaved

Suppose there is an increase in the money supply, but that people's demand for money balances increases by a greater amount at the same time. The net effect would be

Question 18 options:

A) an increase in aggregate demand due to the increase in the money supply, but a decrease in aggregate supply due to the increase in the demand for money.

B) a lower price level in the long run.

C) lower interest rates, greater real GDP, and a higher price level as aggregate demand increases because of the indirect effect of the increase in the money supply.

D) no change in aggregate demand or aggregate supply.

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Question 19 (5 points)

Question 19 Unsaved

The Trading Desk's open market operations

Question 19 options:

A) occur throughout each day.

B) occur once a week.

C) are confined within a six-hour interval each weekday morning.

D) are confined within a one-hour interval each weekday morning.

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Question 20 (5 points)

Question 20 Unsaved

When the Fed purchases federal government bonds in the open market

Question 20 options:

A) there is no change in the money supply.

B) the money supply expands.

C) the demand for money expands.

D) the money supply contracts.