Que 1.

Explain each of the following.

1. During a period of contractionary monetary policy,

a)the price level is increased, which leads to an increase in the money supply.

b)the price level is decreased ,which leads to a decrease in the money supply.

c)the rate of growth of the money supply is increased, leading to an increase in the price level.

d)the rate of growth of the money supply is reduced, leading to a decrease in the price level.

2. An increase in the money supply will affect aggregate demand

a) only if the increase in the money supply causes interest rates to rise.

b) only if the increase in the money supply causes people to buy less goods and services.

c )only if the increase in the money supply causes people to increase their saving.3. It has been observed that a change in monetary policy in the United States

a)impacts net exports.

b)has little or no effect on foreign markets.

c)leads to corresponding changes in other countries.

d)has only short run influences.

4.Suppose the Fed increases the money supply. As a result of this, people go out and spend more money on consumer goods, increasing aggregate spending. This is known as a(n)

a)direct effect of monetary policy.

b)indirect effect of monetary policy.

c)direct effect of fiscal policy.

d)indirect effect of fiscal policy.

5.

What happens when the Fed aims to change interest rates?

a)It asks Congress to legislate new interest rates.

b)It buys or sells government bonds on the open market to achieve the desired rate.

c)It buys or sells dollars on the foreign exchange market to achieve the desired rate.

d)It announces a new discount interest rate.

6.An expansionary monetary policy results in lower interest rates, which in turn

a)increases foreign demand for U.S. financial instruments, raising the international price of the dollar and reducing net exports.

b)increases the foreign demand for U.S. financial instruments, lowering the international price of the dollar and decreasing net exports.

c)reduces the international price of the dollar and increases net exports.

d)reduces the foreign demand for U.S. financial instruments and reduce net exports.

7.One result of a contractionary monetary policy would be

a)a decline in the price level.

b) an increase in the money supply.

c) an increase in business investment.

d)

lower interest rates.

8.According to the interest-rate-based transmission mechanism for monetary policy, an increase in the money supply will cause the

a) interest rate to fall, causing planned real investment spending to rise and leading to a decrease in aggregate demand.

b) interest rate to rise, causing planned real investment spending to rise and leading to a decrease in aggregate demand.

c) interest rate to fall, causing planned real investment spending to rise and leading to an increase in aggregate demand.

d) interest rate to fall, causing planned real investment spending to fall and leading to an increase in aggregate demand.

9.

If the economy is underutilizing its economic resources, the Fed should

a)discourage investment spending.

b)expand the money supply to increase aggregate demand.

c)decrease aggregate supply.

d)contract the money supply to decrease aggregate demand.

Que 2.

1. (4 pts.) Briefly define each of the components of Y = C + I + G + NX and give an example for each category of expenditure:

(3 pts.) Do economists prefer Nominal GDP or Real GDP as the best measure economic activity? Why?

(3 pts.) Your bank pays you 5% on your savings and the inflation rate is 2%. What is your real interest rate? Does this represent an increase or decrease in the purchasing power of your savings?

(4 pts.) Why is productivity important for determining a country's average income per person?

(3 pts.) What is the primary function the financial system serves in our economy?

(4 pts.) Identify each of the following acts as either saving (S) or investment (I):

a. b.

c. d.

7. (4 pts.)

_____ John uses some of his income to buy government bonds.

_____ google.com uses the funds it generated by selling new shares of stock to build a research and development center.

_____ Jane uses some of her income to buy stock in a major corporation.

_____ Walmart uses the funds it raised by issuing bonds to build a new regional warehouse.

The equation below represents National Saving in a closed economy: S = (Y-C-T) + (T-G)

Define each of the variables; also, give the names of the terms for the two expressions in brackets.

8. (5 pts.) The GDP for a country was $18 trillion in 2020; National Saving was $2.2 trillion; government tax revenue was $3.2 trillion; and Public Saving was $ 0.5 trillion. What was the amount of Private Saving in 2020? What was the amount of government expenditures (G)?

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?