Eco 29 HW Questions – Flashcards
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According to the portfolio theories of money demand, what are the four factors that determine money demand?
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o Wealth o Expected return o Liquidity of other assets o Risk of other assets
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If velocity and aggregate output are reasonably constant, what happens to the price level when the money supply increases from $1 trillion to $4 trillion?
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o The price level quadruples.
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According to the quantity theory, changes in the:
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o Quantity of money lead to proportional changes in the price level.
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Why would a central bank be concerned about persistent, long-term budget deficits?
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It may increase inflation expectations, making it harder to keep inflation anchored at a low, stable level.
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If the government deficit is not financed by increased bond holdings by the public:
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The monetary base and the money supply will increase.
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What three motives for holding money did Keynes consider in his liquidity preference theory of the demand for real money balances?
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o Speculation motive o Precautionary motive o Transactions motive
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In Keynes's analysis of the precautionary demand for money, what will happen to money demand if people's incomes increase?
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The demand for money will increase because Keynes believed that people would require more money for more transactions in the future.
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The economy experiences a business cycle expansion
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The demand for money increases during expansions.
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Brokerage fees rise, making bond transactions more expensive
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The demand for money increases
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The stock market surges
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The demand for money increases
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What are the four components of planned expenditure?
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• Consumption expenditure, planned investment spending, government purchases, and net exports
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How and why do changes in the real interest rate affect planned investment spending?
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• When the real interest rate is very low, the cost of funds is very low and the return on many of the firm's planned investments will exceed it. As the real interest rate rises, the return on fewer and fewer planned invesments will exceed the cost of funds. Thus, planned investment spending falls, as the real interest rate rises
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If firms suddenly become more optimistic about the profitability of investment and planned investment spending rises by $100 billion, while consumers become more pessimistic and autonomous consumer spending falls by $100 billion, what happens to aggregate output?
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• Aggregate output remains unchanged
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Will aggregate output rise or fall if an increase in autonomous consumer expenditure is matched by an equal increase in taxes?
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• Aggregate output will rise.
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If the marginal propensity to consume is 0.8 how much would government spending have to rise to increase output by $2,000 billion?
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• Change in gov spending ? $400 billion
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How much will taxes need to decrease to increase output by $2,000 billion?
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• Change in taxes ? $500 billion
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If both taxes and government spending decrease by the same amount, explain whether the IS curve shifts
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• The IS curve shifts to the left.
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Describe how (if at all) the IS curve, MP curve, and AD curve are affected in the following situation: There is an increase in the current inflation rate.
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• There is a movement along the MP curve, which increases the real interest rate, a movement along the IS curve to lower output, and a movement along the AD curve, reducing output.
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" If f increases, then the Fed can keep output constant by reducing the real interest rate by the same amount as the increase in financial frictions." T/F
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• False. The Fed would need to reduce the real interest rate by a little bit less than the change in f to keep output constant.
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Which of the following factors will affect the slope of the aggregate demand curve?
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• d
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The difference between gross private domestic investment and fixed private investment represents
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• Inventory investment
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The aggregate demand curve slopes downward because a rise in inflation leads:
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• The monetary policy authorities to raise real interest rates
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The short-run aggregate supply curve slopes upward because an increase in output relative to potential output:
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• Creates tight labor and product markets that cause inflation to rise.
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What relationship does the aggregate supply curve describe?
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• It describes the relationship between the total quantity of output supplied and the inflation rate.
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The long-run aggregate supply curve is:
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• Vertical because changes in labor, capital ,and technology (not the inflation rate) change the output an economy can produce over the long run.
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Which of the following would cause the long-run aggregate supply curve to shift rightward?
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• An increase in available technology
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In what ways was the Volcker disinflation considered a success? What are the negative aspects of it?
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• The Volcker disinflation was successful in bringing inflation down with contractionary policies; however, these policies resulted in two recessions and a significant increase in unemployment.
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What factors lead to a decrease in both the unemployment rate and the inflation rate in the 1990s?
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• Improved demographic factors, such as an increase in the average age of the workforce. • An increased proliferation of computer technology.
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Which of the following best explains real business cycle theory?
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• The potential level of output changes due to the technology and other shocks, creating business cycles even though the economy is still producing at potential output.
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What basic relationship does the short-run Phillips curve describe?
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• It describes the negative relationship between unemployment and inflation.
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What trade-offs does this relationship seem to offer policymakers?
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• Policymakers can increase inflation to decrease unemployment.
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Okun's law describes the
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• Negative relationship between the unemployment gap and the output gap.
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Combining Okun's law with the Phillips curve helps derive the short-run aggregate supply curve in that:
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• The Phillips curve describes the short-run negative relationship between the unemployment rate and the inflation rate, while the short-run aggregate supply curve describes the positive relationship between output and inflation.
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A "conservative" central banker:
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• Has a strong aversion to inflation.
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"A decrease in short-term nominal interest rates necessarily implies a stance of monetary easing." T/F
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• False. Monetary policy easing should be associated with changes in real interest rates and not nominal rates.
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If nominal interest rates are high, the exchange rate is low, and asset prices are high. Then monetary policy is best described as:
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• Easy.
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Expansionary monetary policy increases stock prices and thus the net worth of firms. As net worth rises, adverse selection and moral hazard problems are reduced, and thus bank lending increases, which increases investment. This statement describes which of the following monetary transmission channels?
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• Balance sheet channel.
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IS curve
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output vs. real interest rates
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MP curve
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inflation vs. real interest rates
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AD curve
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inflation vs. output
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Phillips curve
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unemployment vs. inflation
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Okun's Law
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unemployment gap vs. output gap
