Macro final

Question 1

What are the four key macroeconomic markets?

Answer 1

Resources, goods and services, loanable funds, and foreign exchange.

Question 2

Define aggregate demand for goods and services.

Answer 2

The total demand for all goods and services in an economy at various price levels.

Question 3

Define aggregate supply of goods and services.

Answer 3

The total supply of all goods and services in an economy at various price levels.

Question 4

What determines equilibrium in the goods and services market?

Answer 4

The point where aggregate demand and aggregate supply intersect, determining the economy’s price level and output.

Question 5

Describe the resource market.

Answer 5

Where households supply resources (labor, capital, land) to firms.

Question 6

Describe the loanable funds market.

Answer 6

Where borrowers obtain funds from savers.

Question 7

Describe the foreign exchange market.

Answer 7

Where currencies are traded.

Question 8

What is long-run equilibrium?

Answer 8

When all four macroeconomic markets are in balance.

Question 9

Describe the slope of the aggregate demand curve and the reasons for it.

Answer 9

Slopes downward; reasons include the real-balance effect (higher prices reduce purchasing power), the interest rate effect (higher prices increase interest rates, reducing investment), and the net export effect (higher prices make domestic goods more expensive, reducing exports).

Question 10

What influences short-run aggregate supply?

Answer 10

Factors like resource prices, technology, and expectations.

Question 11

What determines long-run aggregate supply?

Answer 11

The economy’s potential output, which is the level of output the economy can sustain when all resources are fully employed.

Question 12

What determines interest rates?

Answer 12

The supply of savings and the demand for borrowing in the loanable funds market. Inflation can affect the real interest rate, which is the nominal interest rate minus the inflation rate.

Question 13

What determines exchange rates?

Answer 13

The supply and demand for currencies in the foreign exchange market. Factors like interest rates, inflation rates, and income levels influence exchange rates.

Question 14

How are the four macroeconomic markets interconnected?

Answer 14

Changes in one market can have ripple effects in other markets. For example, interest rates in the loanable funds market affect investment decisions in the goods and services market, and changes in government spending impact the loanable funds market.

Question 15

Define anticipated vs. unanticipated changes.

Answer 15

Anticipated changes are expected by economic decision-makers, while unanticipated changes are unexpected.

Question 16

What is the AD-AS model?

Answer 16

A model that explains how aggregate demand and aggregate supply interact to determine an economy’s output and price level.

Question 17

Define economic fluctuations.

Answer 17

Short-term variations in output, employment, and prices.

Question 18

Define recessions and booms.

Answer 18

Recessions are periods of economic contraction, characterized by declining output and rising unemployment, and booms are periods of economic expansion, with rising output and falling unemployment.

Question 19

What factors shift aggregate demand?

Answer 19

Changes in consumption (e.g., due to changes in consumer confidence), investment (e.g., due to changes in interest rates), government spending, and net exports.

Question 20

What factors shift aggregate supply?

Answer 20

Changes in resource prices (e.g., oil prices), technology, expectations, and changes in institutions.

Question 21

What are the effects of unanticipated changes?

Answer 21

They can cause short-run deviations from long-run equilibrium, leading to fluctuations in output and employment. Unanticipated increases in AD can lead to short-run increases in output and prices, while unanticipated decreases in AD can lead to recessions.

Question 22

What influences the price level, and what do changes in the price level reflect?

Answer 22

The interaction of AD and AS; changes in the price level reflect inflation. Rapid and unexpected money growth is a major cause of inflation.

Question 23

How do shifts in AD and AS affect output and prices?

Answer 23

For example, an increase in AD leads to higher output and prices in the short run, while an increase in AS leads to higher output and lower prices.

Question 24

How does the economy self-adjust to long-run equilibrium?

Answer 24

Over time as prices and wages respond to imbalances. For example, if AD increases unexpectedly, leading to higher prices, resource prices will eventually rise, shifting SRAS back to long-run equilibrium.

Question 25

Define Keynesian economics.

Answer 25

An economic theory that emphasizes the role of government spending and taxation in influencing macroeconomic activity.

Question 26

Define fiscal policy.

Answer 26

The use of government spending and taxation to stabilize the economy.

Question 27

Define the multiplier effect.

Answer 27

The idea that a change in government spending or taxation has a magnified impact on aggregate demand.

Question 28

Define automatic stabilizers.

Answer 28

Government spending and taxation policies that automatically respond to changes in economic activity (e.g., unemployment benefits, progressive income taxes).

Question 29

What historical event influenced the development of Keynesian economics?

Answer 29

The Great Depression, which challenged the classical view that the economy would self-correct.

Question 30

Define Keynesian equilibrium.

Answer 30

The level of output at which aggregate expenditure equals aggregate output; aggregate expenditure includes consumption, investment, government spending, and net exports; deviations from this equilibrium lead to changes in output.

Question 31

How can fiscal policy be used to combat recessions?

Answer 31

Expansionary fiscal policy: increased government spending or reduced taxes to increase aggregate demand.

Question 32

How can fiscal policy be used to combat inflation?

Answer 32

Contractionary fiscal policy: reduced government spending or increased taxes to decrease aggregate demand.

Question 33

What are the challenges of fiscal policy?

Answer 33

Timing lags (recognition lag: the time it takes to recognize the problem, administrative lag: the time it takes to enact policy changes, and impact lag: the time it takes for the policy to affect the economy) and political considerations.

Question 34

How do changes in government spending and taxation affect aggregate demand?

Answer 34

Directly.

Question 35

How does the multiplier effect influence the impact of fiscal policy?

Answer 35

It amplifies the initial impact of fiscal policy on aggregate demand and output; the size of the multiplier depends on the marginal propensity to consume (MPC).

Question 36

What is the equation for the multiplier?

Answer 36

The multiplier = 1 / (1 - MPC)

Question 37

Define money.

Answer 37

A medium of exchange, store of value, and unit of account.

Question 38

Define money supply.

Answer 38

The total amount of money in an economy.

Question 39

Define banking system.

Answer 39

The institutions that manage the money supply and provide financial services.

Question 40

Define fractional reserve banking.

Answer 40

A system in which banks hold only a fraction of their deposits as reserves and lend out the rest.

Question 41

What is the Federal Reserve System (the Fed)?

Answer 41

The central bank of the United States, responsible for monetary policy and regulating the banking system.

Question 42

What are the functions of money?

Answer 42

To facilitate transactions and economic activity, reducing transaction costs compared to barter.

Question 43

What are the components of M1 and M2?

Answer 43

M1 includes currency and checking accounts (the most liquid forms of money), while M2 includes M1 plus savings accounts, money market accounts, and other near-monies (less liquid but easily convertible to cash); credit cards are not part of the money supply (they represent debt).

Question 44

How do banks create money?

Answer 44

By lending out a portion of their deposits, with the amount of money created limited by the reserve requirement (the fraction of deposits banks must hold).

Question 45

How does the Fed control the money supply?

Answer 45

Through tools like reserve requirements (the percentage of deposits banks must hold), the discount rate (the interest rate at which banks borrow from the Fed), and open market operations (the buying and selling of government bonds – the most important tool).

Question 46

How do the Fed's actions influence the money supply?

Answer 46

Directly, by changing the amount of reserves available to banks.

Question 47

How do changes in the money supply affect interest rates and aggregate demand?

Answer 47

Changes in the money supply affect interest rates and, consequently, investment and aggregate demand. An increase in the money supply typically lowers interest rates and stimulates aggregate demand.

Question 48

What role do banks play in the money creation process?

Answer 48

Banks' lending activities are crucial; bank runs (when many depositors try to withdraw their money at once) can threaten the stability of the banking system.

Question 49

What is the equation for the deposit multiplier?

Answer 49

The deposit multiplier = 1 / reserve requirement

Question 50

Define monetary policy.

Answer 50

The actions taken by the central bank (the Fed) to manage the money supply and interest rates to influence macroeconomic conditions (inflation, unemployment, economic growth).

Question 51

Define the demand and supply of money.

Answer 51

The interaction of the demand for holding money (for transactions, precautionary, and speculative purposes) and the supply of money (determined by the Fed), which determines the nominal interest rate.

Question 52

Define the quantity theory of money.

Answer 52

A theory that emphasizes the relationship between the money supply and the price level, suggesting that in the long run, changes in the money supply primarily affect the price level.

Question 53

Define inflation.

Answer 53

A general increase in the price level.

Question 54

What are the tools of monetary policy?

Answer 54

Open market operations (the buying and selling of government bonds), the discount rate (the interest rate at which banks borrow from the Fed), and reserve requirements (the percentage of deposits banks must hold); open market operations are the most frequently used.

Question 55

How does monetary policy affect the economy?

Answer 55

Through its impact on interest rates, investment, and aggregate demand; expansionary policy lowers interest rates and stimulates the economy (increases AD), while contractionary policy raises interest rates and slows the economy (decreases AD).

Question 56

What is the long-run effect of changes in the money supply?

Answer 56

Primarily affect the price level (inflation); the quantity theory of money suggests a direct and proportional relationship between money supply growth and inflation in the long run.

Question 57

What are the challenges of monetary policy?

Answer 57

Time lags (similar to fiscal policy lags) and uncertainty about the effects of policy actions.

Question 58

How does monetary policy influence interest rates, investment, consumption, and aggregate demand?

Answer 58

Monetary policy influences interest rates, which affect the cost of borrowing for investment and consumption; lower interest rates encourage more spending, increasing aggregate demand.

Question 59

What determines the equilibrium interest rate?

Answer 59

The demand for and supply of money in the money market. Factors affecting money demand include income, price level, and expectations.

Question 60

What is the equation for the quantity theory of money?

Answer 60

MV = PY (where M is the money supply, V is the velocity of money (the rate at which money changes hands), P is the price level, and Y is real output)

Question 61

Define Keynesian economics (in the context of this topic).

Answer 61

Advocates for government intervention to stabilize the economy, particularly during recessions, focusing on managing aggregate demand.

Question 62

Define Hayekian economics (in the context of this topic).

Answer 62

Emphasizes the importance of free markets and limited government intervention, arguing that government intervention can distort market signals (like prices) and lead to inefficiencies.

Question 63

What is the central debate in this topic?

Answer 63

The role of government in the economy: the extent to which the government should intervene in economic activity.

Question 64

What are Keynes's arguments for government spending during recessions?

Answer 64

Based on the idea that aggregate demand can be insufficient to achieve full employment, Keynes argued that government spending could stimulate demand and pull the economy out of a recession.

Question 65

What are Hayek's arguments against government planning?

Answer 65

Emphasizes the importance of prices as signals that convey information about scarcity and value. Hayek argued that central planners cannot possess the dispersed knowledge necessary to allocate resources efficiently, leading to misallocation and economic problems.

Question 66

What is the debate over fiscal and monetary policy between Keynesians and Hayekians?

Answer 66

Keynesians favor active interventionist fiscal and monetary policies to manage aggregate demand, while Hayekians advocate for rules-based policies and limited discretionary intervention, emphasizing the importance of price stability.

Question 67

What are the differing views of Keynesians and Hayekians on the causes of and solutions to economic crises?

Answer 67

Keynesians often attribute crises to insufficient aggregate demand and advocate for government stimulus, while Hayekians point to distortions caused by government policies (like excessive credit expansion) and advocate for allowing market forces to correct imbalances.

Question 68

What is the main interaction discussed in this topic?

Answer 68

The contrasting views of Keynes and Hayek on how the macroeconomy works, the causes of economic fluctuations, and the effectiveness and desirability of government policies.