Questions

Question 1

When should the economy contract?

Answer 1

When real GDP is above potential GDP and price level is rising.

Question 2

When should the economy expand?

Answer 2

When real GDP is below potential real GDP.

Question 3

What does contracting cause?

Answer 3

Lower price level and lower output, leftward shift of AD

Question 4

What are the Fed’s monetary policy goals?

Answer 4

1. Price stability
2. High employment
3. Stability of financial markets and institutions
4. Economic growth

Question 5

What are the Fed’s monetary policy targets?

Answer 5

Money supply and interest rates

Question 6

Why does the Fed buy treasury securities?

Answer 6

To increase money supply
(Selling securities decreases money supply)

Question 7

What causes a shift in the money demand curve?

Answer 7

Changes in variables other than interest rates cause MD curve to shift:
- Change in price level
- Change in real GDP
- Change in technology

Question 8

What causes a rightward shift in the money supply curve?

Answer 8

• Purchasing treasury securities
• Decrease in required reserve ratio

Question 9

What causes a leftward shift in the money supply curve?

Answer 9

• Selling treasury securities
• Increase in required reserve ratio

Question 10

How are interest rates correlated to money demanded?

Answer 10

Inversely correlated:
A decrease in the money supply will increase interest rates, and vice versa

Question 11

How can an Aggregate Supply Curve shift along its curve?

Answer 11

If the Y-axis is changed (normally price level)

Question 12

What affects the level of investment?

Answer 12

1. Expectations of future profitability
2. Interest rate
3. Taxes
4. Cash flow

Question 13

deposits over required reserve ratio (decimal form)

Answer 13

Increase in the banking sector

Question 14

What are the variables that shift the SRAS curve?

Answer 14

Labor/Capital
Technology (aka Productivity)
Expected Future Prices
Previous expectations
Supply Shocks

Question 15

What is the Expansionary policy

Answer 15

1. FOMC orders expansion policy
2. Money supply increases, interest rates decrease
3. Investment, consumption, net exports increase
4. AD curve shifts to the right
5. Real GDP and the price level rise

Question 16

What is the Contractionary policy

Answer 16

1. FOMC orders a contractionary policy
2. The money supply decreases, interest rates rise
3. Investment, consumption, net exports decrease
4. AD curve shifts to the left
5. Real GDP and price level fall

Question 17

What are the pro-growth policies

Answer 17

1. Enhancing property rights and the rule of law
2. Improving health and education
3. Policies that promote technological change
4. policies that promote savings and investment

Question 18

What are the five determinants of consumption?

Answer 18

1. Current disposable income
2. Household wealth
3. Expected future income
4. The price level
5. The interest rate

Question 19

Two main factors of labor productivity

Answer 19

1. Quantity of capital per hour worked
2. Level of technology

Question 20

Why are high-income countries not catching the US

Answer 20

1. US labor markets are flexible
2. People enter workforce sooner and retire later in the US
3. Financial system is very efficient, ensures high liquidity, which makes people invest here

Question 21

Why is there a lack of growth in low-income countries

Answer 21

1. Failure to enforce laws
2. Wars/revolutions
3. Poor public health and education
4. Low rates of saving/investment

Question 22

We can tell it is a recession when our GDP is _____ our LRAS as our potential GDP.

Answer 22

below

Question 23

An increase in labor force or capital stock shifts the SRAS curve

Answer 23

Right, because more output can be produce at every price level

Question 24

An increase in productivity shifts the SRAS curve

Answer 24

Right, because cost of producing output fall

Question 25

An increase in expected future price levels shifts the SRAS curve

Answer 25

Left, because workers firms increase wages and prices

Question 26

An increase in interest rates causes the aggregate demand curve to shift to the ____, because...

Answer 26

left, because higher interest rates raise the cost to households and firms of borrowing, reducing consumption and investment spending.

Question 27

An increase in government purchases shifts the aggregate demand curve to the ____, because...

Answer 27

right, because government purchases are a component of aggregate demand.

Question 28

An increase in personal income taxes or business taxes shifts the aggregate demand curve to the ____, because...

Answer 28

left, because consumption spending falls when personal taxes rise, and investment falls when business taxes rise.

Question 29

An increase in workers and firms adjusting to having previously underestimated the price level shift the SRAS curve

Answer 29

Left, because workers and firms increase wages and prices

Question 30

An increase in the expected price of a natural resource shifts the SRAS curve

Answer 30

Left, because less of the resource is purchased by the government

Question 31

An increase in household's expectations of their future incomes shifts the aggregate demand curve _____, because...

Answer 31

right, because consumption spending increases.

Question 32

An increase in the firms’ expectations of the future profitability of investment spending shifts the aggregate demand curve ____, because...

Answer 32

right, because investment spending increases.

Question 33

An increase in the the growth rate of domestic GDP relative to the growth rate of foreign GDP shits the aggregate demand curve ____, because...

Answer 33

left, because imports will increase faster than exports, reducing net exports.

Question 34

An increase in the the exchange rate (the value of the dollar) relative to foreign currencies shifts the aggregate demand curve ____, because...

Answer 34

left, because imports will rise and exports will fall, reducing net exports.