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104 Cards in this Set
- Front
- Back
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Which of the following refers to the minimum fraction of deposits banks are required by law to keep as reserves?
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The required reserve ratio.
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Reserves that banks hold over and above the legal requirement.
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Excess reserves
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Reserves that a bank is legally required to hold, based on its checking account deposits.
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Required reserves
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Deposits that a bank keeps as cash in its vault or on deposit with the Federal Reserve.
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Reserves
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A small, but very important, asset on a bank’s balance sheet is:
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reserves
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In the definition of the money supply, where do credit cards belong?
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None of them
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what things invest in very short-term bonds, such as U.S. Treasury bills.
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Money market mutual funds
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A broader definition of the money supply: It includes M1 plus savings account balances, small-denomination time deposits, balances in money market deposit accounts in banks, and noninstitutional money market fund shares.
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M2
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Saving account balances, small-denomination time deposits, and noninstitutional money market fund shares are a component of:
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M2
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The sum of currency in circulation, checking account balances in banks, and holdings of traveler’s checks equals:
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M1
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The narrowest definition of the money supply: The sum of currency in circulation, checking account deposits in banks, and holdings of traveler’s checks.
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M1
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What is fiat money?
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Money that is authorized by a central bank and that does not have to be exchanged for gold or some other commodity money.
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If prisoners of war use cigarettes as money, then cigarettes are:
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commodity money
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The central bank of the United States.
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Federal Reserve
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Households and firms have confidence that if they accept paper dollars in exchange for goods and services...then
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the dollars will not lose much value during the time they hold them.
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What Can Serve as Money?
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1.The good must be acceptable to (that is, usable by) most people. 2. It should be of standardized quality so that any two units are identical. 3. It should be durable so that value is not lost by spoilage. 4. It should be valuable relative to its weight so that amounts large enough to be useful in trade can be easily transported.
5. The medium of exchange should be divisible because different goods are valued differently. |
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The value of money as a medium of exchange is determined primarily by:
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The willingness of people to accept it.
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Money serves as a medium of exchange when sellers are willing to accept it in exchange for goods or services.
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Medium of Exchange
***An economy is more efficient when a single good is recognized as a medium of exchange. |
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Once a single good is used as money, each good has a single price rather than many prices as in a barter system.
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Unit of Account
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Any asset represents a store of value.
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Store of Value
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the ease with which an asset can be converted into the medium of exchange.
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Liquidity
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Money can facilitate exchange at a given point in time by providing a medium of exchange and unit of account, and it can facilitate exchange over time by providing a reliable store of value and standard of deferred payment in borrowing and lending.
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Standard of Deferred Payment
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What are The Functions of Money
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Medium of exchange
Unit of account Store of value Standard of deferred payment |
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Assets that are generally accepted in exchange for goods and services or for payment of debts are specifically called:
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money
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Economies where goods and services are traded directly for other goods and services are called
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barter economies
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For a barter trade to take place between two people, each person must want what the other one has, a requirement economists refer to as a
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double coincidence of wants.
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A good used as money that also has value independent of its use as money.
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Commodity money
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A model that explains short-run fluctuations in real GDP and the price level.
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Aggregate demand and aggregate supply model
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The aggregate demand and aggregate supply model explains:
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Short-run fluctuations in real GDP and the price level
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A curve that shows the relationship between the price level and the quantity of real GDP demanded by households, firms, and the government.
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Aggregate demand (AD) curve
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A curve that shows the relationship in the short run between the price level and the quantity of real GDP supplied by firms.
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Short-run aggregate supply (SRAS) curve
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When the price level falls, the real value of household wealth rises, and so will consumption.
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wealth effect.
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What are the variables that cause the aggregate demand curve to shift fall into three categories:
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Changes in government policies
Changes in the expectations of households and firms Changes in foreign variables |
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Which of the following factors does not cause the aggregate demand curve to shift?
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A change in the price level.
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The actions the Federal Reserve takes to manage the money supply and interest rates to pursue macroeconomic policy objectives.
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Monetary policy
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Changes in federal taxes and purchases that are intended to achieve macroeconomic policy objectives.
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Fiscal policy
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If households become more optimistic about their future incomes and firms become more optimistic about the future profitability of investment spending, the aggregate demand curve will shift to the right.
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Changes in the Expectations of Households and Firms
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If firms and households in other countries buy fewer U.S. goods or if firms and households in the United States buy more foreign goods, net exports will fall, and the aggregate demand curve will shift to the left.
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Changes in Foreign Variables
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If real GDP in the United States increases faster than real GDP in other countries, net exports will ______
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fall
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How can government policies shift the aggregate demand curve to the right?
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By increasing government purchases
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An increase in net exports that results from a change in the price level in the United States:
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Will not cause the aggregate demand curve to shift.
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If the exchange rate between the dollar and foreign currencies rises (the dollar appreciates vis-à-vis foreign currencies), the price in foreign currency of U.S. products will _________ and the U.S. aggregate demand curve will shift the curve to the _________.
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rise; left
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So, in the long run, changes in the price level _____________ affect the level of real GDP
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do not
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The level of real GDP in the long run is called
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potential GDP or full-employment GDP.
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Why does the short run aggregate supply curve slope upward?
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Because profits rise when the prices of the goods and services firms sell rise more rapidly than the prices they pay for inputs
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Variables That Shift the Short-Run Aggregate Supply Curve
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Increases in the Labor Force and in the Capital Stock, Technological Change,
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An unexpected event that causes the short-run aggregate supply curve to shift.
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Supply shock
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If firms and workers could predict the future price level exactly, the short-run aggregate supply curve would be:
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The same as the long-run aggregate supply curve.
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An increase in productivity results in:
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An increase in short-run aggregate supply.
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If business firms become pessimistic and the economy slumps into a recession, which of the following causes the economy to return to its long-run equilibrium?
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The eventual agreement by workers to accept lower wages
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A combination of inflation and recession, usually resulting from a supply shock.
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Stagflation
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If the economy is initially at full employment equilibrium, in the short run, an increase in aggregate demand causes _____________ in real GDP, and in the long run, it causes___________ in the price level.
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an increase; an increase
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Total spending in the economy: the sum of consumption, planned investment, government purchases, and net exports.
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Aggregate expenditure (AE)
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A macroeconomic model that focuses on the short-run relationship between total spending and real GDP, assuming that the price level is constant.
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Aggregate expenditure model
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In any particular year, the level of GDP is determined mainly by the level of
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aggregate expenditure.
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The aggregate expenditure model studies the relationship between:
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total spending and real GDP
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Keynes identified four components of aggregate expenditure that together equal GDP:
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Consumption, planned investment, government purchases, and net exports
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This is spending by households on goods and services.
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consumption
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This is planned spending by firms on capital goods and by households on new homes.
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Planned investment
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This is spending by local, state, and federal governments on goods and services.
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Government purchases
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This is spending by foreign firms and households on goods and services produced in the United States minus spending by U.S. firms and households on goods and services produced in other countries.
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Net exports (NX)
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Aggregate expenditure = (equation)
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Consumption + Planned investment
+ Government purchases + Net exports (C + I + G + NX) |
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Goods that have been produced but not yet sold.
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inventories
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Actual investment will equal planned investment only when there is ____________
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no unplanned change in inventories.
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When aggregate expenditure is ___________ than GDP, inventories will _______, and GDP and total employment will _________.
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greater
decline increase |
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When aggregate expenditure is _____ than GDP, inventories will ______, and GDP and total employment will ______.
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less
increase decrease |
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Only when aggregate expenditure _____ GDP will the economy be in macroeconomic equilibrium.
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equals
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When we say that the components of aggregate expenditure are measured in real terms, we mean that:
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The values have been corrected for inflation.
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The following are the five most important variables that determine the level of consumption:
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Current disposable income
Household wealth Expected future income The price level The interest rate |
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The most important determinant of consumption is:
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Current disposable income.
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Disposable income is the income remaining to households after they have paid the personal income tax and received government transfer payments.
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Current Disposable Income
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A household’s wealth is the value of its assets minus the value of its liabilities.
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Household Wealth
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Most people prefer to keep their consumption fairly stable from year to year, even if their income fluctuates significantly.
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Expected Future Income
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The ____________ measures the average prices of goods and services in the economy.
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The Price Level
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Recall that the nominal interest rate is the stated interest rate on a loan or a financial investment, corrected for the effect of inflation by the real interest rate, which is the nominal interest rate minus the inflation rate.
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The Interest Rate
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What is the impact of an increase in stock prices?
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An increase in the consumption component of aggregate expenditure.
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The relationship between consumption spending and disposable income.
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Consumption function
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The slope of the consumption function: The amount by which consumption spending changes when disposable income changes.
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Marginal propensity to consume (MPC)
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Change in consumption =
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Change in disposable income × MPC
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If the marginal propensity to consume (MPC) is 0.9, how much additional consumption will result from an increase of $80 billion of disposable income?
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$72 billion.
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Disposable income =
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National income − Net taxes
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National income =
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GDP = Disposable income + Net taxes
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Which of the following equalities is correct?
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Disposable income is equal to national income plus government transfer payments minus taxes.
Government transfer payments minus taxes equal net taxes. Disposable income = National income – Net taxes. |
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National income =
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Consumption + Saving + Taxes
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The amount by which saving changes when disposable income changes.
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Marginal propensity to save (MPS)
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When national income increases, there must be some combination of an increase in household:
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Consumption, saving, and taxes.
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The behavior of consumption and investment over time can be described as follows:
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Consumption follows a smooth, upward trend, but investment is subject to significant fluctuations.
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The four most important variables that determine the level of investment are:
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Expectations of future profitability
Interest rate Taxes Cash flow |
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Borrowing takes the form of issuing corporate bonds or receiving loans from banks.
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Interest Rate
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Investment goods are long lived.
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Expectations of Future Profitability
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Firms focus on the profits that remain after they have paid taxes.
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Taxes
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provide firms with tax reductions to increase their spending on new investment goods.
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Investment tax incentives
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Most firms use their own funds to finance spending.
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Cash Flow
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The difference between the cash revenues received by a firm and the cash spending by the firm.
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Cash flow
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Which of the following statements about investment spending is correct?
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The optimism or pessimism of business firms is an important determinant of investment spending.
A higher real interest rate results in less investment spending. When the economy moves into a recession, many firms will postpone buying investment goods even if the demand for their own product is strong. |
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The following are the three most important variables that determine the level of net exports:
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The price level in the United States relative to the price levels in other countries
The growth rate of GDP in the United States relative to the growth rates of GDP in other countries The exchange rate between the dollar and other currencies |
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The Price Level in the United States Relative to the Price Levels in Other Countries
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A slower increase in the U.S. price level than the price levels in other countries increases the demand for U.S. products relative to the demand for foreign products, increasing net exports.
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The Growth Rate of GDP in the United States Relative to the Growth Rates of GDP in Other Countries
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When incomes rise faster in the United States than in other countries, U.S. consumers’ purchases of foreign goods and services increase faster than foreign consumers’ purchases of U.S. goods and services, decreasing net exports.
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The Exchange Rate between the Dollar and Other Currencies
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As the value of the U.S. dollar rises, the foreign currency price of U.S. products sold in other countries rises, and the dollar price of foreign products sold in the United States falls, so net exports will fall.
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Net exports have been __________ in most years between 1979 and 2009. Net exports have usually __________ when the U.S. economy is in recession and __________ when the U.S. economy is expanding.
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negative; increased; decreased
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If inflation in the United States is lower than inflation in other countries, then U.S. exports ________ and U.S. imports ________, which _________ net exports.
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increase; decrease; increases
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As long as the AE line is above the aggregate expenditure equals actual output (Y = AE) line:
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Inventories will decline and firms will expand production.
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What is the condition for macroeconomic equilibrium?
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Y = AE
& Y = C + G + I + X – IM |
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When aggregate expenditure is greater than GDP:
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Inventories will fall.
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