5) Prices or wages are said to be sticky when they do not respond quickly to changes in demand or supply.
6) Workers expect inflation to rise from 3% to 5% next year. As a result, this should shift the short-run aggregate supply curve to left .
7) Fed's two main monetary policy targets are money supply and interest rates .
8) Federal Fund Rates is the interest rate banks charge each other for overnight loans.
9) If the Federal Reserve raises or lowers interest rates too late, it could result in a __procyclical ______ policy that destabilizes the economy.
10) If FOMC decides to increase the money supply, it orders the trading desk at the Federal Reserve Bank of New York to purchase US Treasury Bill .
Part III) Multiple Choices (2pts. each)
1) Which of the following is not a component of aggregate expenditure?
A) consumption spending
B) planned investment spending
C) actual investment spending
D) government spending
2) Consumption spending is $5 million, planned investment spending is $8 million, actual investment spending is $8 million, government purchases are $10 million, and net export spending is $2 million. Based on this information, which of the following is true?
A) There was an unplanned change in inventories.
B) Aggregate expenditure is equal to GDP.
C) Aggregate expenditure is greater than GDP.
D) Aggregate expenditure is less than GDP.
3) If aggregate expenditure is greater than GDP, how will the economy reach macroeconomic equilibrium?
A) Inventories will decline, and GDP and employment will decline.
B) Inventories will rise, and GDP and employment will decline.
C) Inventories will decline, and GDP and employment will rise.
D) Inventories will rise, and GDP and employment will rise.
4) The decline in consumer spending during the 2007-2009 recession was due in part to a decrease in disposable income. The decline in consumption resulting from the decline in disposable income caused a ________ the aggregate expenditure curve.
A) movement up along
B) movement down along
C) downward shift of
D) upward shift of
5) The consumption function describes the relationship between
A) consumption spending and national income.
B) consumption spending and aggregate income.
C) consumption spending and disposable income.
D) consumption spending and personal income.
Disposable Income (dollars)
6) Refer to Table 1. Given the consumption schedule in the table above, the marginal propensity to consume is
A) 0.5. B) 0.6. C) 0.75. D) 0.8.
7) If firms are more pessimistic and believe that future profits will fall and remain weak for the next few years, then
A) investment spending will fall.
B) investment spending will rise.
C) investment spending will remain unaffected.
D) investment spending will rise and then fall.
8) U.S. net export spending falls when
A) the price level in the United States falls relative to the price level in other countries.
B) the growth rate of U.S. GDP is faster than the growth rate of GDP in other countries.
C) the value of the U.S. dollar decreases relative to other currencies.
D) the inflation rate is lower in the United States relative to other countries.
C) short-term real interest rates; long-term real interest rates
D) short-term nominal interest rates; long-term real interest rates
22) The money demand curve has a negative slope because
A) lower interest rates cause households and firms to switch from money to financial assets.
B) lower interest rates cause households and firms to switch from financial assets to money.
C) lower interest rates cause households and firms to switch from money to stocks.
D) lower interest rates cause households and firms to switch from money to bonds.
23) Buying a house during a recession may be a good idea if your job is secure because the Federal Reserve often
A) raises interest rates during recessions.
B) lowers interest rates during recessions.
C) lowers income taxes during recessions.
D) sells Treasury bills to help the housing market.
24) Increases in the price level
A) increase the opportunity cost of holding money.
B) decrease the opportunity cost of holding money.
C) increase the quantity of money needed for buying and selling.
D) decrease the quantity of money needed for buying and selling.
25) Suppose the Fed decreases the money supply. In response households and firms will ________ short term assets and this will drive ________ interest rates.
A) buy; up
B) buy; down
C) sell; up
D) sell; down
26) Refer to Figure 6. In the figure above suppose the economy is initially at point A. The movement of the economy to point B as shown in the graph illustrates the effect of which of the following policy actions by the Federal Reserve?
A) a decrease in income taxes
B) an increase in the required reserve ratio
C) an open market purchase of Treasury bills
D) an open market sale of Treasury bills
27) If the Fed pursues expansionary monetary policy then
B) the money supply will decrease, interest rates will fall and GDP will fall.
C) the money supply will increase, interest rates will rise and GDP will rise.
D) the money supply will increase, interest rates will fall and GDP will rise.
28) From an initial long-run macroeconomic equilibrium, if the Federal Reserve anticipated that next year aggregate demand would grow significantly slower than long-run aggregate supply, then the Federal Reserve would most likely
A) decrease interest rates.
B) increase interest rates.
C) decrease income tax rates.
D) increase income tax rates.
29) Contractionary monetary policy causes
A) aggregate demand to rise and the price level to rise.
B) aggregate demand to fall and the price level to fall.
C) aggregate demand to rise and the price level to fall.
D) aggregate demand to fall and the price level to rise.
30) Refer to Figure 7. In the figure above, if the economy in Year 1 is at point A and expected in Year 2 to be at point B, then the appropriate monetary policy by the Federal Reserve would be to
A) lower interest rates.
B) raise interest rates.
C) lower income taxes.
D) raise income taxes.
Extra Credit (3pts.)
If the Fed pursues expansionary monetary policy then what happen in money market, loanable fund market, and good market?
You need to show your understanding with graphical descriptions.