Released Exam 1995

Question 2

  • Real GDP = Nominal GDP - Inflation

  • Real interest rate = Nominal interest rate - Inflation rate

Question 6

  • AD↑ = Y↑ = C + I↑ + G + NX

Factors That Shift the Aggregate Demand Curve Changes in expectations If consumers and firms become more optimistic, . If consumers and firms become more pessimistic, Changes in wealth If the real value of household assets rises, . If the real value of household assets falls, . Size of the existing stock of physical capital If the existing stock of physical capital is relatively small, . If the existing stock of physical capital is relatively large, Fiscal policy If the government increases spending or cuts taxes, . If the government reduces spending or raises taxes, . Monetary policy If the central bank increases the quantity of money, . If the central bank reduces the quantity of money, .. aggregate demand increases. aggregate demand decreases. aggregate demand increases. aggregate demand decreases. aggregate demand increases. ... aggregate demand decreases. aggregate demand increases. aggregate demand decreases. aggregate demand increases. ... aggregate demand decreases.

Question 13

Contractionary Expansionary
Monetary

Discount Rate ↑

Federal Funds ↑

= Sell Government Security

RRR↑

Discount Rate ↓

Federal Funds ↓

= Buy Government Security

RRR↓
Fiscal

Taxes↑

Government Spending↓

Government Transfer↓

Taxes↓

Government Spending↑

Government Transfer↑

Question 21

  • Consumption function

Household consumer spending, c Slope = MPC Ayd a Consumption function, cf c = a + MPC Ac = MPC x Ayd Household current disposable income, Yd

  • Increases in MPC will increase the equilibrium level of both income and consumption

Question 24

  • National Income↑ → Spending on goods and services↑ → Demand for money↑

Question 25

  • The Keynesian aggregate supply curve is horizontal, indicating that firms will supply whatever amount of goods in demanded at the existing price level

    Price Level Price Level SRAS SRAS

Question 29

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Question 34

  • Classical economics (also known as liberal economics) asserts that markets function best with minimal government interference.

  • Classical economists observe that markets generally regulate themselves, when free of coercion.

Question 36

  • Equilibrium output < Potential output: Recessionary gap

  • Equilibrium output > Potential output: Inflationary gap

  • Spending Multiplier = 1/(1-MPC)

  • Tax Multiplier = -MPC/(1-MPC)

Question 40

Interest rate, r rl A fall in money demand shifts the money demand curve to the left. IL M1—-M2 A rise in money demand shifts the money demand curve to the right. MD3 MDI Quantity of money

  • If the public decides to increase its holdings of currency, the interest rate will increase

Question 41

  • An increase in government expenditure will lower the interest rate, causing less investment (Crowding-out effect)

Question 43

  • Supply shock: Aggregate Supply Curve shifts to the left

  • Supply shock will change both relative prices and the general price level

Question 44

  • unemployment fell = rGDP increase

  • inflation fell = Price level fell

    Aggregate price level (b) A Positive Supply Shock A positive supply shock... SRASI SRAS2 ...leads to higher aggregate output and a lower aggregate price level. AD Real GDP

Question 48

  • An increase in the labor foece participation rate will make it more diffficult to reduce unemployment, since the number of labors has increased

Question 49

  • British economist John Maynard Keynes spearheaded a revolution in economic thinking that overturned the then-prevailing idea that free markets would automatically provide full employment—that is, that everyone who wanted a job would have one as long as workers were flexible in their wage demands

Question 51

  • The most important determinant of saving and consumption is the level of income

Question 52

  • If the interest rate is already low, increasing money supply will not be effective as in the high interest reate.

  • If the employment is already high, it's hard to improve it further to increase rGDP.

  • Nothing to improve = no effect on GDP

  • A lot to improve = greatest effect on GDP

Question 55

  • Gold is not part of the money supply

  • M1

    • Cash

    • Money in checking accounts

    • Traveler's checks

  • M2

    • All money in M1 plus "near-moneys"

    • Saving accounts

    • Certificate of Deposits

    • Money Market Funds

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