Chapter 19 and 20
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Key concepts:
Open Market Purchase Of B...
Marginal Propensity To Con...
Equilibrium
Terms in this set (24)
The price level
If velocity and aggregate output
quadruples
are reasonably constant (as the
classical economists believed),
what happens to the price level
when the money supply increases
from $1 trillion to $4 trillion?
Velocity would
If credit cards were made illegal by
fall because a
congressional legislation, what
greater
would happen to velocity? Explain
quantity of the
your answer.
money supply (M)
would be needed to
carry out the same
level of transactions
(PY).
Nominal GDP
What happens to nominal GDP if
declines
the money supply grows by 20%
by approximately
but velocity declines by 25%?
5%.
Originally, the price
If velocity (V) and aggregate
level is
output (Y) remain constant at $4
1.6.
and $1 comma 250 billion,
respectively, what happens to the
After the money
price level (P) if the money supply
supply decreases,
(M) declines from $500 billion to
the price level is
$400 billion?
1.28.
quantity of money
According to the quantity theory,
lead to proportional
changes in the:
changes in the price
level.
7%
If the growth rate of the money
supply is 12%, velocity is constant,
13%
and real GDP grows at 5% per year
on average, then the inflation rate
17%
will be
________%
If the growth rate of the money
supply increases to 17%, velocity is
constant, and real GDP grows at 4
% per year on average, then the
inflation rate will be
_______ %
If the growth rate of the money
supply increases to 19%, velocity
grows at 1%, and real GDP grows at
3% per year on average, then the
inflation rate will be
________%
more flexibility in the
It was noted in the preceding
long run than in the
analysis that the relationship
short run.
between money growth and
inflation is considerably stronger in
the long run than the short run. The
primary reason for this variable
relationship has to do with the
degree of wage and price
flexibility. More specifically, wages
and prices tend to exhibit
It may increase
Why would a central bank be
inflation
concerned about persistent, long-
expectations,
term budget deficits?
making it harder to
keep inflation
anchored at a low,
stable level.
issuance of bonds
What way can an economy finance
government spending?
increases in the
Which of the following would most
monetary base
likely lead to hyperinflation?
the government can
If government spending is $7
monetize the debt
trillion and tax revenue is $4 trillion,
by issuing $3 trillion
in new bonds, then
having the central
bank conduct an
equivalent open
market purchase of
bonds.
-Transactions
What three motives for holding
motive.
money did Keynes consider in his
liquidity preference theory of the
-Precautionary
demand for real money balances?
motive.
-Speculative motive.
As interest rates rise,
What does Keynes's liquidity
people will reduce
preference theory predict about
their money
the relationship between interest
holdings and
rates and the velocity of money?
therefore velocity
will rise.
has substantial
Keynes's liquidity preference
fluctuations.
theory implies that velocity
interest rates
Keynes's liquidity preference
increase.
theory explains why velocity is
expected to rise when
A decrease in firms'
During and in the aftermath of the
planned
financial crisis of 2007-2009,
autonomous
planned investment fell
investment.
substantially, despite significant
decreases in the real interest rate.
An increase in
Which of the following factors
financial frictions.
related to the planned spending
function could explain this?
$9386 billion.
Assume that autonomous
consumption is $1 comma 634
billion and disposable income is
$10 comma 200 billion. Using the
consumption function, calculate
consumption expenditure if an
increase of $1,000 in disposable
income leads to an increase of
$760 in consumption expenditure.
Consumption expenditure is $______
billion.
$1120 billion
If autonomous consumption
expenditure is $400 billion, the
marginal propensity to consume is
0.90, aggregate income is $1
comma 000 billion, and taxes are
$200 billion, consumption
expenditures will equal $____billion.
people spend half
A marginal propensity to consume
of each additional
of 0.50 means that
dollar of disposable
income.
It shows equilibrium
What does the IS curve show?
points in the goods
market--the
combinations of the
real interest rate and
equilibrium output.
As the real interest
rate rises,
consumption
expenditure,
planned investment
spending, and net
exports fall, which in
turn lowers planned
expenditure.
Aggregate output
must be lower for it
Why does it slope downward?
to equal planned
expenditure and
satisfy goods market
equilibrium. Hence,
the IS curve is
downward-sloping.
Equilibrium output
Assume that the marginal
equals 3000
propensity to consume is 0.90 and
autonomous consumption
expenditures equal $100 billion.
Further, assume that planned
investment spending is $200 billion
and government spending, taxes,
and net exports are zero.
Equilibrium output equals ______
Changes in interest
When the Federal Reserve reduces
rates represent a
its policy interest rate, how, if at all,
movement along the
is the IS curve affected?
IS curve, and so the
IS curve does not
shift.
A shift in the IS
curve occurs when
equilibrium output
changes at each
given real interest
rate. The factors of
shifting are
autonomous
consumption,
What causes the IS curve to shift?
autonomous
investment,
autonomous net
exports, taxes, and
government
purchases.
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