MACROECONOMICS

1. The SRAS curve is upward sloping because:

B) A higher aggregate price level leads to higher output since most production costs are fixed in the short run

2. The aggregate demand curve is negatively sloped in part because of the impact of interest rates on:

C) Consumption and investment.

3. According to the short-run aggregate supply curve, when the _________ rises, the quantity of

_________ rises.

B) Aggregate price level; aggregate output supplied

 

4. (Figure: The Money Supply and Aggregate Demand) Refer to the figure The Money Supply and Aggregate Demand. Panel (a) illustrates what happens when the Federal Reserve decides to _______ the money supply and _______ interest rates.

C) Increase; lower

5. (Figure: The Money Supply and Aggregate Demand) Refer to the figure The Money Supply and Aggregate Demand. Panel (b) illustrates what happens when the Federal Reserve decides to _______ the money supply and _______ interest rates.

D) Decrease; raise

 6. (Figure: The Money Supply and Aggregate Demand) Refer to the figure The Money Supply and Aggregate Demand. Panel _______ illustrates what happens when the Fed decides to _______ government bonds and _______ the money supply.

C) (b); sell; decrease

7. (Figure: The Money Supply and Aggregate Demand) Refer to the figure The Money Supply and Aggregate Demand. If the economy is in a recessionary gap, the Federal Reserve will _______ government bonds, which will _______ the money supply and _______ interest rates. This is shown in panel _______.

C) buy; increase; lower; (a)

8. (Figure: The Money Supply and Aggregate Demand) Refer to the figure The Money Supply and Aggregate Demand. If the economy is in an inflationary gap, the Federal Reserve will _______ government bonds, which will _______ the money supply and _______ interest rates. This is shown in panel _______.

B) sell; decrease; raise; (b)

9. (Figure: The Money Supply and Aggregate Demand) Refer to the figure The Money Supply and Aggregate Demand. If the Federal Reserve intended to encourage investment and expand the economy, it would _______ government bonds, _______ the money supply, and _______ interest rates. This is shown in panel _______.

A) buy; increase; lower; (a)

10. (Figure: Monetary Policy and the AD–SRAS Model) An increase in the money supply is most likely to cause a shift:

C) from SRAS’ to SRAS

11. (Figure: Monetary Policy and the AD–SRAS Model) Refer to the information in the figure Monetary Policy and the AD–SRAS Model. The economy may move from point i to point h as a result of:

A) an increase in the money supply.

12. (Figure: Monetary Policy and the AD–SRAS Model) Refer to the information in the figure Monetary Policy and the AD–SRAS Model. If the economy is in a recessionary gap at point f, it could move to point g as a result of:

C) an increase in the money supply

13. (Figure: Monetary Policy and the AD–SRAS Model) Refer to the information in the figure Monetary Policy and the AD–SRAS Model. The economy could move from point g to point f as a result of:

C) a decrease in the money supply.

14. (Figure: Monetary Policy and the AD–SRAS Model) Refer to the information in the figure Monetary Policy and the AD–SRAS Model. If the economy is in a recessionary gap at point f, it could move to point g as a result of:

D) buying government securities in the open market

15. (Figure: Monetary Policy and the AD–SRAS Model) Refer to the information in the figure Monetary Policy and the AD–SRAS Model. If the economy is in an inflationary gap at point h, it can move to point i as a result of:

C) a decrease in the money supply

16. (Figure: Monetary Policy and the AD-SRAS Model) Refer to the information in the figure Monetary Policy and the AD–SRAS Model. If the economy is at point h because of an open market purchase by the Federal Reserve and no further monetary policy is implemented, in the long run:

A) nominal wages will increase, shift SRAS to SRAS’, decrease real GDP, and increase the price level.

17. (Figure: Monetary Policy and the AD-SRAS Model) If the economy is at point f because of an open market sale by the Federal Reserve and no further monetary policy is implemented, in the long run:

C) nominal wages will decrease, shift SRAS’ to SRAS, increase real GDP, and decrease the price

Level

18. (Figure: Monetary Policy III) Refer to the information in the figure Monetary Policy III. The central bank should adopt policies to move the economy to:

D) Y4

19. (Figure: Monetary Policy III) Refer to the information in the figure Monetary Policy III. Expansionary economic policy will lead to an equilibrium GDP of:

C) Y3.

 

20. (Figure: Monetary Policy III) Refer to the information in the figure Monetary Policy III. Expansionary monetary policy will lead to an equilibrium price level of:

C) P3.

 

 

 

 

 

 

 

  1. Explain why a recession would, all else equal, decrease the demand for money.

A recession refers to a decline in the economic activity of a country over a period of time. It is usually characterized by poor economic as well as market conditions which may possibly result to increased level of unemployment plus an increase in the rate of inflation within the economy. Studies extend to show that money demand usually declines because within a recession, individuals have a less income. This is because with the poor economic conditions the prices of the commodities may perhaps increase reducing the amount in which people can actually afford since their incomes are low thereby deciding to spend less making their demand for money decrease too (Barro, 2007). It is further agreed that recession results to a reduction in the level of confidence for producers as well as that of the consumers immediately the level of unemployment goes down. The consumers will purely have negative expectations during this period of economic contraction as most of them become unemployed, a condition that results to decline in the expected incomes and according to the consumption theories of economics they will automatically reduce their consumption levels which reveal a reduction in their demand hence will require less amounts of money at this time when the prices and rates are feared to raise. The producers, on the other hand, fail to stock their materials, a situation that results to a reduction in the level of production. They are not interested in obtaining loans or demanding huge levels of money because they are afraid of the possible risks that may arise within these poor economic conditions hence decide enter into cost reduction strategies. This eventually results into reduced profitability levels within the organization resulting to a decline in the demand for employees that makes most of the employees to become unemployed minimizing their incomes and demand levels. Other organizations may not be willing to invest at these poor economic conditions hence their demand for money declines. In summary, recession will purely result into a fall in the demand for money (Sexton, 2012).

 

 

 

 

 

  1. Suppose the annual inflation rate is at 2%, and 8.5% of the labor force is unemployed. If you were on the Federal Reserve’s Open Market Committee, what action (i.e., specific action) would you prescribe? How would this affect the economy, the inflation rate, and the unemployment rate?

           It will be realized that the Federal Open Market Committee (FOMC) refers to the monetary policy branch within the Federal Reserve which is the American central bank. This means that the FOMC is actually responsible for fighting against unemployment as well as inflation within the country. It truly does this through adjusting the interest rates. It can either choose a contractionary policy where it raises the level of interests or an expansionary policy where it lowers its interest rates. It is generally believed that the government it should ensure that it sets a significant level of inflation and unemployment that will enhance economic growth (Amadeo, 2014).

If I was within the Federal Reserve’s Open Market Committee I would choose an expansionary monetary policy where I would lower the rate of interests this helps in spurring the economic growth and reducing the level of unemployment by a certain proportion. An increase in the number of employed workers will increase the country’s taxable income yielding to a growth in the gross domestic product. I would further ensure that FOMC adjusts the interest rates through setting targets for Fed funds rate. This refers to the rate which banks usually charge each other for the overnight loans recognized as Fed funds. The Fed will then pressure the banks to adapt to its target with the open market operations. Since the FOMC will be geared at ensuring that the level of unemployment decreases by a certain percentage to encourage an increase in the gross domestic product through reduction in the interest rates then I will also choose buying securities from the banks. This will increase the money supply in the market encouraging more firms and individuals to borrow and entering into investment strategies where the industries will demand more labor. This will eventually result to a decrease in the unemployment level and an increase in the rate of inflation (Arnold, 2008).

This above diagram depicts what will happen in the short run in the event the interest rates decline. It will result to a possible inflation where the prices will increase to P2 resulting to a decline in the gross domestic product (Y2).

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Work cited

Amadeo, K. (2014, March 19). Federal Open Market Committee. About.com US Economy. Retrieved April 23, 2014, from http://useconomy.about.com/od/governmentagencies/p/FOMC.htm

Arnold, R. A. (2008). Macroeconomics (8th ed.). Mason, OH: Thomson/South-Western.

Barro, R. J. (2007). Macroeconomics: a modern approach (Internat. student ed.). Mason, OH: Thomson South-Western.

Sexton, R. L. (2012). Exploring macroeconomics (6th ed., International ed.). Mason, Ohio: South-Western ;.