AP Macroeconomics Unit 4 Multiple Choice and Vocabulary
The _______, or the _ _ _, is the increase in consumer spending when disposable income rises by $1.
Marginal Propensity to Consume
The _______, or the _ _ _, is the increase in household saving when disposable income rises by $1.
Marginal Propensity to Save
Formula For MPC
Change in Consumer Spending / Change in Disposable Income
The ________ is the ratio of total change in Real GDP cause by an autonomous change in aggregate spending to the size of that autonomous change
An _______ _______ __ ____________ _____________ is an initial rise or fall in aggregate spending that is the cause, not the result, of a series of income and spending changes.
autonomous change in aggregate spending
Formula for the Multiplier
1 / (1-MPC)
The __________ ___________ is an equation showing how an individual household’s consumer spending varies with the household’s current disposable income.
_______________ _____________ _____________ is the amount of money a household would spend if it had no disposable income.
Autonomous consumer spending
The __________ ____________ _____________ is the relationship for the economy as a whole between aggregate current disposable income and aggregate consumer spending.
Aggregate Consumption Function
_________ ___________ __________ is the investment spending that businesses intend to undertake during a given period
Planned investment spending
___________ are stocks of goods held to satisfy future sales
_____________ _____________ is the value of the change in total inventories held in the economy during a given period
Positive __________ __________ ___________ occurs when actual sales are less than businesses expected, leading to unplanned increases in inventories. Sales in excess of expectations result in negative unplanned inventory investment
unplanned inventory investment
________ __________ _________ is the sum of planned investment spending and unplanned inventory invesement
Actual investment spending
Changes in Which of the following leads to a shift of the aggregate consumption function?
I. expected future disposable income
II. aggregate wealth
III. current disposable income
I, II, and III
The slope of a family’s consumption function is equal to ____________
the Marginal Propensity to Consume
The level of planned investment spending is negatively related to the _____________
Actual investment spending in any period is equal to ___________
planned investment spending + unplanned inventory investment
__________ ____________ is the use of government policy to reduce the severity of recessions and rein in excessively strong expansions
_______ ________ programs are government programs intended to protect families against economic hardship
________________ fiscal policy increases aggregate demand
_______________ fiscal policy reduced aggregate demand
Which of the following contributes to the lag in implementing fiscal policy?
I. It takes time for Congress and the President to pass spending and tax changes.
II. Current economic data takes time to collect and analyze.
III. It takes time to realize an output gap exists.
I, II, and III
Which of the following is a government transfer program?
a. Social Security
c. unemployment insurance
d. food stamps
e. all of the above
all of the above
Which of the following is an example of expansionary fiscal policy?
a. increasing taxes
b. increasing government spending
c. decreasing government transfers
d. decreasing interest rates
e. increasing the money supply
increasing government spending
Which of the following is a fiscal policy that is appropriate to combat inflation?
a. decreasing taxes
b. decreasing government spending
c. increasing government transfers
d. increasing interest rates
e. expansionary fiscal policy
decreasing government spending
An income tax rebate is an example of _____________
expansionary fiscal policy
________ ____ _____ are taxes that don’t depend on the taxpayer’s income
__________ ___________ are government spending and taxation rules that cause fiscal policy to be automatically expansionary when the economy contracts and automatically contractionary when the economy expands
____________ ________ ________ is fiscal policy that is the result of deliberate actions by policy makers rather than rules
Discretionary fiscal policy
The Marginal Propensity to consume:
I. has a negative relationship to the multiplier
II. Is equal to 1.
III. represents the proportion of consumers’ disposable income that is spent
The presence of taxes has what effect on the multiplier? They ______
A lump sum tax is ___________
independent of income
Which of the following is NOT an automatic stabilizer?
a. income taxes
b. unemployment insurance
d. food stamps
e. monetary policy
The ________ ____ is the price, calculated as a percentage of the amount borrowed, charged by lenders to borrowers for the use of their savings for one year
According to the __________-___________ ____________ _____________, savings and investment spending are always equal for the economy as a whole
savings-investment spending identity
The __________ _________ is the difference between tax revenue and government spending when tax revenue exceeds government spending
The ________ ________ is the difference between tax revenue and government spending when government spending exceeds tax revenue.
The _________ __________ is the difference between tax revenue and government spending
___________ _________, the sum of private savings and the budget balance, is the total amount of savings generated within the economy
____________ ___________ is the net inflow of funds into a country
A household’s ________ is the value of its accumulated savings.
A ___________ _____ is a paper claim that entitles the buyer to future income from the seller
A _________ _______ is a claim on a tangible object that gives the owner the right to dispose of the object as he or she wishes
A ____________ is a requirement to pay money in the future
____________ _______ are the expenses of negotiating and executing a deal
____________ _____ is uncertainty about future outcomes that involve financial losses and gains
An individual can engage in ______________ by investing in several different assets so that the possible losses are independent events
An asset is ________ if it can be quickly converted into cash without much loss of value.
An asset is ____________ if it cannot be quickly converted into cash without much loss of value.
A _____ is a lending agreement between an individual lender and an individual borrower
A ____________ occurs when a borrower fails to make payments as specified by the loan or bond contract
A ______-_________ _______ is an asset created by pooling individual loans and selling shares in that pool
A _____________ _____________ is an institution that transforms the funds it gathers from many individuals into financial assets
a _______ ______ is a financial intermediary that creates a stock portfolio and then resells shares of this portfolio to individual investors
A _______ ______ is a type of mutual fund that holds assets in order to provide retirement income to its members
A _____ __________ __________ sells policies that guarantee a payment to a policyholder’s beneficiaries when the policyholder dies.
life insurance company
a _____ _________ is a claim on a bank that obliges the bank to give the depositor his or her cash when demanded
A _____ is a financial intermediary that provides liquid assets in the form of bank deposits to lenders and uses those funds to finance the illiquid investment spending needs of borrowers
Decreasing which of the following is a task of the financial system?
I. transaction costs
I and II only
Which of the following is NOT a type of financial asset?
c. bank deposits
The federal government is said to be “dissaving” when _____________
there is no budget deficit
A nonprofit institution collects the savings of its members and invests those funds in a wide variety of assets in order to provide its members with income after retirement. This describes a ________
A financial intermediary that provides liquid financial assets in the form of deposits to lenders and uses their funds to finance the illiquid investment spending needs of borrowers is called a _________________
________ is any asset that can easily be used to purchase goods and services
_____________ ___ ______________ is cash held by the public
Currency in circulation
_____________ _____ ____________ are bank accounts on which people can write checks
Checkable bank deposits
The _______ ___________ is the total value of financial assets in the economy that are considered money
A ____________ ___ ____________ is an asset that individuals acquire for the purpose of trading goods and services rather than for their own consumption
medium of exchange
A ________ __ ________ is a means of holding purchasing power over time
store of value
A _____ ___ ________ is a measure used to set prices and make economic calculations
unit of account
_______________ ______ is a good used as a medium of exchange that has intrinsic value in other uses
____________-___________ _______ is a medium of exchange with no intrinsic value whose ultimate value is guaranteed by a promise that it can be converted into valuable goods
__________ _________ is a medium of exchange whose value derives entirely from its official status as a means of payment
A _________ __________ is an overall measure of the money supply
________ are financial assets that can’t be directly used as a medium of exchange but can be readily converted into cash or checkable bank deposits
When you use money to purchase your lunch, money is serving which role(s)?
I.medium of exchange
II. store of value
III. unit of account
I, II, and III
When you decide you want “$10 worth” of a product, money is serving which role(s)?
I. medium of exchange
II. store of value
III. unit of account
In the United States, the dollar is __________
Which of the following is the most liquid monetary aggregate?
e. dollar bills
Which of the following is the best example of using money as a store of value?
a. A customer pays in advance for $10 worth of gasoline at a gas station
b. A babysitter puts her earnings in a dresser drawer while she saves to buy a bicycle
c. Travelers buy meals on board an airline flight
d. Foreign visitors to the United States convert their currency to dollars at the airport.
e. You use $1 bills to purchase soda from a vending machine
A babysitter puts her earnings in a dresser drawer while she saves to buy a bicycle
The ________ _______ of $1 realized one year from now is equal to $1/(1+r): the amount of money you must lend out today in order to have $1 in one year. It is the value to you today of $1 realized one year from now.
The ____ ___________ _______ of a project is the present value of current and future benefits minus the present value of current and future costs
net present value
Suppose, for simplicity, that a bank uses a single interest rate for loans and deposits, there is no inflation, and all unspent money is deposited in the bank. The interest rate measures which of the following?
I. The Cost of using a dollar today rather than a year from now.
II. the benefit of delaying the use of a dollar from today until a year from now.
III. the price of borrowing money calculated as a percentage of the amount borrowed
I, II, and III
If the interest rate is zero, then the present value of a dollar received at the end of the year is _________
equal to $1
IF the interest rate is 10%, the present value of $1 paid to you one year from now is___________
If the interest rate is 5%, the amount received one year from now as a result of lending $100 today is ____________
What is the present value of $100 realized two years from now if the interest rate is 10%?
____ __________ are the currency banks hold in their vaults plus their deposits at the Federal Reserve
A _-______ is a tool for analyzing a business’s financial position by showing, in a single table, the business’ assets (on the left) and liabilities (on the right)
The _______ ______ is the fraction of bank deposits that a bank holds as reserves
The _______ _________ ______ is the smallest fraction of deposits that the Federal Reserve allows banks to hold
required reserve ratio
A _____ ____ is a phenomenon in which many of a bank’s depositors try to withdraw their funds due to fears of a bank failure
__________ ___________ guarantees that a bank’s depositors will be paid even if the bank can’t come up with the funds, up to a maximum amount per account
__________ _____________ are rules set by the Federal Reserve that determine the required reserve ratio for banks
The _____ ______ is an arrangement in which the Federal Reserve stands ready to lend money to banks
_______ _______ are a bank’s reserves over and above its required reserves
The _______ ______ is the sum of currency in circulation and bank reserves
The ______ ________ is the ratio of the money supply to the monetary base. It indicates the total number of dollars created in the banking system by each $1 addition to the monetary base.
Bank Reserves include which of the following?
I. currency in bank vaults
II. bank deposits held in accounts at the Federal Reserve
III. customer deposits in bank checking accounts
I and II
The fraction of bank deposits actually held as reserves is the _________
Bank regulation includes which of the following?
I. deposit insurance
II. capital requirements
III. reserve requirements
I, II, and III
Which of the following changes would be the most likely to reduce the size of the money multiplier?
a. a decrease in the required reserve ratio
b. a decrease in excess reserves
c. an increase in cash holding by consumers
d. a decrease in bank runs
e. an increase in deposit insurance
an increase in cash holding by consumers
The monetary base equals ________ ?
currency in circulation + reserves held by banks
A _____ ____ is an institution that oversees and regulates the banking system and controls the monetary base.
A __________ _______ accepts deposits and is covered by deposit insurance
An _____________ _______ trades in financial assets and is not covered by deposit insurance
A _______ ___ _____ (thrift) is another type of deposit-taking bank, usually specialized in issuing home loans
savings and loan
A financial institution engages in ________ when it finances its investment with borrowed funds
The _______ _____ _____ is the reduction in a firm’s net worth from falling asset prices
balance sheet effect
A __________ ____ ___ __________ takes place when asset sales to cover losses produce negative balance sheet effects on other firms and force creditors to call in their loans, forcing sales of more assets and causing further declines in asset prices
vicious cycle of deleveraging
_______ _______ is lending to home buyers who don’t meet the usual criteria for being able to afford their payments
In ____________ a pool of loans is assembled and shares of that pool are sold to investors
Which of the following contributed to the creation of the Federal Reserve System?
I. The bank panic of 1907
II. the Great Depression
III. The savings and loan crisis of the 1980s
Which of the following is a part of both the Federal Reserve System and the federal Government?
a. The Federal Reserve Board of Governors
b. the 12 regional Federal Reserve Banks
c. the Reconstruction Finance Corporation
d. commercial banks
e. the Treasury Department
the Federal Reserve Board of Governors
Which of the following is NOT a role of the Federal Reserve System?
a. controlling bank reserves
b. printing currency (Federal Reserve Notes)
c. carrying out monetary policy
d. supervising and regulating banks
e. holding reserves for commercial banks
printing currency (Federal Reserve notes)
Who oversees the Federal Reserve System?
the Board of Governors of the Federal Reserve System
Which of the following contributed to the financial crisis of 2008?
a. subprime lending
d. low interest rates leading to a housing boom
e. all of the above
The ______ _____ ______ allows banks that fall short of the reserve requirement to borrow funds from banks with excess reserves.
federal funds market
The _____ ____ _____ is the interest rate determined in the federal funds market.
federal funds rate
The __________ ____ is the interest rate the Fed charges on loans to banks.
An _______-________ __________ is a purchase or sale of government debt by the Fed
Which of the following is a function of the Federal Reserve System?
I. examine commercial banks
II. print Federal Reserve Notes
III. conduct monetary policy
I and III only
Which of the following financial services does the Federal Reserve provide for commercial banks?
I. clearing checks
II. holding reserves
III. making loans
I, II, and III
When the Fed makes a loan to a commercial bank, it charges _________
the discount rate
If the Fed purchases U.S Treasury bills from a commercial bank, what happens to bank reserves and the money supply?
Bank Reserves decrease and Money Supply decreases
When banks make loans to each other, they charge the _______
The ________ ______ ______ ______ is an estimate of what the budget balance would be if real GDP were exactly equal to potential output
cyclically adjusted budget balance
A _______ ____ runs from October 1 to September 30 and is labeled according to the calendar year in which it ends
______ ____ is government debt held by individuals and institutions outside the government
The _______-______ _____ is the government’s debt as a percentage of GDP
___________ ___________ are spending promises made by governments that are effectively a debt despite the fact that they are not included in the usual debt statistics
If government spending exceeds tax revenues, which of the following is necessarily true? There is a
I. positive budget balance
II. budget deficit
I and II only
The cyclically adjusted budget deficit is an estimate of what the budget balance would be if real GDP were __________________
equal to potential output
During a recession in the United States, what happens automatically to tax revenues and government spending?
Tax revenues will decrease and Government spending will increase
Which of the following is a reason to be concerned about persistent budget deficits?
a. crowding out
b. government default
c. the opportunity cost of future interest payments
d. higher interest rates leading to decreased long-run growth
e. all of the above
all of the above
The Federal Reserve can move the interest rate through open market operations that shift the money supply curve. In practice, the Fed sets a ______ ____ ____ ____ and uses open market operations to achieve that target
target federal funds rate
________ _________ _________ is monetary policy that increases aggregate demand
expansionary monetary policy
_______ __________ _________ is monetary policy that reduces aggregate demand
contractionary monetary policy
The _______ _____ ____ ___________ _________ is a rule for setting the federal funds rate that takes into account both the inflation rate and the output gap
Taylor rule for monetary policy
________ ___________ occurs when the central bank sets an explicit target for the inflation rate and sets monetary policy in order to hit that target
At each meeting of the Federal Open Market Committee, the Federal Reserve sets a target for which of the following?
I. The federal funds rate
II. the prime interest rate
III. the market interest rate
Which of the following actions can the Fed take to decrease the equilibrium interest rate?
a. increase the money supply
b. increase money demand
c. decrease the money supply
d. decrease money demand
e. both (a) and (d)
increase the money supply
Contractionary monetary policy attempts to ________ aggregate demand by ________ interest rates.
Which of the following is a goal of monetary policy?
a. zero inflation
c. price stability
d. increased potential output
e. decreased actual real GDP
When implementing monetary policy, the Federal Reserve attempts to achieve ____________
a low, but positive inflation rate
According to the concept of ________ _________, changes in the money supply have no real effects on the economy
In the long run, changes in the quantity of money affect which of the following?
I. Real aggregate output
II. Interest rates
III. the aggregate price level
An increase in the money supply will lead to which of the following in the short run?
a. higher interest rates
b. decreased investment spending
c. decreased consumer spending
d. increased aggregate demand
e. lower real GDP
increased aggregate demand
A 10% decrease in the money supply will change the aggregate price level in the long run by _________
Monetary neutrality means that, in the long run, changes in the money supply _____________
have no real effect on the economy
A graph of percentage increases in the money supply and average annual increases in the price level for various countries provides evidence that ____________
money is neutral in the long run
According to the _________ _____ __ ___ ___ ______, the real quantity of money is always at its long run equilibrium level
classical model of the price level
An __________ ____ is a reduction in the value of money held by the public caused by inflation
________-_______ ________ is inflation that is caused by a significant increase in the price of an input with economy-wide importance
__________-__________ ___________ is inflation that is caused by an increase in aggregate demand
The real quantity of money is:
I. equal to M/P
II. the money supply adjusted for inflation
III. higher in the long run when the Fed buys government securities.
I and II only
In the classical model of the price level,
a. only the short run aggregate supply curve is vertical
b. both the short run and long run aggregate supply curves are vertical
c. only the long run aggregate supply curve is vertical
d. both the short-run aggregate demand and supply curves are vertical
e. both the long-run aggregate demand and supply curves are vertical
both the short run and long run aggregate supply curves are vertical
The classical model of the price level is most applicable in _________
periods of high inflation
An inflation tax is ____________
the result of a decrease in the value of money held by the public
Revenue generated by the government’s right to print money is known as ___________
The ______-_____ _______ _____ is the negative short-run relationship between the unemployment rate and the inflation rate
Short-Run Phillips Curve
The _______________ ___________ _____ ____ ____________ or _______ is the unemployment rate at which inflation does not change over time
non accelerating inflation rate of unemployment, or NAIRU
The ____ ____ ______ _____ shows the relationship between unemployment and inflation after expectations of inflation have had time to adjust to experience
Long-run Phillips Curve
_____ ________ is the reduction in aggregate demand arising from the increase in the real burden of outstanding debt caused by deflation
There is a ____ _______ on the nominal interest rate: it cannot go below zero.
A ________ ___ is a situation in which conventional monetary policy is ineffective because nominal interest rates are up against the zero bound
The Long-run Phillips curve is
I. the same as the short run Phillips curve.
III. the short-run Phillips curve plus expected inflation
The Short run Phillips Curve shows a _______ relationship between ____________
negative relationship between unemployment and inflation
An increase in expected inflation will shift __________
the Short run phillips curve upward
Bringing down inflation that has become embedded in expectations is called _________
Debt deflation is ___________
a. the effect of deflation in decreasing aggregate demand.
b. an idea proposed by Irving Fisher
c. a contributing factor in causing the Great Depression
d. due to differences in how borrowers/lenders respond to inflation losses/gains
e. all of the above
all of the above
_______________ _______ ____________ is the use of monetary and fiscal policy to smooth out the business cycle
Monetary policy activism
_________ asserts that GDP will grow steadily if the money supply grows steadily
____________ _________ __________ is the use of changes in the interest rate or the money supply to stabilize the economy
Discretionary Monetary Policy
A ________ __________ _________ is a formula that determines the central bank’s actions
monetary policy rule
The _________ ______ ____ _____ emphasizes the positive relationship between the price level and the money supply. It relies on the velocity equation (MxV=PxY)
Quantity Theory of Money
The ________ __ ________ is the ratio of nominal GDP to the money supply. It is a measure of the number of times the average dollar bill is spent per year
velocity of money
According to the _________ _____ __________, to avoid accelerating inflation over time, the unemployment rate must be high enough that the actual inflation rate equals the expected inflation rate.
natural rate hypothesis
A ________ __________ __________ results when politicians use macroeconomic policy to serve political ends
political business cycle
_______ __________ _____________ is an approach to the business cycle that returns to the classical view that shifts in the aggregate demand curve affect only the aggregate price level, not aggregate output
New Classical macroeconomics
___________ _____ is the view that individuals and firms make decisions optimally, using all available information
According to ____ ______________ __________, market imperfections can lead to price stickiness for the economy as a whole
new Keynesian economics
_______ ________ _____ _______ claims that fluctuations in the rate of growth of total factor productivity cause the business cycle
Real business cycle theory
Which of the following was an important point emphasized in Keynes’ influential work?
I. In the Short run, shifts in aggregate demand affect aggregate output
II. Animal spirits are an important determinant of business cycles
III. in the long run we’re all dead.
I, II, and III
Which of the following is a central point of monetarism?
a. Business cycles are associated with fluctuations in money demand.
b. Activist monetary policy is the best way to address business cycles.
c. Discretionary monetary policy is effective while discretionary fiscal policy is not
d. The Fed should not follow a monetary policy rule
e. All of the above
The Fed should not follow a monetary policy rule
The natural rate hypothesis says that the unemployment rate should be ________
high enough that the actual rate of inflation equals the expected rate
The main difference between the classical model of the price level and Keynesian economics is that ___________
the classical model assumes a vertical short-run aggregate supply curve
That fluctuations in total factor productivity growth cause the business cycle is the main tenet of which theory?
real business cycle
Is expansionary monetary policy helpful in fighting recessions? (Classical)
Is expansionary monetary policy helpful in fighting recessions? (Keynesian)
Is expansionary monetary policy helpful in fighting recessions? (Monetarism)
Is expansionary monetary policy helpful in fighting recessions? (Modern Consensus)
Yes, except in special circumstances
Is expansionary fiscal policy effective in fighting recessions? (Classical)
Is expansionary fiscal policy effective in fighting recessions? (Keynesian)
Is expansionary fiscal policy effective in fighting recessions? (Monetarism)
Is expansionary fiscal policy effective in fighting recessions? (Modern Consensus)
Can monetary and/or fiscal policy reduce unemployment in the long run? (Classical)
Can monetary and/or fiscal policy reduce unemployment in the long run? (Keynesian)
Can monetary and/or fiscal policy reduce unemployment in the long run? (Monetarism)
Can monetary and/or fiscal policy reduce unemployment in the long run? (Modern Consensus)
No, except in special circumstances
Should monetary policy be used in a discretionary way? (Classical)
Should monetary policy be used in a discretionary way? (Keynesian)
Should monetary policy be used in a discretionary way? (Monetarism)
Should monetary policy be used in a discretionary way? (Modern Consensus)
Still in dispute
Which of the following is an example of an opinion on which economists have reached a broad consensus?
I. The natural rate hypothesis holds true.
II. Discretionary fiscal policy is usually counterproductive.
III. Monetary policy is effective, especially in a liquidity trap.
I and II only
Which of the following is stressed by supply siders?
a. Taxes should be increased
b. Lower taxes will lead to lower tax revenues
c. It is important to increase incentives to work, save, and invest.
d. The economy operates on the upward-sloping section of the Laffer curve.
e. Supply side views are widely supported by empirical evidence.
It is important to increase incentives to work, save, and invest
Which of the following is true regarding central bank targets?
a. The Fed has an explicit inflation target.
b. All central banks have explicit inflation targets.
c. No central banks have explicit inflation targets.
d. The Fed clearly does not have an implicit inflation target.
e. Economists are split regarding the need for explicit inflation targets
Economists are split regarding the need for explicit inflation targets
The Fed’s main concerns are _____________
inflation and unemployment
The “clean little secret of macroeconomics” is that __________
economists have reached a significant consensus
A country’s _________ __ __________ _______ are a summary of the country’s transactions with other countries.
balance of payments accounts
A country’s __________ ____ __________ ____ _____ __________ ________ or the ________ _________ is its balance of payments on goods and services plus net international transfer payments and factor income
balance of payments on the current account, or the current account
A country’s ___________ __ ________ __ ______ ___ _________ is the difference between its exports and its imports during a given period
balance of payments on goods and services
The ____________ _______ ________, or ________ ___________, is the difference between a country’s exports and imports of goods
merchandise trade balance, or trade balance
A country’s ____________ __ _____________ __ ____ ________ __________, or simply the _________ _________, is the difference between its sales of assets to foreigners and its purchases of assets from foreigners during a given period
balance of payments on the financial account, or the financial account
Current Account (CA) + Financial Account (FA) = __________
Current Account = ____________
The current account includes which of the following?
I. payments for goods and services
II. transfer payments
III. factor income
I, II, and III
The balance of payments on the current account plus the balance of payments on the financial account is equal to ________
The financial account was previously known as the ___________
The trade balance includes which of the following?
I. imports and exports of goods.
II. imports and exports of services
III. net capital flows
Which of the following will increase the demand for loanable funds in a country?
a. economic growth
b. decreased investment opportunities
c. a recession
d. decreased private savings rates
e. government budget surpluses