...Principles of Macroeconomics, 9e - TB1 (Case/Fair/Oster) Chapter 18 Debates in Macroeconomics: Monetarism, New Classical Theory, and Supply-Side Economics 18.1 Keynesian Economics 1 Multiple Choice 1) Who wrote the General Theory of Employment, Interest, and Money? A) Adam Smith B) David Ricardo C) Milton Friedman D) John Maynard Keynes Answer: D Diff: 1 Topic: Keynesian Economics Skill: Fact 2) Keynesian economics includes the idea that A) economic policies are ineffective. B) the economy is basically stable. C) prices adjust to clear the markets. D) labor markets don't always clear due to wage rigidities. Answer: D Diff: 1 Topic: Keynesian Economics Skill: Fact 3) Among the propositions of the Keynesian school of thought is A) economic policies are ineffective. B) aggregate supply management is the key to a stable economy. C) aggregate demand determines equilibrium output. D) rational expectations. Answer: C Diff: 1 Topic: Keynesian Economics Skill: Fact 4) Keynes believed which of the following? A) The government has a role to play in fighting inflation, but not in fighting unemployment. B) The government has a role to play in fighting unemployment, but not in fighting inflation. ...
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...PRE-TEST – ANSWER KEY Econ 361, 1st Hourly Prof. Khan Mohabbat 1. The broadest measure of the aggregate price level is the a) GDP deflator.* b) consumer price index. c) producer price index. d) d. gross domestic product. 2. If the value of a price index was 125 for 2005 and 75 for 1982, and GDP was 2500 in 2005 compared to 600 in 1982, the value of real 2005 GDP in terms of 1982 prices is a) 1500.* b) 1000. c) 2500. d) 360. 3. The index that measures the change in price of a typical basket of consumer goods is a) the GDP deflator. b) the consumer price index.* c) nominal GDP. d) real GDP. 4. Personal income equals personal disposable income plus a) payroll taxes. b) transfer payments. c) dividend payments. d) personal saving. e) personal taxes.* 5. If real GDP exceeds potential GDP, this means that a) output is below the level produced at the benchmark rate for high employment and high rate of resource utilization. b) this cannot occur; the economy can never be at a point where real GDP exceeds potential GDP. c) cyclical output is above what the economy can sustain in the long-run.* d) the economy is expanding. 6. In the base year, the relationship between nominal and real GDP is a) uncertain. b) one of equality.* c) real GDP is higher. d) nominal GDP is higher. 1 7. Gross domestic product includes a) all intermediate and final goods and services produced. b) the current production of final goods and services with a country’s borders.* c) exchanges of assets. d) the...
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...9e - TB1 (Case/Fair/Oster) Chapter 12 Aggregate Demand in the Goods and Money Markets 12.1 Planned Investment and the Interest Rate 1 Multiple Choice 1) The market in which the equilibrium level of aggregate output is determined is the A) labor market. B) bond market. C) money market. D) goods market. Answer: D Diff: 1 Topic: Planned Investment and the Interest Rate Skill: Conceptual 2) The market in which the equilibrium level of the interest rate is determined is the A) money market. B) goods market. C) labor market. D) services market. Answer: A Diff: 1 Topic: Planned Investment and the Interest Rate Skill: Conceptual 3) The two links between the goods market and the money market are A) income and the inflation rate. B) the interest rate and the unemployment rate. C) income and the interest rate. D) the inflation rate and the unemployment rate. Answer: C Diff: 2 Topic: Planned Investment and the Interest Rate Skill: Conceptual AACSB: Reflective Thinking 4) Which of the following is determined in the goods market? A) the equilibrium interest rate B) money demand C) income D) money supply Answer: C Diff: 1 Topic: Planned Investment and...
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...stock market will lose its informational efficiency. Informational efficiency is defined as at any given time, stock prices fully reflect all available information of the market. Thus, no investor has an advantage in predicting a return on a stock price because no one has access to information not already available to everyone else. Identifying the relationship or informational efficiency thus can be used to correct the current economic stabilization policies. Therefore, the issue of whether stock prices and macroeconomic variables are related or not have received considerable attention. This paper provides empirical evidence of the relationship between stock prices with each of the macroeconomic variables: exchange rate, inflation rate, money supply variables and so on. The knowledge of the prevailing relationship between stock prices one the one hand, and micro variables like market price/ earnings, growth rate in market capitalization, dividend yield and macro variables, like inflation, industrial production, foreign remittance, GDP and the like on the other hand, is predominantly important in view of the fact that a stable relationship among these variables is likely to form an important postulate in a variety of economic models. Many issues behind the stock market...
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...CHAPTER 11 MONETARY AND FISCAL POLICY Chapter Outline: • The effects of fiscal and monetary policy on output • Monetary policy and the transmission mechanism • The liquidity trap • The classical case • The quantity theory of money • Fiscal policy and crowding out • Monetary accommodation • The effects of alternative policies on the composition of output • The U.S. economy in the 1980s and 1990s • Anticipatory monetary policy • The policy mix during the German re-unification Changes from the Previous Edition: The material in this chapter has been updated, but its format is essentially the same. More emphasis is given to the economic expansion in the U.S. in the 1990s. Introduction to the Material: Chapter 11 uses the IS-LM model derived in Chapter 10 to show how monetary and fiscal policies can be used to dampen economic disturbances. The economic effects of various policy mixes are highlighted in discussions of actual events: the recession and recovery in the United States in the 1980s, the U.S. recession in 1990-91, the long economic expansion thereafter, and the policies enacted by Germany during the re-unification process in 1990-92. First, the Fed's conduct of monetary policy is discussed, with an explanation of how open market operations can be used to change nominal money supply. The effectiveness of monetary policy in changing the amount of output demanded depends on the steepness of the LM-curve. The transmission mechanism, that...
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...2013 The Control of Money Supply & Demand of Money Today, we live in a world of scarcity where resources are limited and the choices one make has become so vital the economy. In the US, the government, the Federal Reserve, have control on the effect of supply and demand and money growth. As both supply and demand for money each depend on the interest rate, we specifically look at how inflation effects supply and demand on money. There are differences of money supply and demand for money; where it comes from and how it’s demanded. Given there are many variables that can effect money supply and the demand for money, we will focus on where it comes from and how inflation effects it. In the book, The General Theory of Employment, Interest, and Money by John Maynard Keynes, he explains liquidity factors in economic interest rates that balance supply and demand for money. There are two different types of interest rate that help explain, in monetary terms, how much borrowers pay for borrowed funds. Generally, during a period of inflation where prices increase, nominal interest can be misunderstood. As the nominal interest rate rises or falls, it can be misleading as to how much the borrower is truly borrowing and how much the lender is receiving. When the borrower repays the principle loan, they lender may not be able to purchase as much goods and services, then when originally loaned. This is because when the loan was initially issued the money was worth more than...
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...A REPORT ON THE EFFECT OF FISCAL DEFICIT ON WHOLE SALE PRICE INDEX IN INDIA Submitted by, Group 7 – Sec A Ankit Rout (U111007) Chinmaya Swain (U111017) Kavindra Sharma (U111027) Nikhil Lukose (U111037) Samik Bhattacharjee (U111047) Swarup Kumar Mishra (U111057) ------------------------------------------------- ACKNOWLEDGEMENT We would like to express our whole-hearted gratitude to all those who have helped with the report or have been associated with the report in any way and made it a worth-while experience. We are greatly indebted to our batch mates and our seniors for having shared their invaluable thoughts and opinions that went a long way in helping us gather information and analyse issues for the report. And, a special mention of Professor Latha Ravindran, whom we cannot thank enough for having given us the opportunity and her total support for working on this project and completing our report. Thank you. INtroduction For the last several years the GDP of India has been growing rapidly. The real GDP growth of India averaged 8.5% in the five years ending March 2010. But at the same time food price inflation and consumer price inflation too have been on the increasing curve. The relationship between fiscal deficit and inflation which is measured by WPI in India is an important issue in macroeconomics study. The main purpose of the study is to analyze the relationship between budget deficit and Whole Sale Price Index. The fiscal deficit...
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...In the short run, an increase in the money supply will push the interest rate down as money demand fluctuations alter people's desire for liquid assets and thus the prices and rates of return on bonds. In an open economy where interest parity between countries must be preserved the exchange rate will increase (currency depreciation) in order to create the expectation that it will fall faster in the future. This increase in the exchange rate makes domestic goods more attractive, thus increasing both foreign and domestic demand for domestically produced goods. This then encourages output growth. In the long run it will depend on whether the money supply increase is deemed to be permanent or temporary. Unless the change is permanent effects in the long run will not be felt. If the change IS permanent, the following will happen: - As money supply increases, the short run effects described above will mean that output is pushed above its natural level. However, as output is above its natural level, this means that workers and machines are working overtime (AA curve shifts right). In the short run it increases due to an increase in the money supply, but then it decreases in the long run as the real money supply is reduced by price increases over time. However it will not go back to its original level. It will be higher by the same percentage as the money supply has been increased by. Monetary policy has different effects in the short run and the long run. Expansionary monetary policies...
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...CHAPTER 11 MONEY, INTEREST, AND INCOME Chapter Outline • The Goods Market and the IS Curve • Investment and the Interest Rate • The Slope of the IS Curve • The Role of the Multiplier • The Position of the IS Curve • A Summary of the IS Curve • The Money Market and the LM Curve • The Demand for Money • The Supply of Money, Money Market Equilibrium and the LM Curve • The Slope of the LM Curve • Shifts in the LM Curve • A Summary of the LM Curve • Equilibrium in the Goods and Money Markets • Changes in the Equilibrium Income and Interest Rate: A First Look at Policy • Deriving the Aggregate Demand Curve • Working With Data Changes from the Previous Edition One of the major problems with this chapter in the previous editions is that the material was presented in a manner that made it sound like it would be difficult, which is not true. Therefore, the long introduction has been shortened, the confusing diagram (former Figure 12-2) has been removed, and the extra part concerning outline of the chapter has been removed. The derivation of the IS curve section has been rewritten at the beginning. Box 11-1 and Box 11-2 and 11-3 are new The LM curve section has been rewritten to make it more clear, and the relevant diagrams are now side by side, which makes much more sense. The last section of the chapter is rewritten to show the comparative statics of shifts in IS and LM; this serves as a good introduction to Chapter 12. Learning...
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...choice questions shown here is the same as that of the questions to be given in the exam. 1. Expansionary monetary policy (a) tends to lead to an appreciation of a nation's currency. (b) usually has no effect on a currency's exchange value. (c) tends to lead to a depreciation of the currencies of other nations. (d) tends to lead to a depreciation of a nation's currency. 2. If the number of people classified as unemployed is 20,000 and the number of people classified as employed is 230,000, what is the unemployment rate? (a) 8% (b) 8.7% (c) 9.2% (d) 11.5% 3. It is often true that as the economy begins to recover from a recession the unemployment rate rises. Which of the following statements would be the best explanation for this? (a) The unemployment rate would rise because as the economy initially recovers from a recession the demand for goods and services falls, so the demand for workers falls. (b) As the economy begins to recover from a recession, workers who were previously discouraged about their chances of finding a job begin to look for work again. (c) The unemployment rate seems to rise as the economy begins to recover from a recession because of errors in the way the data are collected. (d) As the economy initially recovers from a recession, firms do not immediately increase the number of workers they hire. Firms wait to hire more individuals until they are convinced that the recovery is strong. 4. If an individual who cannot find a job because his or her job skills have...
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...choice questions shown here is the same as that of the questions to be given in the exam. 1. Expansionary monetary policy (a) tends to lead to an appreciation of a nation's currency. (b) usually has no effect on a currency's exchange value. (c) tends to lead to a depreciation of the currencies of other nations. (d) tends to lead to a depreciation of a nation's currency. 2. If the number of people classified as unemployed is 20,000 and the number of people classified as employed is 230,000, what is the unemployment rate? (a) 8% (b) 8.7% (c) 9.2% (d) 11.5% 3. It is often true that as the economy begins to recover from a recession the unemployment rate rises. Which of the following statements would be the best explanation for this? (a) The unemployment rate would rise because as the economy initially recovers from a recession the demand for goods and services falls, so the demand for workers falls. (b) As the economy begins to recover from a recession, workers who were previously discouraged about their chances of finding a job begin to look for work again. (c) The unemployment rate seems to rise as the economy begins to recover from a recession because of errors in the way the data are collected. (d) As the economy initially recovers from a recession, firms do not immediately increase the number of workers they hire. Firms wait to hire more individuals until they are convinced that the recovery is strong. 4. If an individual who cannot find a job because his or her job skills have...
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...operations to influence the money supply and the respective consequences of such actions. Include a discussion of the money multiplier effect in your response. Justify your conclusions and provide appropriate examples. I believe that the FOMC has made the decision to slowly decrease the FED purchases to try to decrease the amount of debt the government creates. If they do this then the economy will suffer greatly. By lowering the amount of funds available to companies and people the less money will be spent and the economy will go down. Even by doing this at a slow rate will have a negative effect on the economy, companies will not have the money available to hire employees or be able to keep the ones they have. This will increase the amount of people unemployed. It will also affect the amount of money individuals will be spending. The FOMC buys and sells government securities to set the money supply. The government securities that are used in open market operations are Treasury bills, bonds and notes. If the FOMC wants to increase the money supply in the economy it will buy securities. Conversely, if the FOMC wants to decrease the money supply, it will sell securities. If the FMOC decreases the money supply the economy would be in big trouble. By decreasing the money supply companies and individuals would not have access to enough money to pay their employees or supply the public with the products they make. This would decrease the supply of any given product...
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...deposit expand the total money supply? Assume that the legal reserve requirement (required reserves ratio) is 20%. What is the effect of raising the legal reserve requirement to 50%? (4 pts) $10,000 will increase the money supply by $8,000, because $2,000 will be held in reserve. Raising the legal reserve requirement to 50% would reduce the money supply by $3,000. 2. Describe how Open Market Operations can be used in an expansionary monetary policy. (2 pts) Businesses get cheaper loans and are encouraged to expand so they can get more profits and more GDP. 3. What happens to the money supply if the FED raises the discount rate? Describe the effect on the banking system and on the money supply. (2 pts) Raising the discount rate is a form of contractionary monetary policy and the discount rate is the rate banks can borrow from the Fed. If the discount rate goes up, the interest rate banks charge will go up. In return, the money supply decreases. 4.Consider a full employment economy where the government wishes to increase the level of expenditures. The government chooses to finance these expenditures by increasing the money supply from $200 billion to $400 billion-. Further assume that the short run velocity of money is constant. a. What equation could you use to analyze this situation? Describe the neo-classical (monetarist) quantity theory of money that applies in this situation. (2pts) You would use the Quantity Theory of Money. MV=PT M-money supply V-velocity of circulation...
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...Causes and Effects of Inflation Author Author Affiliation Causes and Effects of Inflation Supply and demand are one of the key factors when it comes to the economics of a country or region. The two factors happen to be the greatest determinants of prices. In cases where there is a high demand and low supply in a region, the prices of commodities or services provided tend to hike. The hiked prices due to high demand and low supply lead to inflation. Inflation has become a worldwide phenomenon that has seen the cost of living to shoot up in most parts of the world. This increase in the cost of living is attributed to by the increase in the demand for basic commodities and a decrease in their supply due to increased cost of production. Even though the whole world experiences inflation, different countries have different inflation rates depending on their development stages. The major factors that contribute to the increase or decrease in inflation rates in a country include the quality theory of money approach, excessive demand and decrease in supply. This paper will discuss these causes of inflation and the effect they have on the economy as a whole. Causes of Inflation Many factors contribute to the increase or decrease of the inflation rate in a country. Spending habits of individuals happen to contribute greatly to increased inflation rates. A good example is when people have too much money to spend on a given product. The increase in the demand for that particular commodity...
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...expand the total money supply? Assume that the legal reserve requirement (required reserves ratio) is 20%. What is the effect of raising the legal reserve requirement to 50%? Since multiplier effect needs to be considered, the total increase in money supply at $10,000 would equal to $50,000 = [$10,000x(1/20%)=$50,000]. If the legal reserve requirement is increased to 50%, the total money supply would expand by only $20,000 = [10,000x(1/50%)=20,000]. From this example we can conclude that the lower the reserve requirement the higher the total expansion of money supply. 2. Describe how Open Market Operations can be used in an expansionary monetary policy. Fed could use Open Market Operations in order to achieve lower target for federal funds rate by buying bonds from banks and public. Purchase of bonds increases the reserves in the banking system, which in turn aids expansion of economy. 3. What happens to the money supply if the FED raises the discount rate? Describe the effect on the banking system and on the money supply. (2 pts) The Fed raises discount rate when it wants to discourage commercial banks from borrowing the money. By doing so the Fed hinders the ability of banks to get additional reserves and lend to businesses or public. The Fed usually does this when they want to restrict the money supply to prevent rapid rise of inflation or other economic perils. 4.Consider a full employment economy where the government wishes to increase the level of expenditures...
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