Banks and savings and loans were allowed to issue NOW accounts nationwide in 1981. An unexpected result was that the relationship between the growth of M1 and GDP broke down. The reason was that customers of depository institutions transferred funds from savings accounts, which are part of M2, into interest-bearing NOW accounts, which are part of M1. The Fed stopped using the growth of M1 as a major policy variable for monetary policy in 1982. Shortly thereafter in 1987, the Fed no longer set growth targets for M1.
In the early 1990s, the growth rate of M2 and a fairly strong relationship between it and GDP began to break down. What happened is that some holders of savings and time deposits moved those funds into mutual funds. M2 decreased but economic activity did not. The upshot was that the Fed could not rely
on the past historical relationship between M2 and GDP.
If the relationship between the money supply and the level of economic activity is not predictable using either M1 or M2, what can you say about how well the quantity theory of money predicts the effect of an increase in the money supply on the level of GDP during a recession? What do you think is the explanation?
Banks and savings and loans were allowed to issue NOW accounts nationwide in 1981. An unexpected result was that the relationship between the growth of M1 and GDP broke down. The reason was that customers of depository institutions transferred funds from savings accounts, which are part of M2, into interest-bearing NOW accounts, which are part of M1. The Fed stopped using the growth of M1 as a major policy variable for monetary policy in 1982. Shortly thereafter in 1987, the Fed no longer set growth targets for M1.
In the early 1990s, the growth rate of M2 and a fairly strong relationship between it and GDP began to break down. What happened is that some holders of savings and time deposits moved those funds into mutual funds. M2 decreased but economic activity did not. The upshot was that the Fed could not rely
on the past historical relationship between M2 and GDP.
If the relationship between the money supply and the level of economic activity is not predictable using either M1 or M2, what can you say about how well the quantity theory of money predicts the effect of an increase in the money supply on the level of GDP during a recession? What do you think is the explanation?
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Question 3
According to Joseph Schumpeter, the theory of creative destruction describes a process by which
A | some new products unleash a gale of destruction that drive other new products out of the market. | |
B | new products unleash a gale of destruction that drives old products out of the market. | |
C | new products are created by the destruction of capital. | |
D | the creation of new products never involves the destruction of old products. |
Question 4
Which of the following countries had the highest GDP per capita in 2012?
A Qatar | ||
B | United States | |
C | Japan | |
D | Norway |
Question 5
________ save a ________ of their income. This ________ capital in their economy and raises economic growth.
A | Developing countries; large proportion; decreases | |
B | Developing countries; small proportion; increases | |
C | High-income countries; large proportion; increases | |
D | High-income countries; small proportion; increases |
Question 6
The demand for loanable funds is determined by the willingness of ________ to borrow money to engage in new investment projects.
A
A | government | |
B | households | |
C | banks | |
D | firms |
Question 7
The U.S. economy has been more stable since 1950.
True
False
Question 8
When the economy reaches a trough in a business cycle, which of the following will occur?
A | Income, production, and employment will continue to fall. | |
B | Income, production, and employment will begin to rise. | |
C | Income and production will rise, but employment will continue to fall. | |
D | Employment rises, but income and production will continue to fall. |
Question 9
In a closed economy, what is the relationship between saving and investment?
A | Saving is greater than investment. | |
B | Investment is greater than saving. | |
C | Investment is equal to saving. | |
D | Investment may be greater or smaller than saving. |
Question 10
The per-worker production function shows the relationship between ________ per hour worked and ________ per hour worked, holding ________ constant.
A | labor; real GDP; technology | |
B | capital; real GDP; technology | |
C | labor; capital; real GDP | |
D | capital; labor; real GDP |
Question 11
New growth theory states that increases in ________ capital will result in ________ at the ________ level.
A | knowledge; increasing returns to scale; firm | |
B | physical; decreasing returns to scale; firm | |
C | knowledge; decreasing returns to scale; economy | |
D | knowledge; increasing returns to scale; economy |
Question 12
Which of the following is not a reason why the Industrial Revolution occurred when and where it did?
A | The British government was committed to upholding private property rights. | |
B | The British government was able to eliminate arbitrary increases in taxes. | |
C | The British government was able to more easily seize wealth. | |
D | Institutional changes by the British government helped protect wealth. |
Question 13
Growth in real GDP per capita for the world economy was greatest during
A | the seventeenth century. | |
B | the eighteenth century. | |
C | the nineteenth century. | |
D | the twentieth century. |
Question 14
Which of the following is a normative statement about economic growth?
A | Economic growth is associated with higher labor productivity growth. | |
B | Economic growth increases GDP per capita. | |
C | Economic growth hurts developing countries. | |
D | Foreign direct investment stimulates economic growth. |
Question 15
The effect of a recession on a company like Whirlpool Corporation is such that
A | sales decline more sharply for Whirlpool as compared to firms that do not produce durable goods. | |
B | profits fall less sharply as compared to firms that do not produce durable goods. | |
C | the decline in sales is more short-lived as compared to firms that do not produce durable goods. | |
D | there is no difference in the impact of the recession on its profits as compared to firms that do not produce durable goods. |
Question 16
For the recessions in the United States since the 1950s,
A | cyclical unemployment has been non-existent. | |
B | unemployment rises on average by about 1.2 percentage points 12 months after a recession begins. | |
C | unemployment falls on average by 2 percentage points 12 months after a recession begins. | |
D | unemployment rises on average about 5 percentage points 12 months after a recession begins. |
Question 17
You are an economic advisor to the president. You are asked to recommend a policy to promote long-term economic growth in the economy. Which of the following policies would you choose?
A | a reduction in sales taxes | |
B | an investment tax credit | |
C | a reduction in taxes on luxury yachts | |
D | All of these |
Question 18
In comparison to a government that runs a balanced budget, when the government runs a budget deficit,
A | the equilibrium interest rate will fall. | |
B | business investment will fall. | |
C | household savings will fall. | |
D | None of these |
Question 19
If labor productivity growth slows down in a country, this means that the growth rate in ________ has declined.
A | labor force participation | |
B | the quantity of goods or services that can be produced by one hour of work | |
C | the working-age population | |
D | nominal GDP |
Question 20
Policies to promote growth by increasing saving and investment work through
A | decreasing the supply of loanable funds, lowering the interest rate, raising the level of investment in physical capital. | |
B | increasing the supply of loanable funds, increasing the interest rate, raising the level of investment in physical capital. | |
C | increasing the supply of loanable funds, lowering the interest rate, lowering the level of investment in physical capital. | |
D | increasing the supply of loanable funds, lowering the interest rate, raising the level of investment in physical capital. |
Question 1
The higher the capital utilization rate, the greater the depreciation rate.
True |
False |
Question 2
Higher capital utilization rates may raise the user costs of capital because higher utilization rates imply
operating at inconvenient times. |
paying overtime to employees operating the machines. |
operating when complementary services like transporters are unavailable or more expensive. |
All of the above. |
Question 3
If the rental price of capital increase, the capital utilization rate
increases. |
decreases. |
remains the same. |
depends on whether the substitution rate is greater than the income effect |
Question 4
The vacancy rate in the labor market is
the number of job openings divided by the number of unemployed people in the labor force. |
the number of job openings divided by the number of workers in the labor force. |
the ratio of open jobs to filled jobs. |
the ratio of open jobs to the total number of jobs that employers want occupied. |
Question 5
Unemployment can exist in a market clearing model if it takes some search time for workers to find jobs.
True |
False |
Question 6
A decrease in workersâ effective real incomes while they are unemployed will
lower the job finding rate and raise the expected duration of unemployment. |
lower the job finding rate and the expected duration of unemployment. |
raise the job finding rate and lower the expected duration of unemployment. |
raise the job finding rate and the expected duration of unemployment. |
Question 7
In the Barro model, the natural rate of unemployment is
positively related to the job separations rate. |
zero. |
fixed. |
positively related to the job finding rate. |
Question 8
If the interest rate increases, the real demand for money also increases
True |
False |
Question 9
Commodity money is money that has value because
of the intrinsic value of the commodity. |
it is legal tender. |
the government says so. |
All of the above. |
Question 10
High-powered money is
money held by business for investment. |
total currency in circulation plus depository institution deposits at the Fed. |
total currency in circulation. |
government bonds held by the public and depository institutions. |
Question 11
U.S. M1 money includes
currency held by the public. |
checkable deposits. |
travelerâs checks. |
All of the above. |
Question 12
U.S. M2 money includes
currency, time deposits, and government bonds. |
savings deposits, small time deposits, and private bonds. |
checkable deposits, savings deposits, and small time deposits. |
retail money market mutual funds, small time deposits, and government bonds. |
Question
Money is different from other assets like capital and bonds in that
money does not pay interest. |
money has intrinsic value. |
money is a better long term store of value. |
All of the above. |
Question
If a personâs income doubles, we expect their cash holdings to
double |
more than double. |
less than double. |
decrease. |
Question 15
Real money demand does not change when
nominal GDP changes. |
the interest rate changes. |
the price level changes. |
All of the above. |
Question 16
All else constant, the price level rises when the supply of money increases.
True |
False |
Question 17
If the nominal interest rate were to increase, then
money demand decreases and the price level increases. |
money demand increases and the price level decreases. |
the money supply and the price level would increase. |
the money supply and the price level would decrease. |
Question 18
Real money demand is a function of real GDP and the nominal interest rate.
True |
False |
Question 19
The real return on money is zero.
True |
False |
Question 20
If the expected inflation rate is 5% and the unexpected inflation rate is 4%, the actual inflation is
1% |
9% |
-1% |
1.25% |
Question 21
When the rate of growth of money is constant
the inflation rate equals the growth rate of money. |
the nominal interest rate rises. |
real money balances are declining. |
All of the above. |
Question 22
A decrease in the money growth rate in the market clearing model causes
a decrease in the nominal interest rate. |
an increase in money demand. |
a decrease in the price level. |
All of the above. |
Question 23
A decrease in the money growth rate in the market clearing model causes
an increase in the nominal interest rate. |
an increase in money demand. |
an increase in the price level. |
All of the above. |
Question 24
Under price level targeting the money supply becomes
neutral |
endogenous |
exogenous |
predetermined |
Q 25 During a recession, the interest rate falls tending to cause money demand to rise, but is at least partly offset by real GDP falling tending to cause money demand to fall.
True |
False |