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ECON102 Study Guide - Midterm Guide: Real Interest Rate, Nominal Rigidity, Loanable Funds

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ivoryworm200
18 Oct 2017
School
University of Waterloo
Department
Economics
Course
ECON102
Professor
Corey Van De Waal

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ECON102 Full Course Notes
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ECON102 Full Course Notes
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Document Summary

Aggregate supply and aggregate demand: explains inflation and real gdp. Downward sloping nature of ad: substitution effect, real exchange rate effect, wealth effect. Sras: positive relationship: sticky wages, misconception: takes time for prices to adjust. Y = c + i + g + x m. C + s + t = c + i + g + x m. I = s + (t g) + (m x) When government expenditure greater than tax revenue: deficit. Country a has net taxes of 30 million and government expenditure of 35 million. Private savings in country a is 5 million and consumption expenditure is 80 million. Country a is running a deficit and national savings is 0. Determined by d and s for loanable funds. Factors determining d for loanable funds: expected profit, real interest rate. Factors affecting s for loanable funds: expected future income. + reserves + commercial bank and central band = monetary base.

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Related Questions

Consider the scenario in which the Fed is implementing a contractionary monetary policy aimed at alleviating inflationary pressures.In this regard please provide an answer to the questions listed below. In order to answer, it might be a good idea to use a money market diagram and show how interest rates affect the economy using the AD/AS diagram. No need to submit the graphs, but once again drawing the two graphs (money market and AD/AS) for yourself will go a long way in guiding you towards the right answer. Note. In the static AD/AS model, initially assume that the economy is in SR equilibrium and real GDP is above potential GDP. a) As a result of the contractionary monetary policy pursued by the Fed, what would happen with the interest rate? The interest rate is going to (rise/fall/stay fixed) Blank 1 . b) What would happen with the short run aggregate supply curve? Short run aggregate supply curve will shift (left/right/stay fixed) Blank 2 . c) What would happen with the long run aggregate supply curve? Long run aggregate supply curve will shift (left/right/stay fixed) Blank 3 . d) What would happen with the aggregate demand curve? Aggregate demand curve will shift (left/right/stay fixed) Blank 4 . e) What would happen with the Real GDP level? Real GDP will (rise/fall/stay fixed) Blank 5 . f) What would happen with the employment level? Unmployment level will (rise/fall/stay fixed) Blank 6 .

1.

In the money market, money supply is determined by the central bank, such as the Fed in the U.S. Because of this, money supply curve is usually vertical in the short run, while the money demand curve is downward sloping. The quantity demanded of money has an inverse relationship with the interest rate, but a direct relationship with both the price level and real GDP. Therefore, when the general price level increases, what will most likely happen?

A. The money demand curve will shift to the right.

B. The money demand curve will shift to the left.

C. Both the interest rate and investment will rise.

D. Only A and C.

E. Only B and C.

3.

Suppose workers become pessimistic about their future employment, which causes them to save more and spend less. If the economy is in the Keynesian range of the aggregate supply curve, then

A. real GDP will fall and the price level will rise.

B. real GDP will rise and the price level will fall.

C. only the real GDP will fall.

D. only the price level will fall.

E. both real GDP and the price level will fall.

5.

Which of the following will shift the aggregate demand curve to the left?

A. The federal government increases spending for highways and bridges.

B. Consumers expect an economic downturn.

C. The federal government increases income taxes.

D. Only A and C.

E. Only B and C.

6.

Which of the following will shift the aggregate supply curve to the left?

A. All workers agree to a reduction in wages.

B. The federal government increases the gasoline taxes.

C. An improvement in technology raises labor productivity.

D. Only A and C.

E. Only B and C

8.

There are also two kinds of deflation, the demand-pull deflation and cost-push deflation. Then which of the following is most likely to be true?

A. An increase in AD will cause the demand-pull deflation.

B. An increase in AS (or SRAS) will cause a cost-push deflation.

C. Economists worry about the demand-pull deflation more than the cost-push deflation.

D. Only A and C.

E. Only B and C.

9.

The short-run aggregate supply curve (SRAS) can be written as follows: Y = Yf + b (p - pe), where Y = real GDP, Yf = full-employment real GDP, p = price level, pe = expected price level, and b is a positive coefficient. The SRAS can be re-written as p = pe - (1/b)(Yf) + (1/b)(Y). Then which of the following is true?

A. An increase in pe will cause a rightward shift of the SRAS curve.

B. An increase in pe will cause a leftward shift of the SRAS curve.

C. An increase in Yf will cause a leftward shift of the SRAS curve.

D. Only A and C.

E. Only B and C.

(Monetary Policy and an Expansionary Gap) Suppose the Fed wishes to use monetary policy to close an expansionary gap.

a. Should the Fed increase or decrease the money supply?

b. If the Fed uses open-market operations, should it buy or sell government securities?

c. 10. Determine whether each of the following increases decreases, or remains unchanged in the short run: the market interest rate, the quantity of money demanded, investment spending, aggregate demand, potential output, the price level, and equilibrium real GDP.