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Macro Econ Cheat Sheet (DRAFT) by


This is a draft cheat sheet. It is a work in progress and is not finished yet.

Study guide 2

The most important determ­inant of consumer spending is:
the level of income.
With a marginal propensity to save of .4, the marginal propensity to consume will be:
1.0 minus .4.
As disposable income goes up, the:
average propensity to consume falls.
The relati­onship between consum­ption and disposable income is such that:
a direct and relatively stable relati­onship exists between consum­ption and income.
If the MPC is .8 and disposable income is $200, then:
consum­ption and saving cannot be determined from the inform­ation given.
John Maynard Keynes created the aggregate expend­itures model based primarily on what historical event?
Great Depres­sion.
The aggregate expend­itures model is built upon which of the following assump­tions?
Prices are fixed.
In the aggregate expend­itures model, it is assumed that invest­ment:
does not change when real GDP changes.
All else equal, a large decline in the real interest rate will shift the:
investment schedule upward.
Refer to the diagrams. Curve A
is an investment demand curve and curve B is an investment schedule.
Other things equal, the slope of the aggregate expend­itures schedule will increase as a result of:
an increase in the MPC.
In a private closed economy, when aggregate expend­itures exceed GDP:
business invent­ories will fall.
The aggregate demand curve:
shows the amount of real output that will be purchased at each possible price level.
The intere­st-rate effect suggests that:
an increase in the price level will increase the demand for money, increase interest rates, and decrease consum­ption and investment spending.
The real-b­alances effect indicates that:
a higher price level will decrease the real value of many financial assets and therefore reduce spending.
The foreign purchases effect suggests that a decrease in the U.S. price level relative to other countries will:
increase U.S. exports and decrease U.S. imports.
If the price level increases in the United States relative to foreign countries, then American consumers will purchase more foreign goods and fewer U.S. goods. This statement describes:
the foreign purchases effect.
Which of the following is incorrect?
When the price level increases, real balances increase and businesses and households find themselves wealthier and therefore increase their spending.
The group of three economists appointed by the president to provide fiscal policy recomm­end­ations is the:
Council of Economic Advisers.
Counte­rcy­clical discre­tionary fiscal policy calls for:

Study guide

Fiscal policy refers to the:
deliberate changes in government spending and taxes to stabilize domestic output, employ­ment, and the price level.
Discre­tionary fiscal policy is so named because it:
involves specific changes in T and G undertaken expressly for stabil­ization at the option of Congress.
An economist who favors smaller government would recommend:
tax cuts during recession and reductions in government spending during inflation.
Discre­tionary fiscal policy will stabilize the economy most when:
deficits are incurred during recessions and surpluses during inflat­ions.
An approp­riate fiscal policy for a severe recession is:
a decrease in tax rates.
An approp­riate fiscal policy for severe demand­-pull inflation is:
a tax rate increase.
In an aggregate demand­-ag­gregate supply diagram, equal decreases in government spending and taxes will:
shift the AD curve to the left.
Which of the following represents the most expans­ionary fiscal policy?
A $10 billion increase in government spending.
A contra­cti­onary fiscal policy is shown as a:
leftward shift in the economy's aggregate demand curve.
A tax reduction of a specific amount will be more expans­ionary the:
larger is the economy's MPC.
Money functions as:
all of these.
If you are estimating your total expenses for school next semester, you are using money primarily as:
a unit of account.
If you write a check on a bank to purchase a used Honda Civic, you are using money primarily as:
a medium of exchange.
Purchasing common stock by writing a check best exempl­ifies money serving as a:
medium of exchange.
When economists say that money serves as a unit of account, they mean that it is:
a monetary unit for measuring and comparing the relative values of goods.
The paper money used in the United States is:
Federal Reserve Notes.
In the United States, the money supply (M1) is comprised of:
coins, paper currency, and checkable deposits.
Checkable deposits are classified as money because:
they can be readily used in purchasing goods and paying debts.
To say that coins are "­token money" means that:
their face value is greater than their intrinsic value.
In defining money as M1, economists exclude time deposits because:
they are not directly or immedi­ately a medium of exchange.
Currency in circul­ation is part of:
both M1 and M2.
The amount of money reported as M2:
is larger than the amount reported as M1.
Paper money (currency) in the United States is issued by the:
Federal Reserve Banks.
"­Nea­r-m­oni­es" are included in:
M2 only.
Most modern banking systems are based on:
fractional reserves.
A fractional reserve banking system:
is suscep­tible to bank "­pan­ics­" or "­run­s."
Bank panics:
are a risk of fractional reserve banking but are unlikely when banks are highly regulated and lend prudently.
The claims of the owners of a firm against the firm's assets are called:
net worth.

Study guid

What are the three basic functions of money? Describe how rapid inflation can undermine money’s ability to perform each of the three functions.
a) Money is a medium of exchange, a unit of account, and a store of value. b) People will only accept money in exchange for the goods and services for the work they perform. Rapid inflation decreases the value of money and makes it impossible to adjust prices instan­tan­eously. As a store of value and using the rule of 70, one can estimate how long it takes a dollar savings to lose half the purchasing power.
What “backs” the money supply in the United States? What determines the value (domestic purchasing power) of money? How does the purchasing power of money relate to the price level? Who in the United States is respon­sible for mainta­ining money’s purchasing power?
a) Nothing backs the money supply, except for the people’s trust in the govern­ment. b) Money has value only because people use it as a medium of exchange. c) The value of money is inversely related to price levels. d) The Board of Governors is respon­sible
Does leverage increase the total size of the gain or loss from an invest­ment, or just the percentage rate of return on the part of the investment amount that was not borrowed? How would lowering leverage make the financial system more stable?
a) Leverage increases the total gain or loss from invest­ment. Lowering leverage lowers the risk.
What is the basic objective of monetary policy? What are the major strengths of monetary policy? Why is monetary policy easier to conduct than fiscal policy?
a) The basic objective is to assist the economy is achieving a full employ­ment, non-in­fla­tionary level of output. b) Monetary policy takes affect much quicker than fiscal.
Explain the links between changes in the nation’s money supply, the interest rate, investment spending, aggregate demand, real GDP, and the price level.
a) Money supply has an inverse relati­onship with interest rates. If the Feds pursue an anti –infla­tionary policy than it would decrease the money supply and increase interest rates. High interest rates decrease spending which moderates aggregate spending and inflat­ionary pressure. Feds would need to put in an expans­ionary policy to increase money supply to stimulate the economy. The lower the prices the higher the aggregate demand, which is a function of GDP. This all affects the consumers reaction to spending or saving.