Economics Review Chapters 7-12

The correct answer is velocity of money. Velocity of money refers to the number of times a dollar is used to transact an exchange in a year. It measures the rate at which money circulates within an economy. A higher velocity of money indicates a more active economy, as money is being spent and exchanged more frequently. This concept is important in understanding the relationship between money supply, economic activity, and inflation.

The correct answer is frictionally unemployed. Frictional unemployment refers to the temporary unemployment that occurs when individuals are transitioning between jobs or entering the job market for the first time. In this case, the 5,000 people who quit their jobs last month are actively seeking better employment opportunities, indicating that they are frictionally unemployed as they are in the process of searching for new jobs.

Money serves as a medium of exchange, meaning it is widely accepted in transactions for goods and services. It also acts as a measure of value, allowing individuals to compare the worth of different items. Lastly, money serves as a store of value, allowing individuals to save and accumulate wealth over time.

When the Fed purchases government securities, it increases banks' reserves. This means that banks have more money available to lend out to borrowers. As a result, the money supply in the economy increases because there is more money circulating through loans and spending. This can stimulate economic activity and promote growth.

Fiscal policy refers to the government's use of spending and taxation to influence the economy. In this context, the government can implement fiscal policy measures to create full employment without causing inflation. This can be done by increasing government spending and/or reducing taxes to stimulate aggregate demand and boost economic activity. By doing so, the government aims to close the inflationary gap, which occurs when aggregate demand exceeds the economy's capacity to produce goods and services without causing inflation. Therefore, fiscal policy is the correct answer in this case.

Aggregate expenditure refers to the total amount of spending in an economy. It includes consumer spending on consumption goods, business spending on investment goods, government spending, and spending by foreigners on net exports. This measure is used to determine the overall level of economic activity and is an important component in calculating the gross domestic product (GDP). By considering all these types of spending, aggregate expenditure provides a comprehensive view of the total demand in an economy.

Open market operations refer to the buying and selling of government securities by the central bank in the open market. By buying government securities, the central bank injects money into the economy, increasing the money supply. Conversely, selling government securities reduces the money supply. This tool is considered the most effective and frequently used because it allows the central bank to have direct control over the money supply, influencing interest rates and overall economic conditions. The discount rate, legal reserve requirement, federal funds rate, and margin requirement are also tools used by the central bank, but they are not as flexible or widely utilized as open market operations.

In the federal funds market, banks borrow from each other. This market allows banks to lend or borrow funds to meet their reserve requirements or to manage their short-term liquidity needs. Banks with excess reserves lend to banks that need additional funds, and this borrowing and lending activity helps to maintain stability in the banking system. By borrowing from each other, banks can ensure that they have enough funds to meet their obligations and maintain the smooth functioning of the financial system.

Government spending on interstate highways, public housing facilities, and defense projects can help close a recessionary gap. During a recession, there is a decrease in aggregate demand, leading to lower economic activity and higher unemployment rates. By increasing government spending on these projects, the president can stimulate economic growth, create jobs, and increase consumer spending. This will help close the recessionary gap by boosting aggregate demand and restoring economic stability.

In the federal funds market, banks borrow from each other. This market allows banks with excess reserves to lend to banks that need additional funds to meet their reserve requirements or to fulfill their short-term obligations. Banks can borrow from each other overnight or for a specific period of time, and the interest rate at which these transactions occur is known as the federal funds rate. This market helps to ensure that banks have enough liquidity to operate smoothly and meet their daily cash flow needs.

The Federal Open Market Committee (FOMC) directs open market operations. The FOMC is a committee within the Federal Reserve System that is responsible for making decisions regarding monetary policy, including the buying and selling of government securities in the open market. This committee consists of members from the Board of Governors and the regional Federal Reserve Banks, but it is the FOMC that ultimately directs and implements these operations.

Those on a fixed income and savers are among the losers from inflation. When inflation occurs, the value of money decreases, causing prices to rise. This means that those on a fixed income, such as retirees or individuals with fixed pensions, will find it more difficult to afford goods and services. Additionally, savers will see the purchasing power of their savings decrease as inflation erodes the value of their money over time. Therefore, both those on a fixed income and savers are negatively affected by inflation.

The capital-output ratio is a measure of the efficiency with which capital is used in the production process. It is calculated by dividing the capital stock (the total amount of physical capital in an economy) by GDP (the total value of goods and services produced in an economy). This ratio helps to assess the productivity and effectiveness of capital investment in generating economic output.

An increase in technology will shift the economy's productivity curve because technological advancements improve efficiency and productivity in the production process. With better technology, businesses can produce more output with the same amount of inputs, such as labor and capital. This leads to an increase in the overall productivity of the economy, shifting the productivity curve upwards. As a result, the economy can produce more goods and services, leading to higher GDP per capita.

Demand deposits are considered a bank liability because they represent funds that customers have deposited into their bank accounts and can withdraw on demand. The bank is obligated to hold and safeguard these funds, making them liable to their customers. Demand deposits are a key component of a bank's liabilities as they represent a debt owed by the bank to its customers.

If $30 billion in new investment is added to the economy and the marginal propensity to consume (MPC) is 0.9, it means that 90% of the additional income will be spent. This means that for every $1 increase in income, $0.90 will be spent. Therefore, if $30 billion is added to the economy, the total increase in national income would be $30 billion divided by (1 - 0.9), which is equal to $300 billion.

The correct answer is 1/legal reserve requirement. The potential money multiplier, denoted as m, represents the maximum amount of money that can be created by banks through the lending process. It is calculated by dividing 1 by the legal reserve requirement. The legal reserve requirement is the percentage of deposits that banks are required to hold as reserves. By dividing 1 by this requirement, we can determine the maximum amount of loans that can be created using the available reserves. Therefore, the correct answer is 1/legal reserve requirement.

Keynesians identify three principal motives for demanding money: the transactions motive, speculative motive, and precautionary motive. The transactions motive refers to the need for money to carry out day-to-day transactions such as buying goods and services. The speculative motive refers to the desire to hold money in order to take advantage of investment opportunities or to speculate on future changes in asset prices. The precautionary motive refers to the need for money to provide a buffer against unexpected expenses or emergencies.

According to the quantity theory of money, if the growth rate of money supply (M) is less than the growth rate of real output (Q), then the price level (P) will fall. This is because when the money supply grows at a slower rate than the output, there is less money available relative to the goods and services produced, leading to a decrease in prices. This relationship is based on the assumption that the velocity of money (V) remains constant.

When a bank keeps some of its excess reserves, it reduces the amount of money available for lending and creating new deposits. This decrease in lending and deposit creation reduces the overall money supply in the economy. As a result, the money multiplier, which represents the relationship between the amount of reserves and the amount of money that can be created, decreases. Therefore, the correct answer is that the actual money multiplier decreases.