Econ 104 Final Exam

Econ 104 Final Exam - Econ 104 Final Exam 1. A. If...

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Econ 104 Final Exam 1. A. If individuals and businesses become more cautious in their spending and investment habits, the aggregate expenditure curve will shift downward, meaning that both AE and output will decrease. When consumers buy less and businesses invest less, it causes the AD curve to shift downward. This causes both the price level and output level to decrease, increasing unemployment and decreasing the productivity of our economy. B. When the Fed cuts interest rates, it is lowering the Federal Funds Rate. This is the interest rate at which banks charge each other for short-term loans, because sometimes banks need to borrow from each other in order to fulfill reserve requirements. C. The most commonly used tool of the Fed in order to influence the interest rate is the conduction of open market operations. This is when the Fed buys and sells treasury bonds on the secondary market. The Fed can also increase or decrease the Federal Reserve Ratio, which tells the banks the percentage of their deposits they must hold as either cash or deposits in their reserve account at the Fed. The last way the Fed can influence the interest rate is by raising or lowering the discount rate, which is the interest rate at which the Federal Reserve charges independent banks when it lends money to them. D. When the Fed increases the Required Reserve Ratio, private banks are forced to keep a higher fraction of their deposits in their vaults. This directly decreases the
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A decrease in the money supply causes the interest rate to increase. The opposite happens when the Fed decreases the Require Reserve Ratio. When the Fed increases the discount rate, banks have more incentive to be careful with their reserves and make sure they have enough, because it will be more costly to borrow from the Fed. This means that they will keep extra money in the vaults, decreasing the amount they lend out and therefore decreasing the money supply (same effect as above). When the Fed sells bonds, it is exchanging bonds for money, which decreases the amount of money held by the public (same as above). E. If the Fed cuts interest rates, it will be cheaper to borrow money and to invest. This provides an incentive for consumers to spend, which will be shown as an increase in both C and I, causing the aggregate demand curve to move to the right. F. Well, fiscal policy also works by shifting the AD curve. It does this by increasing government spending and decreasing taxes or decreasing government spending and increasing taxes. Fiscal policy also carries huge side effects, though, such as staggering government debt. Government debt occurs when there is a deficit year after year, which adds up quite quickly. Deficits happen because increasing government expenditure is much more effective at increasing aggregate demand than decreasing taxes is. 2.
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This note was uploaded on 04/10/2008 for the course ECON 104 taught by Professor Dolenc during the Fall '08 term at UMass (Amherst).

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Econ 104 Final Exam - Econ 104 Final Exam 1. A. If...

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