Question 1

Suppose the Federal Reserve conducts an open market purchase of $50 million in Treasury bonds from a commercial bank. Which of the following best describes the immediate effect on the Fed's balance sheet and the broader economy?

Accepted Answer

Assets increase by $$50 million in securities; liabilities increase by 50 $$million in reserves. This action increases the monetary base, which can expand the money supply through the money multiplier.

Question 2

Which of the following equations correctly defines the monetary base?

Accepted Answer

$$Monetary\ Base = Currency + Bank\ Reserves$$

Question 3

If the monetary base doubles but the economy’s productivity does not increase, what is the most likely macroeconomic consequence according to the study materials?

Accepted Answer

Inflation, because the value of money falls when it becomes more plentiful without a corresponding increase in output.

Question 4

Which of the following best explains why the Long-Run Aggregate Supply (LRAS) curve is vertical?

Accepted Answer

Because in the long run, all prices (including input and output prices) adjust together, so changes in the price level do not affect real output.

Question 5

A sudden increase in oil prices causes energy costs for firms to rise sharply. According to the aggregate supply framework, what is the most likely short-run effect on the economy?

Accepted Answer

Short-Run Aggregate Supply (SRAS) shifts left, leading to higher prices and lower output.

Question 6

Which of the following is NOT a component of GDP as defined by the equation $$GDP = C + I + G + X - M$$?

Accepted Answer

Bank Reserves (R)

Question 7

Why are wages considered 'sticky' in the short run, and how does this affect the shape of the Short-Run Aggregate Supply (SRAS) curve?

Accepted Answer

Wages are slow to adjust due to contracts and hiring frictions, making SRAS upward sloping because profits rise when output prices increase but wages do not.

Question 8

Suppose the government increases transfer payments to households. According to the determinants of consumption, what is the most likely effect on aggregate demand?

Accepted Answer

Aggregate demand increases because higher transfers raise disposable income and thus consumption.

Question 9

Which of the following best describes the role of the financial system in stabilizing consumption during economic downturns?

Accepted Answer

It allows households to borrow against future income and access savings, helping them smooth consumption even when current income falls.

Question 10

If the Fed provides a discount loan to a bank during a financial crisis, what is the immediate effect on the monetary base and why?

Accepted Answer

The monetary base increases because the Fed credits the bank’s reserve account, which can then be lent out.

Question 11

Which of the following would cause a rightward shift in the Long-Run Aggregate Supply (LRAS) curve?

Accepted Answer

An increase in the capital stock due to new investment in machinery and buildings.

Question 12

A country experiences a depreciation of its currency, making imported inputs more expensive. What is the likely short-run effect on aggregate supply?

Accepted Answer

SRAS shifts left because higher input costs reduce profitability and output.

Question 13

Which of the following best illustrates the lifetime income hypothesis as it relates to consumption?

Accepted Answer

A household maintains stable consumption by borrowing during periods of low income and saving during periods of high income, based on expected lifetime earnings.

Question 14

Which of the following is a plausible reason for the Fed to hold only 'super safe' assets like Treasury securities and mortgage-backed securities?

Accepted Answer

To minimize risk and maintain trust in the central bank, since losses could undermine its critical role in the financial system.

Question 15

If wages increase across the economy while output prices remain unchanged, what is the likely effect on the Short-Run Aggregate Supply (SRAS) curve?

Accepted Answer

SRAS shifts left because higher wages increase costs, reducing profitability at each price level.

Question 16

Which of the following best describes the main disagreement between activist and non-activist economists regarding stabilization policy?

Accepted Answer

Activists believe wage stickiness causes long deviations from potential GDP, justifying government intervention, while non-activists believe wages adjust quickly and intervention is unnecessary or harmful.

Question 17

Suppose the banking system collapses and households lose access to credit. According to the study materials, what is the most likely effect on the economy?

Accepted Answer

Consumption would fall sharply, leading to a severe recession, because households could not borrow to smooth consumption.

Question 18

Which of the following scenarios would shift both the LRAS and SRAS curves to the right?

Accepted Answer

A technological innovation that increases productivity across the economy.

Question 19

If all prices in the economy (including input and output prices) double, what happens to real output in the long run according to the aggregate supply framework?

Accepted Answer

Real output remains unchanged because relative prices and incentives are unchanged.

Money, Banking, and Aggregate Supply: Macroeconomic Study Notes

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