Question 1

Purchases and sales of stocks, bonds, and houses take place

Accepted Answer

Purchases and sales of stocks, bonds, and houses take place in the nonmoney asset market as these are nonmoney assets. The goods market is for physical goods and services, and the money market is for short-term, highly liquid assets like Treasury bills or commercial paper. While general equilibrium may affect the prices and quantities traded in the nonmoney asset market, it is not necessarily the only time these transactions take place.

Question 2

Why did the Fed cut interest rates in late 1991?

Accepted Answer

The Federal Reserve cut interest rates in late 1991 to stimulate the economy's recovery from the 1990-1991 recession. Lower interest rates encourage borrowing and can lead to increased spending and investment.

Question 3

An increase in government purchases reduces national saving as long as

Accepted Answer

An increase in government purchases reduces national saving because it typically leads to higher budget deficits unless fully offset by higher taxes. When households' consumption does not decrease by an amount equal to the increase in government spending, total spending in the economy rises, leading to lower national saving. Choices A, B, and D do not directly relate to the impact on national saving from an increase in government purchases.

Question 4

Which of the following is NOT a key factor in determining household saving?

Accepted Answer

The level of government purchases is not a key factor in determining household saving. The other factors listed - expected real interest rate, current income, and expected future income - are all important determinants of household saving.

Question 5

For the goods market to be in equilibrium in a closed economy, which of the following must be true?

Accepted Answer

In a closed economy, the goods market is in equilibrium when the quantity of goods (output) produced and sold (Y) is equal to the quantity of goods consumed (C), investment (I), and government spending (G). This can be written as Y = C + I + G. Since savings (S) equals income (Y) minus consumption (C), and investment equals savings in a closed economy, S = I must be true for Y = C + I + G to hold. Therefore, option D is the correct choice.

Question 6

In a closed economy, national saving equals

Accepted Answer

In a closed economy (without international trade), national saving (S) equals the difference between national income (Y) and total spending by households and government (C + G). Therefore, S = Y - C - G. Investment (I) is not included in national saving because it represents a use of current resources for future benefits, rather than a current saving of resources.

Question 7

In a closed economy, the total quantity of goods demanded equals the sum of

Accepted Answer

In a closed economy, there is no international trade or transactions, so the only factors affecting the total quantity of goods demanded are domestic factors such as consumption spending (by households), investment spending (by businesses), and government spending. Therefore, the correct choice is (A) consumption spending, investment spending, and government spending.

Question 8

A closed economy is one in which

Accepted Answer

A closed economy is one in which there are no international flows of saving and investment. This means that all economic activity, including saving and investment, occurs within the borders of the economy.

Question 9

In macroeconomic models, Y typically represents

Accepted Answer

In macroeconomic models, Y typically represents gross domestic product (GDP), which is the total value of goods and services produced in a country during a certain period of time. It is a measure of the size and health of an economy. Aggregate wealth (A) and the money supply (B) are not typically represented by Y in macroeconomic models, and the income velocity of money (D) is a separate concept related to how quickly money is circulating through the economy.

Question 10

A general equilibrium is an outcome in which

Accepted Answer

A general equilibrium is when all markets in the economy are in equilibrium at the same time, meaning that there is no excess supply or demand in any market. This includes the goods market, labor market, and financial markets. It represents a state where no individual agent can improve their well-being by changing their behavior, given the behavior of all other agents in the system. This is achieved when prices adjust such that the quantity demanded in each market equals the quantity supplied.

Question 11

In the saving-investment diagram, an increase in output will lead to

Accepted Answer

An increase in output typically leads to an increase in saving because people have more income to save. This increase in saving shifts the supply of loanable funds to the right, reducing the equilibrium real interest rate.

Question 12

In macroeconomic models, Y stands for

Accepted Answer

The answer of In macroeconomic models, Y stands for
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Question 13

In a closed economy, the goods market is in equilibrium when

Accepted Answer

In a closed economy, the goods market is in equilibrium when the total amount of output produced (Y) is equal to the total amount of spending on consumption (C), investment (I), and government purchases (G). Therefore, Y = C + I + G is the correct equation for goods market equilibrium.

Question 14

Evidence suggests that when government purchases rise

Accepted Answer

When government purchases rise, it typically leads to an increase in overall demand in the economy. Consumers may reduce their spending due to higher taxes or borrowing by the government crowding out private spending, but this reduction is generally less than dollar for dollar. This is because some of the increased government spending circulates back into the economy, increasing income and thereby supporting consumer spending to some extent.

Question 15

An increase in the real interest rate will

Accepted Answer

An increase in the real interest rate will increase the cost of borrowing for businesses, reducing their willingness to invest. As a result, businesses may divert funds from investment to the purchase of financial assets, such as stocks and bonds, which offer a higher rate of return. This is known as the "crowding out" effect, where government borrowing may also compete with private investment for funds. Therefore, choice C is the best answer.

Question 16

An increase in the expected profitability of investment will cause

Accepted Answer

An increase in expected profitability of investment means that there will be more investment, which will increase aggregate demand. As a result, the demand for goods and services will increase, leading to an increase in output and income. This will cause the IS curve to shift upward.

Question 17

In a closed economy, if the goods market is in equilibrium, national saving is $2 trillion, national consumption is $7 trillion, and government purchases are $2.5 trillion, then GDP equals

Accepted Answer

In a closed economy, GDP can be represented as the sum of consumption (C), investment (I), and government purchases (G). When the goods market is in equilibrium, national saving equals investment. Given that national saving is $2 trillion, government purchases are $2.5 trillion, and national consumption is $7 trillion, GDP can be calculated as the sum of C, I (which equals national saving in this case), and G: $7 trillion + $2 trillion + $2.5 trillion = $11.5 trillion.

Question 18

Why did the Fed cut interest rates in late 1998?

Accepted Answer

The Fed cut interest rates in late 1998 because of concerns about the potential impact of the Asian financial crisis on the US economy. The crisis had already led to significant declines in equity markets, particularly in Asian countries, and there were fears that this could lead to a broader global economic slowdown. By cutting interest rates, the Fed hoped to stimulate domestic economic activity and offset some of the negative effects of the crisis.

Question 19

An increase in the expected real interest rate will have a

Accepted Answer

An increase in the expected real interest rate typically provides more incentive for households to save, as the return on savings is higher, leading to a small positive impact on household saving.

Question 20

The money market includes trade in

Accepted Answer

The money market includes trade in currency, checkable deposits, and other close substitutes for cash, such as short-term Treasury bills, commercial paper, and certificates of deposit.

Quiz 24: Linking the Financial System and the Economy: the Is-Lm-Fe Model