ECON 104 Dr Adrienne Kearney Chapter 13 10 30 11 15 Fall 2013 REVIEW QUESTIONS FOR FINAL EXAM 1 Define long run aggregate supply LRAS What determines the level of LRAS Why do we say LRAS is potential GDP or full employment output Y What do we mean by U 2 How would an increase in the size of the US work force an increase in the U S capital stock or an advance in technology affect the LRAS curve 3 Define short run aggregate supply SRAS Why does the SRAS have a positive slope 4 Which of these factors would result in a shift in the SRAS a Increase in the size of the labor force and the size of the capital stock b Technological change c Expected changes in the future price level level e Supply shock d Adjustments of workers and firms to errors in past expectations about the price 5 Draw a graph of the LR macroeconomic equilibrium where AD LRAS SRAS at price level equals 100 and output at potential Y Label the axes Explain 6 Starting from LR equilibrium in no 5 above show how a leftward shift in SRAS e g oil price shock can cause a recession a Where is SR equilibrium Describe the economy s automatic adjustment mechanism back to Y At the new LR equilibrium is the price level higher or lower than P 100 b What is stagflation equilibrium Why c What happens to wages and prices as the economy returns to Y from SR 7 Starting from LR equilibrium in no 5 above show how a leftward shift in AD decrease in Investment spending can cause a recession a Where is SR equilibrium Describe the economy s automatic adjustment mechanism back to Y At the new LR equilibrium is the price level higher or lower than P 100 b What happens to wages and prices as the economy returns to Y from the SR equilibrium Why 8 In your analysis above what critical assumption must hold in order for the economy to return to LR equilibrium i e automatic adjustment 9 What is fiscal policy to stabilize the economy during recession During inflationary boom In our AD SRAS LRAS model which curve is affected How 10 What is monetary policy to stabilize the economy during recession During an inflationary boom In our AD SRAS LRAS model which curve is affected How 11 The adoption of the Internet a Was the Internet a positive or negative shock to the U S economy b Was adoption of the Internet a shock to supply or demand c How did the Internet affect worker productivity d How was the AD LRAS SRAS model of the U S economy affected Was AD e How did the internet affect U unemployment at full employment ceteris affected paribus Chapter 14 and 15 11 18 12 4 12 What is the problem with using barter for transactions 13 What is the advantage of using money for transactions instead of barter 14 What are the functions of money 15 Are credit cards money 16 How is money measured Define M1 and M2 17 When was the Federal Reserve System created Why 18 What is the FOMC What is its responsibility 19 Why is the FOMC so important 20 At the December 17 18 meeting of the FOMC what do you think they will be talking about 21 Short term interest rate refers to an interest rate on a saving account e g CD bond or loan of how many years or less Long term interest rate refers to an interest rate on a saving account bond or loan with a term that is greater than how many years 22 Why did the Fed decide not to taper in its September FOMC meeting 23 What was the FOMC decision with respect to interest rates both long term and short term at the October FOMC meeting Why 24 Why are market expectations with respect to monetary policy so important 25 At its December meeting the FOMC will decide to keep its foot on the gas pedal or let up on the gas pedal as the economy i e the car reaches a healthy speed of growth or hit the brakes Under what economic conditions would the Fed decide to keep its foot on the gas pedal Hit the brakes Which one of these options is referred to as tapering by the financial press 26 Because short term interest rates were near zero the FOMC took nonconventional or atypical measures quantitative easing to stabilize the economy What was the objective of these measures with respect to interest rates See text page 502 27 What is a bond a share of stock See Stocks and Bonds in the Monetary Policy folder in ANGEL 28 What are the challenges facing the FOMC each time it meets 29 What are open market operations What open operations would the FOMC perform during a recession Inflationary situation How do open market operations affect the economy 30 The supply of loanable funds represents lenders borrowers circle one The demand for loanable funds represents lenders borrowers circle one 31 When the Fed engineers an OMP how does this affect the loanable funds market 32 When the Fed engineers an OMS how does this affect the loanable funds market 33 Why was the Great Recession Great 34 Is the U S economy now back to full employment output Why or why not Interest rates AD Interest rates AD Chapter 16 12 6 12 11 35 To be continued