+ Macro Review: Quiz-O!!! Students will demonstrate understanding of macroeconomic concepts by answering review questions in order to gauge their preparedness for Macro final Homework: Study for Macro Final! Check-out the resources on my Teacher Page

+ Quiz-O Procedure: Take out a piece of notebook paper Select a partner to work with Answer the series of questions presented in each round Tally your score after each round in order to obtain the highest score Objective: Reflect on your preparedness for Thursday/Friday

+ Round 1: 1. The most fundamental problem economics addresses? 2. A sustained increase in _________________________ causes inflation. 3. Name the 3 pillars of economic growth. 4. Unexpected inflation helps_______________ and hurts ___________________. 5. How will contractionary monetary policy affect both nominal interest rates and AD? 6. Name 2 policies that would pull an economy out of severe recession. 7. What is the most liquid of all assets?

+ Round 1 Answers: 1. Scarcity 2. Price level 3. Human capital, physical capital, technology 4. Borrowers. Lenders 5. IR N will increase & AD decrease 6. Fiscal policy: Increase gov’t spending, decrease taxes, increase transfers. Monetary policy: buy bonds (increase money supply) 7. Cash

+ Round 2: 1. Given: MPC =.8 What must MPS = ? What is spending multiplier? What is tax multiplier? 2. What is “dissavings”? 3. How will an increase in gov’t spending affect the money demand in the long run? 4. In the circular flow model who provides the factors of production? 5. Using the “Classical Model of Price Level,” how will a doubling of the money supply will affect price level & in what time frame? 6. Name 2 factors that could decrease SRAS. 7. What is the benefit of trade?

+ Round 2 Answers: 1. MPS =.2 Spending multiplier = 5 (1/.2) Tax multiplier = When consumption is grater than disposable income. 3. Money demand will increase (increase in gov’t spending raises PL…in the LR people will hold more money to make daily purchases…this also raises IR N !!!) 4. Households 5. Price level will double in the long run 6. Increase input costs (oil, wages, ect.) or labor strike 7. Country can consume beyond PPC, overcoming their scarce factors of production and productivity

+ Round 3: 1. Name 3 factors that could cause a decrease in AD. 2. Who benefits from the appreciation of the US dollar? 3. What are “open market operations”? 4. Relative to the US and Japan: If price level in Japan increases 10%, what happens to the Yen in the FOREX? 5. If SRAS and AD both increase, what will happen to PL and output in AD/AS model? 6. What is the CPI and why is it criticized by macroeconomists? 7. What is the difference between cyclical and frictional unemployment?

+ Round 3 Answers: 1. Fiscal policy: Gov’t spending decrease, increase in taxes, decrease transfers. Monetary policy: Sell bonds (increase IR N ) 2. Users of the dollar…purchasing power has increased 3. FED buying or selling of gov’t securities/bonds 4. Depreciates (Supply of Yen increases) 5. PL—uncertain Output—increase 6. Consumer price index, the basket of goods/services used to gauge inflation. Criticized because it overstates inflation b/c it cannot account for substitutes 7. Cyclical is people not able to find jobs (indicator of recession) Frictional is people voluntarily searching for a new job(considered somewhat “healthy”

+ Round 4: 1. What is stagflation and how is it caused in AD/AS model? 2. Name 3 factors that could cause depreciation of a nations currency. 3. If a nation’s central bank increases the reserve requirement what will be the affect on the money multiplier and the money supply? 4. Gov’t deficit spending does what in the loanable funds market. Illustrate and explain. 5. US purchases Japanese gov’t bonds. How will this be recorded on the US’s BOP? 6. Rational expectations theory suggests what about consumers/firms? 7. If a country is running a financial account deficit, what must be true of said nation’s current account? How does this affect AD?

+ Round 4 Answers: 1. Fall in output and rise in price level. Caused by a negative supply shock. 2. Fall in their interest rate relative to other nations. Increase in aggregate price level relative to other nations. Change in tastes for other nation’s goods/services. Increase in GDP relative to other nations. 3. Money multiplier will decrease (1/RR) & money supply will decrease. 4. LFD increases, raising IR R (CROWDING OUT) 5. Debit in the financial account (or outflow of capital) 6. Use all available information relative to inflation to adjust inflationary expectations as accurately as possible 7. Current account must be in surplus (exports>imports). AD increases. IR R QLF S D D2D2

+ Round 5: Banking System Use the balance sheet of Mi Tierra Bank to answer the following questions. 1.What is the reserve requirement? 2. Assuming a $5,000 withdrawal from a personal checking account, how much will Mi Tierra’s reserves change? 3.What is the effect of the withdrawal on the M1 money supply? 4.Following the withdrawal what is the new balance of excess reserves? 5.Assume the next day a bank customer withdrawals funds that exceed the bank’s excess reserves. How can the bank cover its required reserves?

+ Round 5: Banking System Answers 1. 10% RR (10,000/100,000) 2. Reserves decrease $5,000 (change in liabilities = change in assets 3. No affect (transfer of components: checkable deposit to cash) 4. $500 (RR fall $500—10% of $95,000—and the remaining difference of the $5,000 withdrawal must be made up from excess reserves—$5000- $4500 = $500) 5. Borrow funds from the FED or another bank

+ Round 6: Loanable Funds Market For the following questions illustrate the loanable funds market and indicate what component of the model is affected by the given events below and how economic growth is affected. 1. As a result of political instability, investor pull their their funds out of the country Tera. 2. US households decide to increase savings for retirement. 3. The Japanese gov’t is running a budget surplus. 4. If the US is running a current account deficit. 5. The US buys Chinese securities. Draw China’s LFM. 6. US gov’t borrows to finance a new infrastructure project. 7. The interest rate on gov’t issued bonds in the US increases relative to Japan. Draw US’s LFM.

+ Round 6: Loanable Funds Market Answers 1. Supply decreases (shift left). Increase in IR leading to a slow down in economic growth. 2. Supply increases (shift right). Decrease in the IR leading to an increase in economic growth. 3. Demand decreases (shifts left). Decrease in the IR leading to economic growth. CROWDING-IN EFFECT!!! 4. Supply increase (shift right). Decrease in IR increasing economic growth. ***Current account deficit = financial account surplus = inflow of capital = increase in LFS. 5. Supply increase (shift right). Decreasing IR and leading to economic growth. 6. Demand increase (shift right). Increasing IR and slowing growth. CROWDING-OUT EFFECT! 7. Supply increase (shift right). Decrease in IR leading to growth.

+ HOW WELL DO YOU KNOW MACROECONOMICS??? 1 10