Macro cue cardMacro cue cardby by Sally DicksonSally Dickson, Austin, TX., skdickson@yahoo.com, Austin, TX., skdickson@yahoo.com

IX. FRQ Index by Topic (Textbooks IX. FRQ Index by Topic (Textbooks and and study guides have questions study guides have questions on allon all topics.) topics.)

Alphabetical Meaning of SymbolsAlphabetical Meaning of Symbols

Macro Free Response Question CUE CARD - 2005Macro Free Response Question CUE CARD - 2005

Part III: Monetary Policy – by Federal Reserve’s FOMCPart III: Monetary Policy – by Federal Reserve’s FOMC

FedFed

Part IV:Part IV: IInternational nternational TTrade.[Compare rade.[Compare USAUSA to to ROWROW--RRest est OOf the f the WWorld]orld]

ROWROW

MACRO CUE CARD QUIZMACRO CUE CARD QUIZ1. _____________________ Who conducts Fiscal PolicyFiscal Policy?

2. ____________________(1)What are the two tools of Fiscal PolicyFiscal Policy?

____________________(2)

3. ____________________ Does Fiscal PolicyFiscal Policy aim to shift AS, AD, or both?

4. ____________________ Inflationary problemsInflationary problems require which type of Fiscal Policy?

5. ____________________ Unemployment and recessionaryUnemployment and recessionary problems require which type of Fiscal Policy?

6. ____________________ If we have stagstagflationflation, where does AD cross AS?

7. ____________________ Does Fiscal PolicyFiscal Policy affect Demand or Supply of Loanable Funds?

8. ____________________ What happens to the Price of BondsPrice of Bonds when interest Rates increase?9. ____________________ The effect on business borrowing that occurs when the federal government borrowsfederal government borrows is called?10. ___________________(1)Two reasons expansionary Fiscal Policyexpansionary Fiscal Policy might cause interest rates to rise are what? ___________________ (2)

CongressCongress

Tax (“T”)Tax (“T”)

Gov. Spending (“G”)Gov. Spending (“G”)

ADAD

ContractionaryContractionary

ExpansionaryExpansionaryBelow FE, in the Below FE, in the Keynesian rangeKeynesian range

DDLFLF [Mankiw says [Mankiw says SSLFLF]]

PPrice of bonds fallrice of bonds fall

Crowding-out effectCrowding-out effectG G borrowing borrowing leads increase leads increase LFM, LFM, leads to increaseleads to increase in r. in r.

GDPGDPNN incr. leads increase in incr. leads increase indemand demand Dm(MDm(MDD) ) leads incrleads incr. i. i

19. ___________________ What happens to business investment if interestbusiness investment if interest rates increaserates increase?

20. ________________ Why Why does this (#19) happen?

11. ___________________ Who conducts Monetary PolicyMonetary Policy?

12. ___________________(1) What are the threethree tools of Monetary Policy tools of Monetary Policy?

___________________(2)

___________________ (3)

13. ___________________ Does Monetary PolicyMonetary Policy mainly affect AS, AD, or both?14. ___________________ If inflationinflation is the problem, what type of Monetary

Policy is needed?15. ___________________ If unemployment & recessionrecession are the problems, what type of Monetary Policy is needed?16. ___________________ Does Monetary PolicyMonetary Policy affect Demand or Supply of Money?17. ___________________ Which group makes Monetary PolicyMonetary Policy decisions?

18. ___________________ What happens if Excess Reserves increaseExcess Reserves increase in the banking system?

The Federal ReserveThe Federal Reserve

OMOOMO

RReserveeserve R Requirementequirement

Discount RateDiscount Rate

ADAD

Tight (Contraction)Tight (Contraction)

Easy (Expansionary)Easy (Expansionary)

SSmm (MS) (MS)

FOMCFOMCIncrease supply of loans, Increase supply of loans, increase In MS, increases iincrease In MS, increases i

Interest rates increase,Interest rates increase, decrease Igdecrease Ig

At higher interest rate, At higher interest rate, fewer Ig projects profitablefewer Ig projects profitable

21. ___________________ Why does Aggregate Demand decreaseAggregate Demand decrease in this situation? (#19-20)22. ___________________ If real GDP in the US increasesreal GDP in the US increases, how does this affect US imports?

23.___________________ WhyWhy? (see #22)

24. ___________________ What happens to US imports from ChinaUS imports from China if they experience inflation?25. ___________________ Why? (see #24)

26. ___________________(1)If real interest rates in Europe rosereal interest rates in Europe rose relative to ours, what would happen to the (1) supply of

US dollars and (2) 27. ___________________(2) demand for US dollarsdemand for US dollars in the foreign exchange

markets?

28. ___________________ Why do both both curves shiftcurves shift? (see #26-27)

29. ___________________ Interpret this scriptInterpret this script into plain English: ¥P/$↑.

Ig Ig is a component ofis a component of AD AD

M increaseM increaseBecause Americans have moreBecause Americans have more

incomeincome to to spend spend on on bothboth domestic and foreign goodsdomestic and foreign goods

M decreasesM decreasesBecause their products Because their products cost more, we buy less.cost more, we buy less.

Supply of $’s increaseSupply of $’s increase

Demand Demand forfor $’s $’s decrease decrease

When U.S. investors buy EuropeanWhen U.S. investors buy Europeanassets, they supply $’s in FEX. assets, they supply $’s in FEX. Foreign investors buy more Foreign investors buy more European assets and fewer U.S.European assets and fewer U.S.assets, so demand for $ declines.assets, so demand for $ declines.

Yen price per dollar increasesYen price per dollar increases

30. ___________________(1) What are two ways to show “economic growth”“economic growth” on graphs?31. ___________________(2)

32. ___________________ If investment in real capital declines significantly in the short run, what will happen to the “stock of capital”“stock of capital” in the long run?

33. ___________________ To what do the words “stock of capital”“stock of capital” refer?

34. ___________________ Looking at the graph, how do we know that the long run Phillip’s Curvelong run Phillip’s Curve is not related to inflation?35. ___________________ Is the short run Phillipsshort run Phillips curve related most to the short run AS curve or the AD Curve?36. ___________________ Are points on the short run Phillips curvepoints on the short run Phillips curve related most to short run AS or AD?37. ___________________ Why might nominal wages not respond to a nominal wages not respond to a changing inflationchanging inflation rate in the short run?38. ___________________ What is another name one might give to the 5% another name one might give to the 5%

UnemploymentUnemployment of the Long Run Phillip’s Curve?

PPC shifts outPPC shifts out

LRAS LRAS shifts out to rightshifts out to right

If Ig is less than depreciationIf Ig is less than depreciationin SR, capital stock shrinks. in SR, capital stock shrinks.

All human-made resourcesAll human-made resourcesof a nationof a nation

They are parallelThey are parallel

ASAS

ADAD

Wage contractsWage contracts

Natural rate of unemploymentNatural rate of unemployment