ECON 252 Final Questions with Correct Answers (Grade A+)
Question 1: Money
Answer: is the asset that people use to make and receive payments when buying and selling goods and
services.
Question 2: Money has three functions
Answer: 1. it is a medium of exchange
2. it is a store of value
3. it is a measure of relative value, or a unit of account.
Question 3: medium of exchange
Answer: is an asset that can be traded for goods and services.
Question 4: Store of value
Answer: is an asset that enables people to transfer purchasing power into the future.
Question 5: unit of account
Answer: is a universal yardstick that is used for expressing the worth of different goods and services.
Question 6: Fiat money
Answer: refers to something that is used as legal tender by government decree and is not backed by physical
commodity, like gold or silver.
Question 7: money supply
Answer: adds together currency in circulation, checking accounts, savings, accounts, traveler's checks', and
money market accounts, it is sometimes called M2
Question 8: Quantity Theory of Money
Answer: assumes that the growth rate of the money supply and growth rate of nominal GDP are the same
over the long run. (the quantity theory implies that inflation is equal to the gap between the growth rate of
money and the growth rate of real GDP.)
Question 9: Inflation equation of the Quantity Theory of Money
Answer: Inflation Rate = Growth Rate of money supply
- Growth Rate of real GDP
Page 1
,Question 10: deflation
Answer: is the rate of decrease of the price index.
Question 11: real wage
Answer: is the nominal wage divided by a price index, like the CPI.
Question 12: Central Bank
Answer: the government financial institution that monitors financial institutions, controls certain key
interest rates, and indirectly controls the money supply. These activities constitute monetary policy.
Question 13: seigniorage
Answer: Government revenue obtained from printing currency.
Question 14: Federal Reserve Bank
Answer: is the name of the central bank in the United States
Question 15: Federal Funds Market
Answer: refers to the market where banks obtain overnight loans of reserves from one another.
Question 16: Federal Funds Rate
Answer: is the interest rate that the banks charge each other for overnight loans in the federal funds market.
The funds being lent are reserves at the Federal Reserve Bank.
Question 17: 5 Key Reasons for shift in the demand curve for Reserves
Answer: 1. Economic Expansion or Contraction
2. Changing liquidity needs
3. Changing deposit base
4. Changing Reserve Requirement
5. Changing interest rate paid by the Fed for having the reserve on deposit at the Fed.
Question 18: Open Market Operations
Answer: If the fed wishes to increase the level of reserves that private banks hold, it offers to buy
government bonds from the private banks, and in return it gives the private banks more electronic reserves.
If the fed wishes to decrease the level of reserves that private banks hold, it offers to sell government bonds
to the private banks and in return the private banks give back some of their reserves. By buying or selling
government bonds, the Fed shifts the vertical supply curve in the federal funds market and thereby controls
the level of reserves.
Page 2
, Question 19: federal funds equilibrium
Answer: The point where the supply and demand curve cross in the federal fund market
Question 20: The Fed Basic Policy Levers
Answer: 1. changing the quantity of reserves supplied
2. changing the reserve requirement
3. Changing the interest rate paid on reserves.
Question 21: Recession
Answer: defined as episodes of negative economic growth lasting at least two quarters
Question 22: Expanison
Answer: a period of positive growth. Expansions are periods between recessions.
Question 23: Since 1929, a recession has occurred about ___ and lasted an avg of ___
Answer: 1 every 6 years and 1 year
Question 24: We can also examine the business cycle by plotting the...
Answer: percent deviation of real GDP from the trend line (GDP-Trend)
Question 25: Economic fluctuations have three key properties:
Answer: 1. Co-movement of many macroeconomic variables
2. Limited predictability of fluctuations
3. Persistence in the rate of economic growth
Question 26: what is co-movmement property
Answer: Many aggregate macroeconomic variables grow or contract together during booms and busts,
exhibiting a pattern of positive or negative co-movement
Question 27: Variables such as real consumption, real investment, and employment move...
Answer: positively with GDP
Question 28: Variables such as unemployment move...
Answer: negatively with GDP
Page 3
Question 1: Money
Answer: is the asset that people use to make and receive payments when buying and selling goods and
services.
Question 2: Money has three functions
Answer: 1. it is a medium of exchange
2. it is a store of value
3. it is a measure of relative value, or a unit of account.
Question 3: medium of exchange
Answer: is an asset that can be traded for goods and services.
Question 4: Store of value
Answer: is an asset that enables people to transfer purchasing power into the future.
Question 5: unit of account
Answer: is a universal yardstick that is used for expressing the worth of different goods and services.
Question 6: Fiat money
Answer: refers to something that is used as legal tender by government decree and is not backed by physical
commodity, like gold or silver.
Question 7: money supply
Answer: adds together currency in circulation, checking accounts, savings, accounts, traveler's checks', and
money market accounts, it is sometimes called M2
Question 8: Quantity Theory of Money
Answer: assumes that the growth rate of the money supply and growth rate of nominal GDP are the same
over the long run. (the quantity theory implies that inflation is equal to the gap between the growth rate of
money and the growth rate of real GDP.)
Question 9: Inflation equation of the Quantity Theory of Money
Answer: Inflation Rate = Growth Rate of money supply
- Growth Rate of real GDP
Page 1
,Question 10: deflation
Answer: is the rate of decrease of the price index.
Question 11: real wage
Answer: is the nominal wage divided by a price index, like the CPI.
Question 12: Central Bank
Answer: the government financial institution that monitors financial institutions, controls certain key
interest rates, and indirectly controls the money supply. These activities constitute monetary policy.
Question 13: seigniorage
Answer: Government revenue obtained from printing currency.
Question 14: Federal Reserve Bank
Answer: is the name of the central bank in the United States
Question 15: Federal Funds Market
Answer: refers to the market where banks obtain overnight loans of reserves from one another.
Question 16: Federal Funds Rate
Answer: is the interest rate that the banks charge each other for overnight loans in the federal funds market.
The funds being lent are reserves at the Federal Reserve Bank.
Question 17: 5 Key Reasons for shift in the demand curve for Reserves
Answer: 1. Economic Expansion or Contraction
2. Changing liquidity needs
3. Changing deposit base
4. Changing Reserve Requirement
5. Changing interest rate paid by the Fed for having the reserve on deposit at the Fed.
Question 18: Open Market Operations
Answer: If the fed wishes to increase the level of reserves that private banks hold, it offers to buy
government bonds from the private banks, and in return it gives the private banks more electronic reserves.
If the fed wishes to decrease the level of reserves that private banks hold, it offers to sell government bonds
to the private banks and in return the private banks give back some of their reserves. By buying or selling
government bonds, the Fed shifts the vertical supply curve in the federal funds market and thereby controls
the level of reserves.
Page 2
, Question 19: federal funds equilibrium
Answer: The point where the supply and demand curve cross in the federal fund market
Question 20: The Fed Basic Policy Levers
Answer: 1. changing the quantity of reserves supplied
2. changing the reserve requirement
3. Changing the interest rate paid on reserves.
Question 21: Recession
Answer: defined as episodes of negative economic growth lasting at least two quarters
Question 22: Expanison
Answer: a period of positive growth. Expansions are periods between recessions.
Question 23: Since 1929, a recession has occurred about ___ and lasted an avg of ___
Answer: 1 every 6 years and 1 year
Question 24: We can also examine the business cycle by plotting the...
Answer: percent deviation of real GDP from the trend line (GDP-Trend)
Question 25: Economic fluctuations have three key properties:
Answer: 1. Co-movement of many macroeconomic variables
2. Limited predictability of fluctuations
3. Persistence in the rate of economic growth
Question 26: what is co-movmement property
Answer: Many aggregate macroeconomic variables grow or contract together during booms and busts,
exhibiting a pattern of positive or negative co-movement
Question 27: Variables such as real consumption, real investment, and employment move...
Answer: positively with GDP
Question 28: Variables such as unemployment move...
Answer: negatively with GDP
Page 3
