ECON 252 Exam 3 Questions and Answers Already Passed

ECON 252 Exam 3 Questions and Answers Already Passed 3 Functions of Money - Answers Medium of exchange, sore of value, unit of account Quantity Theory of Money - Answers Money supply & nominal GDP grow a the same rate in the long-run Inflation Equation - Answers Inflation rate = growth rate M2 - growth rate real GDP How does a rising inflation rate affect interest rate? - Answers Lowers the interest rate What is seigniorage? - Answers Government revenue from printing currency How do you find real wage? - Answers Nominal Wage / CPI Shifts in demand curve for federal funds market - Answers 1. economic expansion/contraction 2. changing liquidity needs 3. changing deposit base (bank's balance) 4. changing reserve requirement 5. changing IR paid by Fed for having reserves Properties of economic fluctuations - Answers 1. co-movement of macroeconomic variables 2. limited predictability of turning points 3. persistence in rate of economic growth Shifts in labor demand in Labor Market - Answers 1. changing output prices 2. changing output demand 3. changing tech and productivity 4. changing input prices What is the real business cycle theory for driving economic fluctuations? - Answers technology influences changes in labor demand What is the Keynesian theory for driving economic fluctuations? - Answers changing sentiments - animal spirits (psychological factors that influence mood) What is the financial and monetary theory for driving economic fluctuations? - Answers decrease in money supply leads to lower labor supply Okun's Law - Answers change in unemployment = -.5 x (annual growth of GDP - 2%) How does a short-run decrease of interest rate affect the interest rate in the long-run? - Answers The long-run interest rate falls, too, since the long-run Interest rate is an average of the short-run interest rates Taylor Rule - Answers LR Fed Funds Rate Target + 1.5*(Inflation Rt. - Inflation Target Rt.) + 0.5*(output gap in % points) Output gap = ? - Answers (GDP - Trend GDP)/Trend GDP Example of automatic stabilizer - Answers Food stamps