Liberty University ECON 214 Test 5

Expansionary monetary policy - Correct Ans-money supply increases and interest rates decrease, AD increases, real GDP increases (open market purchase of treasury Securities) Open market purchases by the Fed loanable funds market _______ and interest rates ______ - Correct Ans-Increase, decrease Fisher equation - Correct Ans-nominal interest rate - inflation rate = real interest rate* Contractionary monetary policy - Correct Ans-money supply decreases and interest rates increase, AD decreases, price level decreases (open market sale of Treasury securities) Monetary neutrality - Correct Ans-money supply does not affect real economic variables The Phillips curve - Correct Ans-inverse relationship between inflation and unemployment rates, not a stable curve but may shift in the long run. How workers are affected by unexpected inflation - Correct Ans-only unexpected inflation can lower unemployment World exports/world GDP - Correct Ans-Total world exports are 1/4th of world GDP The impact of free trade on price and quantity - Correct Ans-Trading with comparative advantage reduces prices and increases production Trade deficit - Correct Ans-When imports exceed exports for a country. U.S. has been in trade deficit since 1975 Comparative advantage - Correct Ans-Specialize in producing the product that has lower opportunity cost and trading for the other goods and services that a country wishes to consume Comparative advantage calculation - Correct Ans-What you're giving up/what you're producing Tariff: - Correct Ans-taxes levied on imported goods and services, paid by the producer of the imported good when the good arrives in a foreign country. Quotas: - Correct Ans-limits on the quantity of products that can be imported into a country. Why trade barriers? - Correct Ans-National Security, infant industries, Anti-dumping, Special Interests. Depreciation and appreciation of a currency - Correct Ans-$1.30 = € 1 - $1.24 = € 1 Higher interest rates in the U.S. - Correct Ans-increased demand for U.S. dollars, Increase the value of dollar Exchange rate manipulation - Correct Ans-When a national government intentionally adjusts its money supply to affect the exchange rate of its currency. Pegged exchange rate - Correct Ans-Exchange rates that are fixed at a certain level through the actions of the government. Floating/flexible exchange rate - Correct Ans-Exchange rates that are determined by the market forces of supply and demand for currency. The law of one price - Correct Ans-after accounting for transportation costs and trade barriers, identical goods sold in different locations must sell for the same price. Pa = Pb A long-run theory The theory of purchasing power parity - Correct Ans-The idea that a unit of currency should be able to buy the same quantity of goods and services in any country, an extension of the law of one price. Pa