EC202 Week 8-10

In an effort to address the troubled economy, ..."For the ninth time in just over a year, the Federal Reserve is expected to cut interest rates, quite possibly its last reduction in this downturn." Rates have not been this low "... since 2003, when the economy was growing at a snail's pace." www.csmonitor.com, 10/28/2008 These rate cuts are designed to

decrease the real long term interest rate and increase real GDP.

An increase in the tax on interest income ________ the supply of loanable funds and ________ the equilibrium investment.

decreases; decreases

An income tax ________ potential GDP by shifting the ________ curve ________. A) increases; labor demand; rightward

decreases; labor supply; leftward

Unemployment insurance are payments made to unemployed workers. Typically workers are paid for no more than 26 weeks. In December 2012, the federal government passed legislation that would extend the payments to a maximum of 73 weeks. This extension is an example of

discretionary fiscal policy

The structural deficit or surplus is the

government budget deficit or surplus that would occur if the economy were at potential GDP.

he core inflation rate, measured by the core PCE deflator, measures changes in the

prices of consumer goods except food and fuel

Consumer confidence in the economy rises, and as a result, real GDP increases above potential GDP. To move U.S. GDP back to potential GDP, the Fed should

raise the federal funds rate

Suppose that the economy is at full employment and aggregate demand increases by more than it is anticipated to increase. Other things remaining the same, ________.

real GDP increases above potential GDP

In a demand-pull inflation brought about by increases in the quantity of money, real GDP might increase at times because

real wages fall

If the Fed carries out an open market operation and sells U.S. government securities, the federal funds rate ________ and the quantity of reserves ________.

rises; decreases

Stagflation is the combination of a ________ and ________.

rising price level; a decreasing real GDP

If the government's outlays are $1.5 trillion and its tax revenues are $2.2 trillion, the government is running a budget

surplus of $0.7 trillion

Income taxes in the United States are part of an automatic fiscal policy because

tax revenues increase when income increases, thus offsetting some of the increase in aggregate demand.

Demand-pull inflation starts as the

AD curve shifts rightward.

In 2012, the Federal Reserve announced it would hold the federal rates near 0 percent "at least through mid-2015." This policy attempted to shift the

aggregate demand curve rightward

All of the following are part of fiscal policy EXCEPT A) setting tax rates. B) setting government spending. C) choosing the size of the government deficit. D) controlling the money supply.

D

Which of the following is one of the Fed's policy goals? A) help the President win reelection B) exchange rate C) monetary base D) price level stability

D

The ________ states that the main source of economic fluctuations is volatile business confidence.

Keynesian cycle theory

A rational expectation of inflation is

a forecast of inflation that uses all relevant information.

Along the long-run Phillips curve,

actual inflation is equal to expected inflation.

What could start a demand-pull inflation?

an increase in government expenditure

Cost-push inflation can start with

an increase in oil prices

When the Fed lowers the federal funds rate, aggregate demand

increases

A cost-push inflation spiral results if the Fed's response to stagflation is to keep

increasing aggregate demand

For a given level of anticipated inflation and natural unemployment rate, the short- run Phillips curve shows the relationship between

inflation and the unemployment rate

In the short run, the Federal Reserve faces a tradeoff between

inflation and unemployment

If the economy is initially at potential GDP and people correctly anticipate an increase in inflation so that their money wage rate adjusts immediately, then

only the price level rises with no change in real GDP.

One characteristic of automatic fiscal policy is that it

requires no legislative action by Congress to be made effective

Suppose that the money prices of raw materials increase so that short-run aggregate supply decreases. If the Federal Reserve does not respond, the higher money price of raw materials will

result initially in lower employment and a higher price level

An increase in the expected inflation rate shifts the

short-run Phillips curve upward.

Once supply side effects are taken into account, tax cuts for labor income can change

the supply of labor and potential GDP

Along a short-run Phillips curve, suppose the expected inflation rate is 6 percent. If the inflation rate turns out to be 8 percent instead,

there is a movement upward along the short-run Phillips curve.

When workers and employers correctly anticipate an increase in inflation caused by an increase in aggregate demand,

unemployment will be at the natural rate.

If people correctly anticipate an increase in aggregate demand, a result is

workers demanding higher money wages to keep the real wage unchanged.