Econ 300 Quiz 4 review

For which of the following AS equations is the inflation rate most sensitive to the output​ gap? The graph to the right shows two aggregate supply curves. For which aggregate supply curve is inflation most sensitive to changes in the output gap?

5+3Y AS1

In the United​ States, consumption taxes​ (such as sales​ taxes) are typically state rather than federal taxes. In​ Europe, consumption taxes are imposed nationally rather than​ regionally, and they are mostly far higher than U.S. consumption taxes. In the United​ States, consumption taxes​ (such as sales​ taxes) are typically state rather than federal taxes. In​ Europe, consumption taxes are imposed nationally rather than​ regionally, and they are mostly far higher than U.S. consumption taxes. Would you expect a consumption tax to have a different effect on consumer savings than an income​ tax?

A higher consumption tax would tend to relatively REDUCE consumption and INCREASE savings, thereby causing AN INCREASE in investment. Yes. A higher consumption tax would tend to relatively reduce consumption and increase savings.​ However, a higher income tax would reduce disposable income and thus would reduce consumption as well as savings.

In January​ 2012, the Federal Reserve changed its policy of implicitly targeting inflation to setting an explicit inflation target of​ 2%. According to a Reuters​ article: "Skeptics, particularly among congressional​ Democrats, have in the past worried that an explicit inflation target would relegate the full employment goal to the back​ burner." Which of the following does not explain why setting an explicit inflation target might conflict with a goal of full​ employment?

According to the Phillips​ curve, inflation and unemployment are inversely related in the​ short-run. Therefore, by keeping inflation rates​ lower, the Fed will have to be accepting of higher unemployment rates.

The Fed can use monetary policy to fight a recession by

All of the above.

Timing is important when conducting monetary policy because An example of how a poorly timed monetary policy can negatively affect the economy would be the implementation of

All of the above. A and B only.

Cuts in individual income taxes affect potential GDP by Cuts in corporate income taxes affect potential GDP by Cuts in taxes on dividends and capital gains affect potential GDP by

All of the above. A and C only. increasing the return to saving and thus the level of investment.

How are lags different for fiscal policy than for monetary​ policy? How are they the​ same?

Although recognition and impact lags are similar for monetary and fiscal​ policy, implementation lags may be considerably longer for fiscal policy since fiscal policy often requires​ time-consuming stages of government approval.

Which of the following factors would not cause the aggregate supply curve to​ shift?

An increase in consumption.

​[Related to the Solved Problem in this​ section] In 1999 and early​ 2000, the Fed increased the target federal funds rate​ repeatedly, partly because it believed that the economy was overheating and that inflation would increase. The graphs to the right show the position of the economy prior to the​ Fed's actions.

Ch 12, question 24

Not all changes in production costs are bad for the economy. During the​ 1990s, changes in technology lowered costs. Use the ​IS-MP model including the Phillips curve to analyze the situations described​ below:

Ch 12, question 26

Explain how the ability to pay interest on reserves allows the Fed to​ fine-tune its control of bank reserves.

If the Fed increases the interest rate on reserves, then banks should become more reluctant to make loans.

Explain how the Fed uses open market operations to target the federal funds rate.

If the actual rate is below the target rate, the Fed will conduct an open market SALE by SELLING u.s. treasury bills, thus DECREASING reserves and the money supply, which will RAISE the federal funds rate.

If expectations are​ rational, but a change in monetary policy is a​ surprise, will monetary policy be​ effective?

If the change is​ unexpected, there is little time to​ respond, and thus monetary policy can change real GDP.

What effect would the increase in the target federal funds rate have on the​ economy?

Increasing the target for the federal funds rate increases the real interest rate. This in turn decreases investment and interest-sensitive consumption, which decreases output and decreases the inflation rate.

China has used a fixed exchange rate to keep the value of its currency below its market level. ​China's purchase of U.S. Treasury securities is affected by its exchange rate policy since the latter puts it in the position of accumulating large foreign currency​ reserves, primarily A decision by China to allow its currency​ (the yuan) to float​ would:

It is easier for a country to undervalue a currency than to overvalue it because overvaluing a currency requires SELLING FOREING ECHANGES RESERVES FOR THE DOMESTIC CURRENCY U.S. DOLLARS increase its imports and decrease both its exports and purchases of U.S. Treasury securities.

How are changes in discretionary fiscal policy shown in the ​IS-MP​ model? A change in discretionary policy shifts the _____ curve. A decrease in government spending or an increase in taxes will shift the _____ curve to the _____. As a result this discretionary policy, there will be _____ the Philips curve.

LS, IS, left movement down along

The charters of the First and Second Banks of the United Stated were not renewed largely​ because:

Many advocates of a limited federal government distrusted the​ banks' power.

Complete the​ right-hand column in the following table to indicate how the Fed would use each tool to increase bank​ reserves:

Open market operations. Engage in open market PURCHASES. Discount loans. DECREASES the discount rate. Reserve requirements. LOWER the required reserve ratio.

Which of the following are the four primary goals of the​ Fed? ​(Check all that​ apply.)

Price stability, Interest rate stability, Financial market stability, High employment.

Which of the following are the lags associated with monetary​ policy? ​(Check all that apply​.) How long are these​ lags?

Recognition lag, implementation lag, impact lag Variable in length and variable over time.

Which of the following are not among the​ Fed's three traditional monetary policy​ tools? ​(Check all that apply​.)

Temporary lending programs, interest on bank reserves.

Why are the terms of members of the Board of Governors both very long and​ staggered?

Terms are long and staggered to insulate the Board of Governors from political influence.

In a March 2012 interview on Bloomberg​ Television's "In The​ Loop," former Federal Reserve Governor Randall Kroszner described inflation expectations in the United States as​ "well anchored." Expected inflation is well anchored when it is stable and households and firms expect the Fed will keep the actual inflation rate close to the expected inflation rate. What would happen to the AS curve if inflation expectations were not well​ anchored?

The AS curve will shift up if expectations of inflation increase.

What effect would the​ Fed's actions have on the​ economy?

The Fed would be expected to pursue an expansionary monetary policy, thereby decreasing the real interest rate and increasing real GDP.

Even with increased liquidity due to the​ Fed's actions, it appeared that banks became so risk averse that they were reluctant to lend. Evaluate the effectiveness of the bank lending channel in stimulating economic activity during this period.

The bank lending channel is only effective if banks are willing to​ lend, so in this​ case, the bank lending channel was extremely ineffective in stimulating economic activity.

What does it mean to describe a central bank as​ independent? Why is it desirable for a country to have an independent central​ bank?

The central bank can make policy decisions without approval from other parts of government. Monetary policy is too important and technical to be determined by politicians.

An article in the Economist magazine observed that when the​ Fed's "policy rate is effectively zero and​ long-term rates are close to​ all-time record lows. . . .​ [doesn't] additional easing amount to little more than pushing on a​ string?" What is the​ Fed's "policy​ rate"? The​ author's use of the phrase​ "additional easing" means In comparing additional easing to​ "pushing on a​ string," the author suggests that ______ may not rise in response to expansionary monetary policy. With​ short-term rates at or near zero and​ long-term rates at record​ lows, is it likely that additional quantitative easing by the Fed would amount to little more than pushing on a​ string?

The federal funds rate. continued expansionary monetary policy. aggregate expenditure No. Additional easing can generate inflation expectations and thus produce negative real interest​ rates, and it is real rates that impact consumption and investment spending.

Describe the relationship between central bank independence and inflation rates. Reasons for this relationship include the

The greater the degree of central bank​ independence, the lower the inflation rate. All of the above.

Compared to the​ past, FOMC meetings are now much more transparent. How might this transparency impact the effectiveness of monetary policy​ actions?

The transparency helps make the​ Fed's actions more credible and should help make policy actions more effective.

Which of the following is not a reason to doubt the policy ineffectiveness​ proposition?

When expectations are​ rational, policy actions are fully incorporated into expectations.

When financial markets do not function​ well, savers and investors waste​ resources, and the economy is less efficient. How might problems in financial markets affect employment and economic​ growth?

With LOWER levels of investment, aggregate expenditure DECREASES, real gdp DECREASES, employment DECREASES, and long-term economic growth DECREASES.

​[Related to the Solved Problem in this​ section] The initial recovery from the 2001 recession was very slow. As a​ result, the Fed reduced the federal funds rate to just​ 1% in 2003 and kept it there for a full year. Some economists argue that the low federal funds rate kept mortgage rates too low for too long and helped cause housing prices to rise. The rise in housing prices in​ 2001-2006 was a key factor in setting the stage for the financial crisis of​ 2007-2009. Why might the Fed have kept interest rates too low for too​ long?

With the lags inherent in monetary​ policy, incomplete​ data, and models that may have limited​ accuracy, the Fed may have believed that the economy required AN EXPANSIONARY stance for monetary policy. Thus interest rates remained​ low, and by the time rates were​ increased, the economy was already OVERHEATING.

Some argue that the Fed should not interfere in financial markets. Why is maintaining the stability of financial markets important to the​ Fed's other​ goals?

With unstable financial​ markets, investment falls, which means that it is difficult to maintain high employment and economic growth.

Why is it important to have a central bank to act as a lender of last​ resort?

Without a lender of last​ resort, it would be more likely for banks and other financial institutions to have liquidity problems and bank runs.

According to the​ chapter, contractionary fiscal policy is rarely used. But during the late​ 1990s, the U.S. government had a budget surplus. Does this surplus imply that fiscal policy in this period was​ contractionary?

Yes. The government had a cyclically adjusted budget balance​ surplus, which implies that fiscal policy was contractionary.

What is​ stagflation, and how does it​ occur? Stagflation​ is: When the adverse supply shock that caused the stagflation stops​ (e.g., oil prices stop​ rising), AS will shift to the _____. ​But, expected inflation will be _____ actual​ inflation, so the new AS curve will be _____ the position of the AS curve prior to the adverse supply shock. Inflation expectations must _____ to return the economy to​ long-run equilibrium.

a combination of high inflation and​ recession, usually resulting from an adverse aggregate supply shock. right, above, to the left of, fall further

Identify whether the following is​ (1) a discretionary fiscal​ policy, (2) an automatic​ stabilizer, or​ (3) not a fiscal policy. government spending on rebuilding highways this is a

a discretionary fiscal policy

With its goal of price​ stability, the Fed attempts to

achieve a​ low, stable inflation rate.

The Fed conducts open market operations with the primary goal of

affecting the federal funds rate.

What are rational​ expectations? Rational expectations is the assumption that people make forecasts of future values of a variable​ using: Adaptive expectations is the assumption that people make forecasts of future values of a variable​ using:

all available information. only past values of a variable.

Which of the following factors would shift the aggregate demand curve to the right?

an increase in government purchases of goods and services.

If expectations are​ rational,

anticipated demand shocks will have no effect on real​ GDP, while unanticipated demand shocks will influence the economy and real GDP.

The policy trilemma is the hypothesis that it is impossible to simultaneously achieve

exchange rate​ stability, monetary policy​ independence, and free capital flows.

Rational expectations can make monetary policy ineffective because households and firms adjust their expectations _____ after a change in monetary​ policy, and thus the policy change influences _____.

immediately, only inflation

Which of the following is a goal of fiscal​ policy?

promote maximum employment

During the housing market and financial crises of 2007 and​ 2008, the Fed increased the volume of discount loans in an attempt to

reassure financial markets and promote financial market stability.

What is fiscal​ policy? Who is responsible for conducting fiscal​ policy? Fiscal policy refers to changes that

the federal government makes to​ taxes, purchases of goods and​ services, and transfer payments that are intended to achieve macroeconomic policy objectives.

The aggregate supply curve​ shows: Which of the following statements is​ true?

the total quantity of​ output, or real​ GDP, that firms are willing and able to supply at a given inflation rate. The Philips curve and aggregate supply curve are identical.

Consider the following​ statement:

​"On average, rates of unemployment in Europe are higher than rates of unemployment in the United States.​ Thus, the Fed must be doing a good job of maintaining high​ employment."

Consider the following​ statement: ​"Currently, interest rates are very low. Because everyone knows that the Fed will raise rates at some​ point, raising rates will have no effect when it​ happens." Do you agree with this​ statement? Briefly explain.

​No, as long as the timing of the rate increase is​ unknown, it will still have an effect.

​[Related to the Solved Problem in this​ section] Economic activity in the United States peaked in March 2001 and then began to decline with the NASDAQ crash resulting from the collapse of the​ dot-com bubble. The terrorist attacks on the United States on September​ 11, 2001, worsened the recession.

Ch 12, question 25

In early​ 2011, unrest in the Middle East caused a sharp increase in the price of oil. Suppose that the economy was below potential GDP prior to the oil​ shock, as shown at point A on the Phillips curve graph to the right.

Ch 12, question 28

​[Related to the Solved Problem in this​ section] In​ 1968, the U.S. government placed a temporary​ 10% surcharge on personal and corporate income in an attempt to prevent the economy from overheating and inflation from accelerating. The graph to the right shows a possible​ short-run equilibrium prior to the surcharge. Assume that the economy was already experiencing inflation at this point.

Ch 13, question 19

From 1991 to​ 2000, the Japanese economy grew so slowly that those years have become known as the​ "Lost Decade."​ Nevertheless, the Japanese government increased the national sales tax in 1997 because it had become concerned about its budget deficit. As a​ result, real GDP decreased by​ 2.0% in 1998 and​ 0.1% in 1999. The graph to the right shows​ short-run equilibrium in the Japanese economy in 1997 prior to the sales tax increase. The graph assumes that growth had been slow but not​ negative, so the economy was at or near full employment. If the primary goal of the government is full​ employment, was increasing the national sales tax in 1997 a wise​ policy?

Ch 13, question 20 ​No, a fall in consumption due to the sales tax reduces real GDP further and increases unemployment.

The size of the expenditure multiplier varies depending on economic conditions and the conduct of monetary policy. Suppose that the government decides to spend an extra​ $100 billion on infrastructure projects and that the central bank targets an inflation rate of​ 2%. In​ addition, assume that the central bank always adjusts policy to hit this target. According to the​ graph, the central​ bank's commitment to the inflation target

Ch 13, question 26 All of the above.

The graph to the right shows an ​AD-AS model in​ short-run equilibrium. A positive supply shock leads to _____ in the output gap and _____ in inflation, while a positive demand shock leads to _____ in the output gap and _____ in inflation. If the output gap​ increases, it would be possible to determine whether supply or demand had changed by looking at the change in _____.

Ch 14, question 14 an increase, a decrease, an increase, an increase inflation

According to to former Federal Reserve Governor Randall​ Kroszner, inflation expectations in 2012 were well anchored. The Making the Connection discusses how the Fed may have induced a recession to reduce both current and expected inflation. To reduce​ inflation, the Fed must _____ the target federal funds rate. This will _____. decreasing inflation but also _____ real GDP.

Ch 14, question 15 increase, decrease AD, decreasing

​[Related to the Macro Data ​feature] Real oil prices decreased significantly during the 1990s. The graph to the right shows the initial equilibrium at point A and the shift in aggregate supply due to lower oil prices. Lower oil prices_____ inflation in the first period but not in later periods.​ Therefore, in the next​ period, the actual inflation rate is _____ the expected inflation rate. As the oil price shock ends and the expected inflation rate​ falls, _____ ​, causing _____ in inflation and _____ in the output gap. This adjustment must continue until the expected inflation rate is _____ the actual inflation rate and the output gap is _____.

Ch 14, question 16 decrease, less than, AS will shift to the left, an increase, a decrease, equal to , zero

​[Related to the Solved Problem in this​ section] Suppose that a severe recession in Europe causes a sharp decline in U.S. exports. The decline in U.S.​ exports, prior to changes in inflation​ expectations, will _____ the inflation rate and will _____ output. In the​ long-run, the economy​ will:

Ch 14, question 17 decrease, reduce move to point A and the inflation rate and output will return to their original levels.

In​ 1913, Congress created 12 Federal Reserve districts spread over the country. Why did Congress divide the country into districts?

Congress divided the districts in this way to attempt to adequately represent the interest and needs of the country at the time.

Consider the following​ statement: ​"Because economic models cannot precisely predict the effect of policy​ changes, policymakers should not use them to make predictions about the​ economy." Do you agree with this​ statement? Briefly explain.

Disagree --- While models are imperfect​ instruments, the existence of lags and the inability to​ fine-tune the economy requires that economic models be used to estimate the path of the economy and the expected effect of possible policies.

Consider the following​ statement: ​"Monetary policy and fiscal policy are really the same thing because they both can involve the buying and selling of U.S. Treasury​ securities." Do you agree or disagree with this​ statement? Explain your answer.

Disagree. U.S. Treasury​ securities, after they have been​ issued, are used to implement monetary policy because the central bank buys and sells bonds on the secondary market.

Consider the following​ statement: ​"Because automatic stabilizers are built into the​ economy, there is no need for discretionary fiscal​ policy." Do you agree with this​ statement? Briefly explain.

Disagree. While automatic stabilizers may be sufficient for ordinary fluctuations in economic​ activity, more severe shocks usually require intervention through discretionary fiscal policies.

Consider the following​ statement: ​"Because the Chairman of the Fed is appointed by the president of the United States and serves a​ four-year term, the president controls the​ Fed." Do you agree or disagree with this​ statement? Briefly explain.

Disagree. While the President appoints the​ Chairman, the Chairman is not the only voice or power in the Fed.

How is discretionary policy different from an automatic​ stabilizer?

Discretionary policy is implemented by​ decision, such as the American Recovery and Reinvestment Act of​ 2009, and usually has a much longer response lag. Automatic stabilizers are policies that act in response to the business cycle without explicit​ implementation, such as unemployment insurance.

Some argue that Fed districts should change. Why might this change make​ sense?

District banks should be redistributed to better recognize economic activity today.

How do automatic stabilizers affect the ​IS-MP​ model? Include the Phillips curve in your discussion.

Due to automatic​ stabilizers, changes in the IS curve are not as great.​ Likewise, movements along the Phillips curve are smaller.

Indicate which statements in the table given below make the case that the importance of monetary policy necessitates central bank independence and which statements make the opposite argument that the importance of monetary policy makes central bank independence undesirable. Do this by inserting into each​ statement's response box one of the following​ labels: F​- For​ independence; A​ - Against​ independence; or N​ - Neither for or against independence.

Elected officials should make monetary policy since they are held accountable for its results. A Monetary policy is too technical to be left in the hands of politicians. F Politicians may use monetary policy to advance their narrow political interests. F Elected officials have plenty of experience dealing with complex tasks. A The effectiveness of monetary policy is enhanced if it is formulated in secrecy. N

During the 2007-2009 financial​ crisis, banks faced liquidity​ problems, in part due to the illiquidity of some of their assets. This in turn made some banks reluctant to​ lend, causing problems for households and firms that needed to borrow​ funds, which in turn caused economic activity to decline. Explain how the Fed can use the bank lending channel to solve this problem.

The Fed can conduct an open market purchase of government securities to increase bank reserves, thereby increasing liquidity and making more loanable funds available.

What is the Federal Open Market Committee​ (FOMC), and why is it​ important?

The Federal Open Market Committee is a committee consisting of the chair of the Board of​ Governors, the other 6 Fed​ governors, the President of the New York​ Fed, and the presidents of 4 other Fed district banks who serve on a rotating basis. It is important because it conducts open market operations.

When and why did Congress create the Federal Reserve​ System?

The Federal Reserve System was created​ in 1913 to act as the central bank of the Untied States.

Most of the programs that we think of as automatic stabilizers did not exist in 1929. Suppose that the automatic stabilizers existed in 1929. Briefly explain the effect these stabilizers would have had on the severity of the Great Depression.

The decline in consumption would have been​ reduced, making the decrease in real GDP and employment smaller than was actually experienced.

Demand shocks can contribute to inflation​ when: What cost factors contribute to​ inflation? How do these factors relate to the aggregate supply​ curve?

a positive demand shock raises real GDP above potential GDP. Firms experience capacity​ constraints, as raw materials and labor become harder to find at existing prices. They help to explain why the aggregate supply curve is upward sloping.

The Congressional Budget Office uses​ 5% as its estimate of the natural rate of unemployment. Most economists estimate that the natural rate is between​ 5% and​ 6%. However, some evidence suggests that the natural rate of unemployment may have increased after the recession of 2007 - 2009. If the Fed believed that the natural rate of unemployment was lower than the true rate and tried to maintain that​ rate, what would be the consequences for the​ economy?

an increase in the inflation rate

If a country has a small​ economy, such as​ Sweden, and the economy is open rather than​ closed, then the effectiveness of fiscal policy in that country will Compared to its effectiveness in a large closed​ economy, fiscal policy in a large open economy​ (with a floating exchange​ rate) is

be enhanced since the real interest rate​ doesn't change in a small open economy. diminished

Monetary policy affects aggregate expenditure by changing

borrowing costs for households and firms.

As mentioned in the​ chapter, in​ 1968, the U.S. government placed a temporary​ 10% surcharge on personal and corporate income in an attempt to prevent the economy from overheating and causing inflation to accelerate. How would you describe this​ policy? ​(Check all that​ apply.) Economic research has shown that consumers are more likely to make changes in consumption spending when there is a permanent change in their income. Based on this​ idea, would you expect this surcharge to have the desired​ result? How would your answer be different if the surcharge were​ permanent?

contractionary fiscal policy, discretionary fiscal policy No. Since the surcharge was known to be​ temporary, it is more likely that spending would not change by a considerable​ amount, and thus the policy would not be greatly effective. If the surcharge were​ permanent, it would have a more significant effect on consumer incomes over​ time, and thus consumers would be more likely to decrease their spending.

Through open market​ operations, the Fed

controls the supply of​ reserves, but not the demand for​ reserves, in the banking system.

The United Kingdom faced a fiscal crisis during 2010 and 2011. The government had a large budget​ deficit, which it believed needed to be reduced. At the​ time, though, the United Kingdom had only barely recovered from the 2007-2009 recession. Which of the following fiscal policies would achieve the U.K.​ government's budget​ goal? What effect would these policies have on the British​ economy?

decrease government purchases These contractionary fiscal policies will reduce demand and thus decrease real GDP.

To increase the money​ supply, the Federal Reserve could

decrease reserve requirements.

Why does the value of the federal funds rate​ matter? The value of the federal funds rate is important because an increase in the federal funds rate

decreases the level of investment and​ interest-sensitive consumption.

In early​ 2010, consumer prices in the United Kingdom rose above​ 3%, even though the economy was growing slowly. An article in The Economist ​commented: ​"This may not be​ stagflation, 1970s-style; rather it is​ slumpflation, given that the economy is bumping along the bottom of the biggest hole dug in GDP since the second world​ war." The difference between a recession and stagflation is that during an ordinary​ recession, inflation _____, while during stagflation, inflation _____. During times of positive but slow economic​ growth, it is expected that the rate of inflation will_____. The article also stated that the inflation rate was expected to decline. How would the ​AD-AS model explain​ this, assuming that the source of the high inflation was a cost​ shock?

falls, rises fall Inflation expectations will​ adjust, which will cause AS to shift to the​ right, reducing the inflation rate.

For each of the following​ events, describe the change in aggregate expenditure and explain what happens to the IS curve and the Phillips curve. the government decreases infrastructure spending on roads and bridges by 25%. As a result, _____ and aggregate expenditure will _____, the LS curve will _____, and there will be _____ the Philips curve. The government cute the corporate tax rate in half. As a result, _____ and aggregate expenditure will _____, the LS curve will _____, and there will be _____ the Philips curve The length of time an individual can collect unemployment insurance is reduced from 99 weeks back to 26 weeks, as a result, _____ and aggregate expenditure will _____, the LS curve will _____, and there will be _____ the Philips curve.

government purchases, decrease, shift leftward, movement down along investment, increase shift rightward, movement up along consumption, decrease, shift leftward, movement down along

A decrease in personal income taxes will cause real GDP and employment to a decrease in corporate income taxes will cause real GDP and employment to an increase in transfer payments will cause real GDP and employment to increase

increase increase increase

How does a change in the personal tax rate affect the​ multiplier? How does a change in the size of the multiplier affect the​ economy? A decrease in the personal tax rate _____ the size of the multiplier, which means that any given change in the autonomous spending has a relatively _____ effect on real GDP.

increases, larger

For each of the following​ situations, choose a fiscal policy and explain how it could be used to correct the economic problem. Real GDP is above potential GDP after a stock market boom. The government would The economy is in a recession due to a decline in investment spending. The government would

increase​ taxes, thereby decreasing demand and moving real GDP closer to potential GDP. increase government​ purchases, thereby increasing demand and moving real GDP closer to potential GDP.

The​ Fed's dual mandate refers to

its Congressionally authorized pursuit of both price stability and maximum employment.

With its goal of high​ employment, the Fed attempts to

keep unemployment at its natural rate.

​"The most effective way that Congress could help to support the economy right​ now, would be to work to address the​ nation's fiscal challenges in a way that takes into account both the need for​ long-run sustainability and the fragility of the​ recovery." The​ "fiscal challenges" faced by the United States in 2012 were evidenced by its ​Bernanke's admonition that inadvisable actions not be taken given the​ "fragility of the​ recovery" likely reflected his worry that Congress might

large budget deficit. All of the above.

Compared to its effectiveness in a closed​ economy, fiscal policy in an open economy with a floating exchange rate is

less effective since an expansionary​ policy's impact on the real interest rate results in a currency appreciation and consequent drop in net exports that reinforces the interest rate driven declines in consumption and investment.

With a budge surplus the government's expenditure is _____ than it s tax revenue while a budget deficit is the situation in which the government's expenditure is _____ than its tax revenue. The national debt Since the start of the Great Depression

less, greater All of the above. years with federal budget deficits have outnumbered those with​ surpluses, the national debt has​ grown, and the​ debt-to-GDP ratio has fluctuated.

Compared to its effectiveness in a closed​ economy, fiscal policy in an open economy with a fixed exchange rate is

more effective since fiscal​ policy's impact on the real interest rate is negated by the central​ bank's commitment to the fixed exchange rate. With no change in the real interest​ rate, there are no offsets to fiscal policy from interest rate induced changes in consumption and investment.

In a letter to a member of​ Congress, Fed Chairman Ben Bernanke made the following​ statement: The monetary accommodation provided by the Federal Reserve has substantially helped the U.S. economy by easing financial conditions. . . . The easing in financial conditions has promoted economic activity through a variety of​ channels, including reducing the cost of​ capital, boosting the aggregate wealth of U.S.​ households, and improving the competitiveness of U.S. businesses in the global marketplace. ​Bernanke's use of the phrase​ "monetary accommodation" refers to actions by the Fed to What does Bernanke mean by​ "easing financial​ conditions"? The easing of financial conditions promoted economic activity through the three​ "channels" Bernanke mentions in the following​ way: the reduced cost of capital increased​ ______, the boost to household wealth increased​ ______, and the improved competitiveness of U.S. firms increased​ ______.

promote recovery and growth through the implementation of expansionary monetary policy. All of the above. ​investment; consumption; net exports.

What are the​ long-run equilibrium conditions in the ​AD-AS​ model? In​ long-run equilibrium: Changes in the equilibrium real interest rate in the​ IS-MP model causes_____ the AD curve in the​ AD-AS model. And a shift of the IS curve causes _____ the AD curve.

real GDP equals potential GDP and the inflation rate equals both the central​ bank's target inflation rate and the expected inflation rate. movement along, a shift of

During the 2007-2009 financial​ crisis, among​ policymakers, the Fed was the first to respond with a reduction in​ short-term nominal interest rates in September 2007. Fiscal policy actions came later. Comment on the length of fiscal and monetary policy lags and why monetary action occurred first. While _____, are identical for monetary and fiscal​ policy, _____ are far shorter for monetary policy.​ Thus, it was easier for the Fed to act immediately than for the President and Congress.

recognition lags, implementation lags

For the following​ scenario, identify the​ short-run effect on the AD​ curve: Investors become more pessimistic Aggregate demand

shifts to the left

For the following​ scenario, identify the​ short-run effect on the AS​ curve: There is a change in technology that lowers the cost of production. Aggregate supply

shifts to the right.

The effect of crowding out and the presence of​ forward-looking households makes the size of the multiplier This happens​ because, in the case of crowding​ out, a government budget deficit pushes the real interest rate _____, with the result that investment is _____. With the presence of​ forward-looking households, a government budget deficit suggests that future taxes may be _____ than otherwise, and this depresses present _____.

smaller higher, reduced higher, consumption

The aggregate demand curve​ shows: An increase in inflation causes the Fed to_____ the real interest rate. This shifts the _____. Consumption, investment, and _____ all decline, which reduces real GDP.

the relationship between aggregate expenditure on goods and services by households and firms and the inflation rate. increase, MP curve up, net exports

Consider the following​ statement: ​"The supply shock inflation​ parameter, s​, must always be positive because supply shocks always increase production​ costs." Do you agree with this​ statement? ​(Check all that​ apply.)

​No, because decreases in oil prices and improvements in production technology can cause positive supply shocks. ​No, because a positive value of s represents a reduction in inflation---a positive supply shock