ECON Exam #4

the exchange rate effect is the

inverse relationship between real interest rates and net exports

A budget deficit occurs when

government spending > government revenue

If an economy has a postive output gap of 3% this means..

GDP is 3% above potential GDP

What happens to prices and GDP when productivity increases in the economy?

Prices decrease, and GDP increases

What rises when the economy is expanding

Real GDP growth

Retirement benefits, unemployment benefits, maternity leave benefits, death and funeral benefits, and other benefits are examples of??

Social Insurance

Ceteris Paribus

a Latin phrase that means "all other things held constant"

what leads to a decrease in the price level but an increase in the quantity of output in the economy?

a rise in aggregate supply

Typically business cycles

a. have short and sharp recessions, followed by long and gradual expansions

income taxes are taxes assessed on...?

all income

Which is a narrow indicator? a. consumer price index b. stock price for JP Morgan Chase & Co. c. non-farm payrolls d. real GDI

b. stock price for JPMorgan Chase & Co.

An example of a lagging indicator is a. consumer confidence b. unemployment insurance claims c. business confidence d. the stock market

b. unemployment insurance claims

If a bank's reserves are low it can increase them by..

borrowing from other banks in the overnight loan market

in order to lower output, the federal government engages in ___ fiscal policy, which ___ government spending and ____ taxes.

contractionary; lowers; raises

contractionary monetary policy ___ consumption, investment and net exports; ___ aggregate expenditures; and ____ aggregate demand

decreases; lowers; lowers

what is provided by the federal government

medicare

The broadest measure of economic activity is

real GDP

Why does the federal reserve target inflation rather than unemployment

it would be poor optics for the Fed to intentionally increase unemployment

the higher the GDP deflator of the economy the

lower the real wealth of in the economy more expensive the country's exports

Expanisionary Fiscal Policy ___ taxes, ___ government expenditure, ____ aggregate expenditures, and ____ aggregate demand

lowers; raises; boosts; raises

An inflation- induced monetary policy response to lower interest rates causes a

movement along the same aggregate demand curve

a rise in prices leads to a...

movement up and to the left, along the same aggregate demand curve

the debt effect helps explain the

positive relationship between real interest rates and net exports

when inflation rises above its target rate, the federal reserve will

raise interest rates

If the output gap is positive, then the Federal Reserve will use its floor framework to ____ the interest on excess reserves, borrow ____ money from financial institutions to set the lower bound for the federal funds rate, and ___ the discount rate to set the upper bound for the federal funds rate.

raise the interest on excess reserves, borrow more money, and increase the discount rate.

if the actual inflation rate is greater than the target inflation rate, then relative to the neutral interest rate, the Federal Reserve will ___ the real interest rate to drive ___ consumption and investment

raise the real interest rate ; drive down consumption and investment

If the problem in the economy is contagious higher-than-expected increases in the consumer price index, we expect the Federal Open Market Committee (FOMC) to ___ interest rates to ___ spending today

raise; reduce

If inflation is 4% and a firm gives its workers 1.5% nominal wage raise then... ?

real wages have fallen by 2.5%

suppose that the economy is overheating. one would expect to see real GDP

rise above potential GDP

During a recession one would expect to see the unemployment rate

rise above the equilibrium unemployment rate

an output-induced monetary policy response to lower interest rates causes a

right shift of the aggregate demand curve

ceteris paribus, an increase in investment leads to a:

right shift of the aggregate demand curve

If the economy has an output gap of 0% this means the economy is..

suffering from hyperinflation

What is a regressive tax?

those with less income tend to pay a higher share of their income in taxes

the aggregate demand curve shows the relationship between the price level and the

total quantity of output that buyers collectively plan to purchase

the aggregate supply curve shows the relationship between the price level and the

total quantity of output that suppliers collectively produce.

Aggregate Expenditure

total spending in the economy: the sum of consumption, planned investment, government purchases, and net exports

if a bank decides to print money this can lead to...?

inflation

if congress decides to increase military spending this is an example of..?

discretionary spending

when prices rise in the United States, what is the effect on net exports and aggregate expenditure?

exports become more expensive, imports become cheaper, net exports fall, and aggregate expenditure falls

Mandatory spending is spending that

supports programs that do not get determined annually but instead are set in law

Which of the following statements is true?

taxable income is less than income earned because of deductions

quantitative easing (QE)

the purchase of long term government and private mortgage-backed securities by central banks to make credit available in hopes of stimulating aggregate demand