Exam 3 Econ

Which of the following would supply-side economists advocate? 1. reducing tax rates in order to encourage people to work more 2. providing investment tax credits to stimulate capital formation spending 3. increasing government spending 4. increasing transfer payments to those who want to be retrained for employment

1 and 2

The notion that there is a tradeoff between inflation and unemployment is expressed as a a. Phillips curve. b. Schumpeter curve. c. Keynes curve. d. Friedman curve.

A

The three major categories of government spending are a. government purchases, transfer payments, and net interest. b. defense spending, Medicare and Medicaid, and net interest. c. government purchases, defense spending, and interest payments. d. government purchases, defense spending, and transfer payments.

A

When the Fed lowers the target rate of interest for federal funds, it a. buys government bonds. b. lowers the discount rate. c. sells government bonds. d. lowers the required reserve ratio.

A

How does a change in interest rates affect aggregate demand? (Be sure to discuss how a change in interest will affect each component of aggregate demand.)

AD shifts right with a decrease in interest rates, and left with an increase. Consumption, Investment and Net Exports all increase with a decrease in interest rates.

Suppose a country has a national debt of $5,000 billion, a GDP of $20,000 billion, and a budget surplus of $130 billion. How much will its new national debt be? a. $5,130 billion b. $4,870 billion c. $15,130 billion d. $19,870 billion

B

The interest rate on a bond is a. determined by its face value b. inversely related to its price c. directly related to its price d. determined by the time to maturity

B

When the Fed sells bonds in the open market, we can expect a. bond prices and interest rates to fall. b. bond prices to fall and interest rates to rise. c. bond prices and interest rates to rise. d. bond prices to rise and interest rates to fall.

B

A higher U.S. exchange rate means that a. U.S. products are now cheaper to foreign countries. b. U.S. products are now more expensive to U.S. citizens. c. foreign products are now cheaper to U.S. citizens. d. foreign products are now more expensive to U.S. citizens.

C

A lower price level in the United States. a. discourages U.S. exports and increases U.S. imports. b. discourages U.S. exports and reduces U.S. imports. c. encourages U.S. exports and reduces U.S. imports. d. encourages U.S. exports and increases U.S. imports.

C

Refer to the figure below. https://i.imgsafe.org/bc3ef1ed67.png If real GDP is equal to Yr, there is a. equilibrium at full employment. b. a short-run and a long-run equilibrium. c. an inflationary gap. d. a recessionary gap.

C

The lag in realizing that a macroeconomic problem exists is called a. the impact lag. b. the implementation lag. c. the recognition lag. d. the market lag.

C

Using the equation of exchange, if velocity is stable in the long run, the inflation rate, (%∆P) can be expressed as a. %∆P = %∆M ÷ %∆Y b. %∆P = %∆M * %∆Y c. %∆P = %∆M - %∆Y d. %∆P = %∆M + %∆Y

C

What are the two policy making bodies of the Federal Reserve? a. the Board of Governors and the U.S. Congress b. the Board of Governors and the Presidents' office c. the Board of Governors and the Federal Open Market Committee d. the Federal Open Market Committee and the U.S. Congress

C

What is an automatic stabilizer? a. It refers to a stabilization program that keeps inflation in check automatically. b. It refers to a discretionary policy that is triggered when actual output is not equal to potential output to improve the economy's performance. c. It refers to any government program that tends to reduce fluctuations in GDP automatically. d. It refers to a government program that is automatically triggered when the economy enters a recession.

C

Which of the following affects the quantity of U.S. dollars demanded in the currency market? a. Payments to foreign owners of U.S. assets b. Domestic purchases of U.S. goods and services c. Foreign purchases of U.S. goods and services d. U.S. purchases of foreign assets

C

Which of the following does not cause the money demand curve to shift? a. a change in real GDP b. a change in the price level c. a change in the interest rate d. a change in transfer costs

C

Which of the following result from a change in the money supply brought about by an open market sale? a. lower interest rate, higher exchange rate, decreased demand for investment and net exports b. lower interest rate, lower exchange rate, increased demand for investment and net exports c. higher interest rate, higher exchange rate, decreased demand for investment and decreased demand for net exports d. higher interest rate, lower exchange rate, decreased demand for investment and increased demand for net exports

C

LRAS Shifters

Changes in Factors of Production and Changes in Technology

What are the possible means and the end results of contractionary fiscal policy?

Decrease G or Increase T; AD goes down, rGDP goes down, PI goes down, Unemployment rate goes up.

If firms and workers have adaptive expectations, what impact will expansionary monetary policy have on inflation, unemployment, and the Phillips curve

With adaptive expectations, expansionary monetary policy will result in an increase in inflation, a decrease in unemployment and movement along the short run Phillips curve.

Explain how each of the following events would affect the aggregate demand, long-run aggregate supply, and/or short-run aggregate supply curve. Consider how this will impact the long-run and short-run equilibrium price level and real GDP. a. An increase in the price level b. An increase in government purchases c. Higher state income taxes d. Higher interest rates e. Faster income growth in other countries f. A higher exchange rate between the dollar and foreign currencies g. An increase in the labor force h. An increase in the quantity of capital goods i. Technological change j. An increase in what the price level is expected to be in the future k. An unexpected increase in the price of an important raw material l. An increase in the labor force participation rate

a. This will cause movement along a curve b. AD will shift to the right, SR and LR price levels will increase, rGDP will increase and then decrease c. AD will shift to the left, SR and LR price levels will decrease, rGDP will decrease and then increase d. AD will shift to the left, SR and LR price levels will decrease, rGDP will decrease and then increase e. AD will shift to the right, SR and LR price levels will increase, rGDP will increase and then decrease f. AD will shift to the left, SR and LR price levels will decrease, rGDP will decrease and then increase g. LRAS and SRAS will shift to the right, just looking at a shift in SRAS - this would result in a decrease in price level, rGDP will increase h. LRAS and SRAS will shift to the right, just looking at a shift in SRAS - this would result in a decrease in price level, rGDP will increase i. LRAS and SRAS will shift to the right, just looking at a shift in SRAS - this would result in a decrease in price level, rGDP will increase j. SRAS will shift to the left, SR price level will increase, but will return to start in LR, rGDP will decrease and then increase k. SRAS will shift to the left, SR price level will increase, but will return to start in LR, rGDP will decrease and then increase l. SRAS will shift to the left, SR price level will increase, but will return to start in LR, rGDP will decrease and then increase

For the scenarios described below, determine and explain if it is part of an expansionary fiscal policy, contractionary fiscal policy, or not part of fiscal policy: a. The corporate income tax rate is increased b. Defense spending is increased c. The Federal Reserve lowers the target for the federal funds rate d. Families are allowed to deduct all their expenses for day care from their federal income taxes e. The individual income tax rate is decreased

a. contractionary fiscal policy b. not part of fiscal policy c. not part of fiscal policy d. expansionary fiscal policy e. expansionary fiscal policy

Is this discretionary fiscal policy, an automatic stabilizer, or not a fiscal policy? The revenue the federal government collects from the individual income tax declines during a recession

automatic stabilizer

Is this discretionary fiscal policy, an automatic stabilizer, or not a fiscal policy? The total the federal government pays out for unemployment insurance decreases during an expansion

automatic stabilizer

Is this discretionary fiscal policy, an automatic stabilizer, or not a fiscal policy? The Federal Reserve sells Treasury securities

not a fiscal policy

Is this discretionary fiscal policy, an automatic stabilizer, or not a fiscal policy? The federal government changes the required gas mileage for new cars

not a fiscal policy

What are the AD Shifters?

1) Changes in gov't policies; a. monetary (as interest rate goes up, aggregate demand decreases) b. fiscal (as government purchases go up, aggregate demand goes up, and as taxes go up, aggregate demand goes down) 2) Change in expectations (As confidence goes up, aggregate demand goes up. 3) Change in foreign variables a. Growth Rate relative to the rest of the world (As growth rate relative to rest of the world goes up, net exports decrease, and aggregate demand decreases) b. Exchange Rates (As currency value goes up, net exports decrease, and aggregate demand decreases)

SRAS Shifters

1) Increase in Factors of Production -> Increase in SRAS 2) Advances in Technology -> Increase in SRAS 3) Change in Expected Future Price; If the Expected Future Price is expected to go up -> SRAS will decrease. 4) Adjustment if Expectations were Wrong; if PI went up more than expected -> SRAS goes down. 5) Supply Shock; If a negative shock to the supply occurs -> SRAS goes down.

Which of the following are monetary policy goals? 1. maintain high interest rates 2. keep unemployment rates low 3.reduce the size of the banking sector 4. prevent high rates of inflation

2 and 4

An expansionary fiscal policy is likely to result in a. higher interest rates and lower private investment. b. lower interest rates and higher private investment. c. higher interest rates and higher private investment. d. lower interest rates and lower private investment.

A

Each point on a Phillips curve is a different combination of a. the inflation rate and the unemployment rate. b. saving and disposable income. c. aggregate output and the unemployment rate. d. aggregate output and the inflation rate.

A

Net exports equal a. exports − imports. b. imports − exports c. domestic consumption − foreign consumption. d. foreign consumption − domestic consumption.

A

Suppose an economy is operating with an inflationary gap. In this case, policymakers would seek to move the economy a. back down the Phillips curve toward an unemployment rate that is closer to the natural rate of unemployment. b. up the Phillips curve toward an unemployment rate that is closer to the natural rate of unemployment. c. up the Phillips curve toward an unemployment rate that is further from the natural rate of unemployment. d. back down the Phillips curve toward an unemployment rate that is further from the natural rate of unemployment.

A

The balance between spending flows into a country and spending flows out of that country is called a country's a. balance of payments. b. current account. c. capital account. d. foreign exchange.

A

Which of the following is an advantage of automatic stabilizers? a. Because they affect disposable personal income directly, automatic stabilizers act swiftly to reduce the degree of changes in real GDP. b. The lag for automatic stabilizers is relatively long. c. It is much easier to measure the impact of automatic stabilizers compared to the impact of discretionary fiscal policy. d. There is no administrative cost to implementing automatic stabilizers.

A

As the incomes in foreign nations rise, their imports from the United States will a. fall as they become less dependent on other countries. b. rise. c. rise and the U.S. dollar exchange rate will fall. d. not be affected.

B

If the demand for U. S. dollars goes down, the exchange rate will a. increase and, as a result, net exports in the United States will decrease b. decrease and, as a result, net exports in the United States will increase c. decrease and, as a result, net exports in the United States will decrease d. increase and, as a result, net exports in the United States will increase

B

Let M = money supply; P = price level; V = velocity; Y = real GDP. The equation of exchange is given by a. M P = V Y b. M * V = nominal GDP c. M V = (1/V)P Y d. M Y = P V

B

A liquidity trap is said to exist when a change in monetary policy has no effect on a. the natural level of employment. b. the money supply. c. aggregate supply. d. interest rates.

D

A period marked by rising unemployment and high inflation is called a a. inflationary phase. b. recovery phase. c. Phillips phase. d. stagflation phase.

D

An increase in the demand for bonds leads to a. a decrease in the price of bonds, a decrease in the interest rate, and a decrease in aggregate demand. b. a decrease in the price of bonds, an increase in the interest rate, and an increase in aggregate demand. c. an increase in the price of bonds, an increase in the interest rate, and an increase in aggregate demand. d. an increase in the price of bonds, a decrease in the interest rate, and an increase in aggregate demand.

D

Government tax and expenditure policies that affect real GDP are called a. supply-side policy. b. discretionary fiscal policy. c. automatic fiscal policy. d. fiscal policy.

D

In the short run, an increase in net exports causes a. an increase in real GDP and a decrease in the price level. b. a decrease in real GDP and an increase in the price level. c. a decrease in real GDP and the price level. d. an increase in real GDP and the price level.

D

Suppose the government increases the corporate income tax rate. This is a. an automatic fiscal policy that will shift the aggregate demand curve to the left by an amount equal to the initial change in investment times the spending multiplier. b. a contractionary fiscal policy that will shift the aggregate demand curve to the left by an amount equal to the initial change in the corporate income tax rate times the spending multiplier. c. an expansionary fiscal policy that will shift the aggregate demand curve to the right by an amount equal to the initial change in corporate income tax revenue times the spending multiplier. d. a contractionary fiscal policy that will shift the aggregate demand curve to the left by an amount equal to the initial change in investment times the spending multiplier.

D

The time it takes for the Fed or government policymakers to enact policies to correct unemployment or inflation problems is a source of which lag? a. the government lag b. the impact lag c. the recognition lag d. the implementation lag

D

Which of the following predictions can be made using the growth rates associated with the quantity equation, assuming velocity is stable? a. If the money supply grows at the same rate as real GDP, the price level will also increase at the same rate as real GDP. b. If the money supply grows at a slower rate than real GDP, there will be inflation. c. If the money supply grows at the same rate as real GDP, the price level will be fall and there will be deflation. d. If the money supply grows at a faster rate than real GDP, there will be inflation.

D

When will an increase in aggregate demand not result in lower unemployment rates in the short run?

If there is a shift in AS that offsets it.

What are the possible means and the end results of expansionary fiscal policy?

Increase G or decrease T; AD goes up, rGDP goes up, PI goes up, Unemployment rate goes down.

What actions can the Fed take if it believes the inflation rate is about to dramatically increase?

Increase interest rates, increase the required reserve ration, sell treasury securities

Is this discretionary fiscal policy, an automatic stabilizer, or not a fiscal policy? Congress and the president enact a temporary cut in payroll taxes

discretionary fiscal policy

Is this discretionary fiscal policy, an automatic stabilizer, or not a fiscal policy? The federal government increases spending on rebuilding the New Jersey shore following a hurricane.

discretionary fiscal policy