macro: final

less than the marginal tax rate

At income levels above the limit for the lowest tax bracket, the average tax rate is:

buy government bonds

If the Fed wants to increase the money supply, it will:

AD curve

Increases in government spending are NOT very effective in offsetting real shocks because they shift the:

trade

Tariffs, like the Smoot-Hawley Tariff of 1930, make which of the following less efficient?

banks have low reserves and the money multiplier is large

The Fed will be most effective at changing the money supply when:

the Fed has the most influence over short-term interest rates, but investment spending depends on longer-term rates.

The Fed's actions do NOT change aggregate demand by any guaranteed amount, because:

the Fed operates in real time and information on recessions becomes available with a lag.

The Fed's job in manipulating monetary policy is made harder by the fact that:

primarily address the problem of high inflation.

The Federal Reserve's response to the oil crisis of the 1970s was to:

80%

The debt-to-GDP ratio in 2020 was a little over:

stabilize

The phenomenon of sticky wages usually leads to _______________ unemployment during a recession.

Social Security.

The single item on which the U.S. federal government spent the most in 2017 was:

provides a distorted price signal

When government policy moves the price in a manner that encourages investors to take risks, the price:

intertemporal substitution

how people choose to allocate consumption, work, and leisure across time to maximize well-being is known as:

25

if the reserve ratio is 4%, the money multiplier is:

the envy of the world

in the late 1990s, the American economy was:

3%

over the last 60 years, US real GDP has grown at an average rate of...

monetary base

over which aspect of the money supply does the Fed have the most direct control?

aggregate demand

the Fed wants to use its tools to influence:

the elderly

the largest amount of federal dollars goes to which group?

subsequent consumer spending that increases AD as a result of expansionary fiscal policy.

the multiplier effect is the:

true

true/false: The Fed has considerable power to influence aggregate demand, but that power is constrained by uncertainty.

true

true/false: the difference between the deflation of the great depression and the disinflation of the 1980s is that the disinflation of the 1980ss was a policy chosen on purpose

less investment spending

what is not a result of expansionary OMOs?

its ability to boost market confidence

what is one of the Fed's most important tools?

aggregate demand inflation

when a financial bubble collapses, what two things falls?

Ricardian Equivalence

when consumers save a tax cut instead of spending it, this is known as:

balanced budget

when government spending and taxes are equal

a monetary offset

when the central bank contracts the money supply in response to expansionary fiscal policy, this is known as:

budget deficit

when the federal government spends more than it collects in taxes in a given time period

budget surplus

when the government receives more in taxes than it spends in a given time period

increases the money supply result in price increases in the long run

3. How does the Quantity Theory of Money help us understand the limitations of the Federal Reserve's power to control economic growth?

AD shift to the left

A decrease in consumption growth will cause:

inflation rate; real growth rate

A negative real shock leads to a higher _____ and a lower _____.

decrease / increase

A negative real shock to the economy shifts the LRAS curve to the left, causing a(n) ____________ in growth and a(n) ____________ in inflation.

money supply

All of the following factors are fundamental to an economy's potential growth rate except for:

solow growth rate

An economy's potential growth rate is also known as what?

decrease in both velocity and money supply

An increase in uncertainty will lead to:

the money multiplier will decrease

As the reserve ratio rises:

make the boom even bigger.

Banks' responses to higher asset prices in an economic boom will tend to:

the federal reserve is considered a powerful institution because it has the power to:

Buy government bonds, act as a lender of last resort, and create money.

sell treasury bills to banks

Contractionary OMOs are the reverse of expansionary OMOs and are intended to have the opposite effect. Which of the following should the Fed do to conduct contractionary OMOs?

reduced cash flow; less money

During a recession, firms have _____, which means that banks are willing to lend _____ to firms.

expansionary fiscal policy & fiscal multiplier

During a recession, the government increases spending by $300B, which in turn increases GDP by $350B.

transmission mechanisms

Economic forces that can amplify shocks by making their effects extend across time and sectors of the economy are known as:

short-term real interest rates

Fed has the most influence over:

shock to aggregate demand

Fiscal policy is MOST effective in keeping both inflation and real growth stable when there is a:

time bunching

GDP consistently grows more in the fourth quarter (sept-dec) than in any other quarter. this is evidence of:

The Federal Reserve tries to offset a negative shock to aggregate demand with an increase in the money supply.

Given a best-case scenario, which of the following statements correctly describes the Federal Reserve's behavior?

consumption spending declines rapidly as many people fear a recession american workers get laid off by the hundreds of thousands because of a sudden collapse in investment purchases

Given that an ideal stimulus is timely, targeted, and temporary, which of the following scenarios would most benefit from expansionary fiscal policy?

inflation does not have an effect on long-run real growth

How does inflation affect the long-run real growth?

the aggregate demand curve shifts right

If the government performs expansionary fiscal policy, which curve shifts and in what direction?

aggregate demand

In the best-case scenario, the Federal Reserve is most successful at counteracting a negative _____ shock.

raise its expenditures and/or lower taxes to increase aggregate demand

In working to correct a recession with fiscal policy, the government can:

exempt income

Income that is not subject to taxation is called:

The Federal Reserve can control short-run growth better than long-term growth but even then, there are limits to its powers to influence short-term growth, in part because:

It has incomplete data about the economy, lagged results from policy to growth, and limited control.

time bunching

Once some economic activity is moving upward or downward, other parts of economic activity tend to follow that momentum in an effort to gain the advantages of:

expectations; the money supply

One of the Federal Reserve's most powerful tools is its influence over _____, not its influence over _____.

regressive tax

Social Security payroll tax is an example of what type of tax?

a fall in taxes OR a rise in government spending

Suppose a change in fiscal policy causes the AD curve to shift up and to the right. Which response below would most likely cause that shift?

true

T/F: the government can cut taxes during a recession to try to increase private spending

it has the incomplete data about the economy, lagged results from policy to growth, and limited control

The Federal Reserve can control short-run growth better than long-term growth but even then, there are limits to its powers to influence short-term growth, in part because:

the federal reserve

The bank that issues the money we use in the United States today is known as:

may be greater than, less than, or equal to

The benefits each person receives from the federal government _____ the amount of taxes that person pays.

banks can decide to hold more cash than the minimum reserve ratio requires people might not hold their money in banks, which limits the loanability of that cash

The control the Federal Reserve has in manipulating the money supply by setting the minimum reserve ratio is limited because:

earned income tax credit

The federal tax system assists people below the poverty level through the:

systemic risk

The possibility that the failure of one bank affects the performance of other banks is called:

not fixed but depends on how much of their assets banks want to hold as reserves.

The size of the money multiplier is:

how changes in interest rates impact the number of depositors

To design effective monetary policy, the Fed does NOT need to monitor or estimate:

engage in actions to increase interest rates

To reduce the money supply in the economy, the Fed would:

the effects of sticky prices and wages

Using both a long-run aggregate supply curve and a short-run aggregate supply curve can help demonstrate what effects in a real economy?

fiscal policy

What policy on taxes, spending, and borrowing is designed to influence business fluctuations?

an increase in the average price level

When the economy is at full employment, the main impact of an increase in total spending is:

a leftward shift of the long-run aggregate supply curve

Which creates the most difficult combination of economic problems for a monetary policymaker to address?

The growth rate of the money supply fell.

Which event occurred as a result of falling real estate prices in 2006 and 2007?

The central bank announces its policy in public and sticks with the policy over time.

Which is the MOST credible monetary policy action?

dust bowl drought

Which of the following natural shocks hit the United States early-on in the Great Depression, contributing to the length and slow recovery?

a war leads to more government spending

Which of the following would increase the velocity of money?

false

a business fluctuation is a type of recession

an increase in the value of an asset

a capital gain is...

a portion of profits paid back to shareholders

a dividend is...

disinflation

a significant reduction in the rate of inflation

increase government spending expand the money supply

according to keynesian business cycle theory, what should the government do in response to a recession?

diversify the economy

according to real business cycle theory, how can we avoid recessions?

outward / inward

an increase in spending growth will shift the AD curve __________, while a decrease in spending growth will shift the AD curve _____

automatic stabilizers

changes in fiscal policy that stimulate aggregate demand in a recession without the need for explicit action by policymakers

true

credible inflation reduction by the federal reserve empirically increases unemployment

menu cost

firms' costs associated with changing their prices

investors become pessimistic about future profit opportunities the federal government passes a national sales tax

for what shocks is the best course of action is to increase the money supply

solow growth rate

given flexible prices and the existing factors of production, a measure of how much the economy grows

it allows the Fed to discretion to react to velocity shocks

how does market monetarism differ from standard monetarism?

ricardian equivalence

is less significant when consumers deem tax cuts or rebates as permanent.

taking action to increase aggregate demand when confidence falls lending to banks to help stave off a recession sending countersignals when market fears arise

methods used by the Federal Reserve to maintain market confidence?

can influence aggregate demand, but it can't push the demand for housing down and at the same time keep the demand for everything else up.

monetary policy:

fed purchase of long-term government bonds

quantitative easing is the:

real GDP and employment

recessions are declines in

electronic claims

reserves held by banks are mainly held in the form of:

false

t/f: economists are rarely confused by the causes of aggregate demand shocks

crowding out

the decrease in private spending that occurs when government spending increases

it takes time for data to be gathered, released, and interpreted banks may be unwilling to lend changes in monetary policy typically affect the economy with a lag that can vary from 6 to 18 months

three statements that describe the difficulty that makes it hard for the Fed to get monetary policy exactly right all of the time?

nominal wage confusion

when workers respond, not to the purchasing power of their wage, but to the face value of their wage or salary

output

which is NOT neutral in the long run?

a shot to AD

which shock can the Fed deal with most effectively?

increase/increase

A positive shock to the AD curve will cause inflation to __________ in the short run and growth to ___________ in the short run.

it will fall

According to Keynesian business cycle theory, if consumption and investment fall, what will happen to government spending?

Malinvestments made in response to distorted price signals fail when met with insufficient consumer demand.

According to the Austrian theory of business cycles, how does the boom part of the business cycle lead to the bust? *

by increasing inflation, the central bank causes interest rates to fall, falsely signaling an increase in consumer savings.

According to the Austrian theory of business cycles, how does the central bank distort price signals? *

increase inflation in the short run increase GDP growth in the short run increase GDP growth in the long run

According to the quantity theory of money, expansionary fiscal policy will do what?

Which of the following best describes the monetary base?

Currency plus reserve deposits.

expansionary fiscal policy & crowding out

During a recession, the government sends $500 checks to every American family. 70% of American families save the money or use it to pay off their debt.

greater cash flow; more money

During an economic boom, firms have _____, which means that banks are willing to lend _____ to firms.

private sector is reluctant to spend or to invest

Given the possibilities for crowding out, expansionary fiscal policy financed through government borrowing is MOST likely to be effective when the:

less than 5%

Households in the bottom 20% of the income distribution pay approximately what percentage of their income in federal taxes?

they work more

How do individuals respond to positive shocks, given that they engage in intertemporal substitution?

By paying interest on reserves.

How does the Fed now influence how much banks hold in reserves?

$200,000

If $500,000 in new taxes is raised and spent on building a new school and $300,000 in private spending would have been spent anyway, how much is added to short-run aggregate demand?

4

If a $500 increase in reserves ultimately leads to a $2,000 increase in the money supply, the money multiplier is:

0%

If inflation is 1% and you receive a 1% raise in your nominal wage, by how much did your real wage change?

-5%

If inflation is 6% and you receive a 1% raise in your nominal wage, by how much did your real wage change?

high inflation

If the Fed increases 𝑀−→ to fight slower real growth after a negative real shock, what should occur?

GDP volatility will increase rather than decrease.

If the Fed responds too often in the wrong direction or with the wrong strength:

buy bonds in open market operations

If the Fed wants to decrease interest rates, it should:

a distorted price signal

If the Fed's monetary policy moves a price in a manner that encourages investors to take risks, economists like von Mises and Hayek would say that there is:

the banks can make fewer loans and the money supply decreases

If the Federal Reserve increases the minimum reserve ratio that private banks are required to hold, the following will occur:

consumption investment government spending

If the velocity of money increases, then the growth rate of which of the following must also change?

expanding / contracted

In the 1930s, instead of ________ the money supply, the Federal Reserve ________ the money supply, which prolonged the Great Depression.

decrease / decrease

In the short run, a decrease in consumption would lead to a(n) _________ in growth and a(n) _________ in inflation.

wages and prices are sticky

In the short run, a monetary contraction leads to increased unemployment because:

lessen

In theory, inflation in an economy should ___________________ the sticky-wage phenomenon.

How does the Quantity Theory of Money help us understand the limitations of the Federal Reserve's power to control economic growth?

Increases in the money supply result in price increases in the long run.

consumption, work, and leisure

Intertemporal substitution is the allocation of _____ across time to maximize well-being.

longer

It's often very difficult to time fiscal policy correctly. Suppose each fiscal lag identified in the video lasts approximately 3 months. If the average U.S recession since World War II lasts around 11 months, is the total fiscal lag longer or shorter than the typical recession?

credit is easy and it is a good idea to borrow money

Low interest rates are a signal that:

currency and checkable deposits

M1 includes:

currency, checkable deposits, saving deposits, money market mutual funds, small-time deposits

M2 includes:

Over which aspect of the money supply does the Fed have the most direct control?

Monetary base.

crude: can't

Monetary policy is a _____ means of popping a bubble because monetary policy _____ push down the price of specific commodities.

real shocks; aggregate demand shocks

Monetary policy is much less effective at combating _____ than _____.

Which of the following count as money?

Money market mutual funds, currency, checkable deposits.

Gift cards are a part of

None of the above.

Contractionary open market operations.

Reverse repurchase agreements are like temporary ___________.

higher if the central bank counters the shock than if it does not react.

Suppose the central bank targets a low rate of unemployment. If a negative real shock occurs, the real growth rate will be:

engage in actions to raise interest rates

Suppose the economy is growing faster than its long-run potential growth rate. To bring the real growth rate back to the long-run potential rate, the Fed should:

increases: increases

Suppose the government decreases taxes. What will happen to disposable income and consumer spending?

increase by $1,000

Suppose the reserve ratio is 20% for all banks. If the Fed increases bank reserves by $200, then the money supply will:

$1,500

Suppose the tax rate on the first $20,000 of income is 0%; 10% on the next $20,000 earned; and 20% on any additional income earned. A person earning $35,000 pays an income tax of:

4.3%

Suppose the tax rate on the first $20,000 of income is 0%; 10% on the next $20,000 earned; and 20% on any additional income earned. The average tax rate for a person earning $35,000 is:

the aggregate supply curve shifts left

Suppose there is a negative oil shock and oil prices dramatically increase. What has happened?

expansionary fiscal policy & crowding out

The government hires 2000 workers for new infrastructure projects. Over half of the newly hired construction workers, however, were employed in other sectors of the economy and quit their jobs to take this better paying opportunity. *

amplify shocks by transmitting them across time and sectors of the economy.

Transmission mechanisms are best described as economic forces that can:

they do not know the priorities of the public and there is little incentive to spend carefully.

Two reasons why government leaders do NOT spend tax revenue as carefully as individuals spend their own income are that:

investors will wait to see what will happen, which causes resources to sit idle.

Uncertainty can make an economic slowdown worse because:

investment spending: assets like cash

Uncertainty drives people away from _____ and toward _____.

more than double

Under a progressive tax system, tax payments will _____ if a person's income doubles.

increased spending doesnt immediately cause full inflation, so there is short run growth

What happens in the short run when spending increases?

Labor adjustment costs can increase structural unemployment due to the costs of moving labor from declining sectors of the economy to growing sectors of the economy.

What impact do labor adjustment costs have on structural unemployment after a negative shock hits the economy?

With interest rates near zero, it became nearly impossible to impact the economy by lowering the federal funds rate.

What is one reason open market operations stopped being as effective during and after the Great Recession?

nominal GDP targeting

What is the name of the monetary policy rule that changes interest rates based on a target for the nominal GDP growth rate?

crowding out and the multiplier effect

What two opposing forces affect the degree of impact that fiscal policy has on the economy?

both tax changes and government spending changes

What types of expansionary fiscal policy actions can be offset by crowding out?

The tariff taxed foreign goods intending on increasing demand for domestic goods, but it backfired when other nations also imposed tariffs and trade fell.

What were the intentions of the Smoot-Hawley Tariff, and what was the actual outcome of the policy?

the bridge between saving and investing collapsed, making the economy less efficient

When banks failed, people lost their money and had less to spend, leading to a negative AD shock. Which of the following describes how bank failures also resulted in a negative real shock to the economy?

people decide to invest in an education.

When jobs are scarce and wages are stagnant:

fiscal policy

Which federal government policy influences business cycle fluctuations by taking action on taxes, spending, and borrowing?

the ability to change taxes

Which is NOT needed for the Fed to design and implement effective monetary policy to reduce the severity and length of a recession?

Corporate owners, workers, and consumers each bear the burden of the increase.

Which is correct regarding who bears the cost when corporate tax rates increase?

unemployment insurance

Which of the following are automatic stabilizers used by the government? *

long-term contracts

Which of the following is a reason for sticky wages?

US dollar

Which of the following is also known as a Federal Reserve note?

a drought stifles crop growth for the searson

Which of the following is an example of a negative real shock to an economy?

Repos are also conducted with other financial institutions besides banks.

Which of the following is an important difference between repos and OMOs?

interest rates

Which of the following is not a component of aggregate demand?

a fall in velocity caused by consumer pessimism

Which of the following would not affect the long-run aggregate supply curve?

Rick notices that his brother Steve and many other investors have reduced the amount they invest, and Rick decides to do the same.

Which of the situations describes a bandwagon effect caused by a lack of confidence in markets?

Inflation is kept in check in the long run by keeping the growth of M1 and M2 on a steady path.

Which of the statements best describes the monetary rule, as proposed by the economist Milton Friedman?

short implementation time with a long lag before observation of effectiveness

Which statement best describes the Federal Reserve timeframe for monetary policy implementation and observable policy effect?

negative real shocks

While a series of negative aggregate demand shocks largely caused the Great Depression, ___________ contributed and led to a slow recovery.

When countering a negative supply shock to reduce unemployment, Fed action will raise inflation.

Why is monetary policy not fully effective in combating a negative supply shock?

Directly influence particular sectors of the economy

With quantitative easing, the Fed can now ____________.

workers would have earned higher wages without the tax payments.

Workers bear at least a majority, if not all, of the burden of the employers' share of FICA and Medicare tax payments because the:

AD curve to shift to the left

a decrease in money supply growth will cause the:

a bank begins to have liabilities in excess of the value of their assets

a solvency crisis occurs when:

long run aggregate supply

according to real business cycle theory, negative real shocks initially affect ______

government program that is designed to stimulate aggregate demand during recessions without the need for specific actions by policymakers.

an automatic stabilizer is a:

when people save during good economic times and use those savings during bad economic times

an example of automatic stabilizer:

a decrease in the average level of prices

deflation is best defined as:

a decrease in prices, that is, a negative inflation rate

deflation is:

disinflation

disinflation/deflation: a period when the inflation rate is positive, but declining

disinflation

disinflation/deflation: a reduction in the rate of inflation

disinflation

disinflation/deflation: results in a decrease in output

deflation

disinflation/deflation: results in a decrease in the general price level

deflation

disinflation/deflation: the opposite of inflation

decreasing taxes during a recession

example of countercyclical fiscal policy

real growth

inflation occurs when more money chases the same amount of goods and services. If _________ increases, we can expect a corresponding decrease in inflation, because more money will be chasing more goods

The alternative minimum tax:

is a separate income tax code that began in 1969 to prevent the rich from not paying income taxes.

recession

mistimed contractionary fiscal policy can cause:

anything that is widely accepted means of payment

money is best defined as:

there is no money in "your account" the social security tax is "pay as you go"

reasons NOT to depend on social security as a retirement plan

inflation: recession

suppose that the federal reserve bank achieves the growth it wants, but also experiences the negative consequences. as a result, it will seek to decrease _______, at the risk of leading the economy into a ________.

aggregate demand

suppose that the federal reserve bank wants to address high levels of unemployment in the economy. to do so, it would likely increase:

consumers the central bank businesses

the effects of expansionary fiscal policy depend on the behavior of:

inflation

the federal reserve bank is able to instigate the growth it desires, it will likely come at the cost of increasing:

false

the federal reserve can always achieve its stated monetary policy targets or goals

false

the federal reserve does not consider market confidence when creating monetary policy

regulate banks loan money to banks increase the economy's money supply

the federal reserve has the power to:

buy government bonds, act as a lender of last resort, and create money

the federal reserve is considered a powerful instititon because it has the power to:

true

the federal reserve operates in real time, where data concerning the economy is not completely known

regulates the banking system

the federal reserve:

contractionary fiscal policy

the government increase taxes on corporations

longer for changes in government spending than for changes in taxation.

the implementation lag is likely to be:

implementation lag

the time lag due to the fact that bureaucracies must put the plan into action is called the:

government debt

the total accumulated amount that the government has borrowed and not yet paid back over time

true

true / false: banks earn profits on loans

true

true / false: intertemporal substitution magnifies negative economic shocks

true

true / false: labor adjustment costs are the costs of shifting workers from declining sectors of the economy to the growing sectors?

true

true / false: under fractional reserve banking, banks hold only a small portion of deposits in reserve, and they lend the rest

false

true/false: fed has little power to influence aggregate demand, but that power is constrained by incertainty

it fails to explain why entrepreneurs dont account for the distortions in price signals caused by the central bank it fails to explain why failed investments cause so much unemployment

two problems with the austrian theory of business cycles

in less-productive uses

uncertainty tends to keep resources:

business fluctuations

variations in the growth rate from the long-run of economic growth

policy implementation lags are long and variable a stable inflation rate should be enough to stabilize business cycles the information of policymakers is limited

what are reasons that monetarists want to constrain the fed?

falling aggregate demand may be a symptom, not a cause, of recession wages are only sticky during recessions

what are some problems with the keynesian business cycle theory

lending to banks and other financial institutions changes in the interest rate paid on reserves open market operations

what are the three main tools used by the Fed to influence aggregate demand?

stabilizing one measure of the money supply may destabilize other measures of it it leaves the Fed unable to act in case of negative real shocks and velocity shocks

what are two problems with monetarism?

Fed could have restrained some of the subprime mortgages that were sold during the boom

what could the Fed have done to prevent the housing bubble that led to the financial crisis of 2007-2008?

money market mutual funds, currency, checkable deposits

what counts as money?

currency plus reserve deposits

what describes the monetary base?

high inflation leads to misallocation of resources

what do monetarists and keynesians disagree on?

increase uncertainty

what do negative shocks do to uncertainty

revenue from the current social security tax is used to fund current payments

what does it mean that social security is a pay-as-you-go system?

it doesnt explain why unemployment is so high during recessions

what is a weakness of real business cycle theory?

to keep the interest rate from becoming too low

what is not a reason that banks keep reserves?

when the Fed swaps money with banks for assets other than treasury bills

what is quantitative easing?

the money multiplier

what is the amount by which the money supply expands with each dollar increase in reserves.

limited government that doesnt interfere with market price signals

what is the austrian solution to business cycles?

increase in aggregate demand

what is the intended effect of expansionary open market operations (OMOs)?

decrease in aggregate demand

what is the intended effect of raising the federal funds rate?

individual income taxes

what is the largest source of tax revenue in the US?

systemic risk

what is the risk that the failure of one financial institution will bring down other institutions as well

the Fed buys bonds in an open market operation the monetary base increases short-term interest rates decrease

what would occur if the Fed's goal was to increase aggregate demand?

insolvent

when a bank has liabilities that are greater than its assets, the bank is:

sticky

when wages and prices are ________, an aggregate demand shift will cause a shift along the short-run aggregate supply curve, which will cause the rate of real growth to change

a tax increase that occurs without a government spending increase. to the left and down

which policy is likely to shift the AD curve? which direction will it shift?

decrease taxes

which properly describes fiscal policy that could be used to fight a recession?

the borrower, unless he or she defaults

who owns collateral