Econ 211
Social security retirement funding is "pay as you go" system. This means that
Your current social security payroll taxes are used to pay for current retirees
The time between the FOMC meeting where a decision has been made to lower the federal funds interest rate and the time when open market operations are conducted is called the
implementation lag
Open market operations are conducted
in the secondary market for Treasury securities
A positive aggregate demand shock will ________ prices in the long run.
increase
Tax rates are progressive if they
increase as income increases
An open market sale of government securities by the Federal Reserve will INITIALLY
increase banks holding of government securities and decrease its reserves
When the Federal Reserve conducts an open market purchase of $50 million, the first impact is that bank reserves
increase by $50 million
An increase in the budget deficit will tend to
increase interest rates and appreciate the exchange rate
An increase in government spending, holding taxes constant, will
increase interest rates and decrease investment spending in both the short run and the long run
If an open market purchase of government securities increases bank excess reserves by $80 million, then banks will likely
increase loans by $80 million
During the Great Recession the budget deficit sharply increased. Which of the following items did NOT contribute to the deficit's increase
Federal Reserve's policy of quantitative easing
A positive aggregate demand shock will
increase output and employment in the short run
Automatic stabilizers tend to
increase spending following a negative aggregate demand shock
An open market sale of government securities by the Federal Reserve will
increase the federal funds interest rate
Suppose investment spending falls. To offset the change in output the Federal Reserve could
increase the money supply. This increase would also move the price level closer to its value before the decline in investment spending
Suppose that the central bank unexpectedly increases the growth rate of the money supply. In the short run the effects of this are shown by
moving to the left along the short-run Phillips curve
The 1980-81 recession was caused by
negative AD shock created by monetary policy
The economist A.W. Phillips published a famous article in 1958 in which he showed a
negative correlation between the rate of unemployment and the rate of inflation
The stagflation of the 1970s was at least in part created by
negative shocks to SRAS caused by OPEC's ability to increase the price of oil
A positive aggregate demand shock will __________ production in the long run.
not change
When the Federal Reserve lowers the federal funds interest rate, in the long run
only prices are higher
In the long run, policy that changes aggregate demand change
only the price level
The long-run impact of an increase in government purchases is
output is unchanged, investment spending is lower and prices are higher
The short-run Phillips Curve shifts up when
price expectations and wages increase causing the SRAS to shift up
During the 1950s and 1960s the Phillips Curve appeared stable because
price expectations didn't change much
A negative aggregate demand shock in the long run will lower
prices
Following a shock, the economy's self-adjustment mechanism occurs when
prices a wages adjust to return the economy to full employment at potential output
When the Federal Reserve lowers the federal funds interest rate, in the short-run firms will
produce more because per unit profit is rising
The most common method employed by the Fed to increase the money supply is the
purchase of U.S. government bonds
Figure 35-9. The left-hand graph shows a short-run aggregate-supply (SRAS) curve and two aggregate-demand (AD) curves. On the right-hand diagram, "Inf Rate" means "Inflation Rate." Refer to Figure 35-9. The shift of the aggregate-supply curve from AS1 to AS2
represents an adverse shock to aggregate supply
The minimum amount of reserves that banks must hold is called
required reserves
The cash that banks keep on hand or on deposit at the Federal Reserve is called
reserves
Stagflation exists when prices
rise and unemployment rises.
An economic expansion caused by a shift in aggregate demand remedies itself over time as the expected price level
rises, shifting aggregate supply left.
Which of the following would cause stagflation?
rising oil prices
Refer to Figure 34-9. Suppose the economy is currently at point A. To restore full employment, the Federal Reserve should
sell government bonds, which will reduce the money supply.
If the federal funds rate were below the level the Federal Reserve had targeted, the Fed could move the rate back towards its target by
selling bonds. This selling would reduce reserves
Refer to Figure 34-8. An increase in government purchases will
shift aggregate demand from AD1 to AD2.
Refer to Figure 34-8. An increase in taxes will
shift aggregate demand from AD1 to AD3
Tax increases
shift aggregate demand left while increases in government expenditures shift aggregate demand right
A positive aggregate demand shock that increases consumption spending by $50 billion will
shift the AD curve to the right by more than $50 billion
The Stock Market Boom of 2015 Imagine that in 2015 the economy is in long-run equilibrium. Then stock prices rise more than expected and stay high for some time. Refer to Stock Market Boom 2015. In the long run, the change in price expectations created by the stock market boom shifts
short-run aggregate supply left.
In the short-run following a positive aggregate demand shock, some firms will raise prices because
shortages exit at the original prices
During the Great Recession, the Federal Reserve purchased commercial paper
so financial firms (including investment banks) would have a continued source of short-term financing
Payroll taxes are used to pay for
social security and Medicare
A decrease in the money supply might indicate that the Fed had
sold bonds in an attempt to increase the federal funds rate
When personal income taxes decline by $5 billion and the MPC = .8, in the first round of the spending multiplier process
spending increases by $4 billion
When government spending increases by $5 billion and the MPC = .8, in the first round of the spending multiplier process
spending increases by $5 billion
When the economy enters a recession, policy-makers often use stabilization policy because
sticky wages and prices mean the economy's self-adjustment mechanism can be slow acting
If I deposit my paycheck in the bank today because I want to spend it next week, this is an example of which basic function of money
store of value
Suppose the economy is in long-run equilibrium. Concerns about pollution cause the government to significantly restrict the production of electricity. At the same time, taxes fall. In the short-run
the price level will rise, and real GDP might rise, fall, or stay the same.
The quicker that wages and price expectations adjust
the quicker will be the economy's adjust back to potential output
According to the Phillips curve, unemployment and inflation are negatively related in
the short run, but not in the long run
A change in expected inflation shifts
the short-run Phillips curve, but not the long run Phillips curve
When wages and price expectations rise
the short-run aggregate supply curve shifts up/left
The U.S. federal government currently has a debt level of about $16 trillion. To pay off the debt over the next 50 years would require that
the sum of government deficits and surpluses be at least $16 trillion
Lately, the FOMC has been referring to a symmetric 2% inflation target in its minutes. By symmetric, the FOMC means
they would view movements above and below the target equally acceptable
Economists use the word "money" to refer to
those assets regularly used to buy goods and services
Refer to Figure 33-4. If the economy starts at A and there is a fall in aggregate demand, the economy moves
to C in the long run
During periods of expansion, automatic stabilizers cause government expenditures
to fall and taxes to rise
If government spending decreases by $10 billion and personal income taxes are also cut by $10 billion, then the net effect on total spending (after the multiplier process) is that
total spending decreases
A positive aggregate demand shock will eventually raise firms per unit costs because wages will eventually rise and operating costs may also rise.
true
Treasury securities are issued by the federal government to finance budget deficits.
true
The short-run Phillips curve shows the combinations of
unemployment and inflation that arise in the short run as aggregate demand shifts the economy along the short-run aggregate supply curve
As the aggregate demand curve shifts leftward along a given aggregate supply curve,
unemployment is higher and inflation is lower.
The long-run Phillips curve is
vertical at the natural rate of unemployment
When the Federal Reserve lowers the federal funds interest rate, in the transition from the short run to the long run,
wages rise and production falls
If output is above its natural rate, then according to sticky-wage theory
workers will strike bargains for higher wages. In response to the higher wages firms will produce less at any given price level
Which of the following is an example of a decrease in government purchases?
The government cancels an order for new military equipment.
An open market operation INITIALLY changes the composition of the bank's
assets
If the reserve ratio is 8 percent, then an additional $800 of reserves can increase the money supply by as much as
$10,000
If the reserve ratio is 6 percent, then $9,000 of additional reserves can create up to
$150,000 of new money
Currently, the federal government debt held by the public is about $15 trillion. The projected budget deficit for 2019 is $1 trillion. If this projection holds, we would expect that at the end of the 2019 fiscal year, total debt held by the public would be approximately
$16 trillion
If the marginal propensity to consume is 0.75, and there is no investment accelerator or crowding out, a $15 billion increase in government expenditures would shift the aggregate demand curve right by
$60 billion, but the effect would be larger if there were an investment accelerator.
Suppose the economy is at potential output when consumer confidence suddenly booms and consumer spending increases sharply. Which of the following options describe an appropriate stabilization policy?
(a) the Federal Reserve increases the federal funds interest rate, (d) the federal government increases personal and corporate taxes
Suppose the economy is at potential output when the economy experiences a large decline in housing prices and stock market values. Which of the following options describe an appropriate stabilization policy?
(b) the Federal Reserve decreases the federal funds interest rate, (c) the federal government decreases personal and corporate taxes
An increase in government purchases is likely to
crowd out investment spending by business firms
The term used to describe the impact of an increase in government spending on investment spending is
crowding out
Government outlays increased during the Great Recession because
- a fiscal stimulus packaged (ARRA) that included an increase in spending on government-funded projects was enacted - mandatory spending increased because as incomes fell, more people qualified for Medicaid, unemployment insurance and Supplemental Nutritional Assistance Program.
Which of the following is a function of money?
- a store of value - a unit of account - medium of exchange
Which of the following would increase output in the short run?
- government spending increases - an increase in stock prices makes people feel wealthier - firms chose to purchase more investment goods
Suppose the economy is in long-run equilibrium. If the government increases its expenditures, eventually the increase in aggregate demand causes price expectations to
- rise. This rise in price expectations shifts the short-run aggregate supply curve to the left.
Critics of stabilization policy argue that
- the impact of policy may last longer than the problem it was designed to offset. - policy can be a source of, instead of a cure for, economic fluctuations. - there is a lag between the time policy is passed and the time policy has an impact on the economy.
The lag problem associated with monetary policy is due mostly to
- the political system of checks and balances that slows down the process of determining monetary policy. - the fact that business firms make investment plans far in advance. - the time it takes for changes in government spending to affect the interest rate.
M1 includes
- traveler's checks. - demand deposits. - currency.
If R represents the reserve ratio for all banks in the economy, then the money multiplier is
1/R
If the reserve ratio is 10 percent, the money multiplier is
10
Table 29-7. Bank of Springfield Assets Reserves $19,800 Loans $160,200 Liabilities Deposits $180,000 Refer to Table 29-7. If the Bank of Springfield has lent out all the money it can given its level of deposits, then what is the reserve requirement?
11.0 percent
In which of the following recession periods did both inflation and unemployment rise
1973-74
A bank has $8,000 in deposits and $6,000 in loans. It has loaned out all it can given the reserve requirement. It follows that the reserve requirement is
25 percent
If the MPC is 5/6 then the multiplier is
6, so a $200 increase in government spending increases aggregate demand by $1200
In 2017 approximately _____ of the federal budget was devoted to mandatory spending
62.5%
When the Federal Reserve lowers the federal funds interest rate, the _______ curve shifts to the _________.
AD, right
A significant portion of the projected rise in deficits is attributed to projected additional spending on
defense
Which of the following is an example of crowding out?
An increase in government spending increases interest rates, causing investment to fall
Which of the following is NOT an automatic stabilizer
defense spending
Which of the following is a bank liability
deposits
Refer to Figure 33-4. A decrease in taxes would move the economy from C to
B in the short run and A in the long run
The fed chairperson most associated with establishing clear communication and transparency in the conduct monetary policy is
Ben Bernanke
Which of the following is NOT a fiscal policy action
Congress passes a new law legalizing marijuana use in the United States
The Great Recession of 2007-09 was caused by all of the following shocks EXCEPT
Contractionary monetary policy
Which of the following statements is correct?
In the short run, unemployment and inflation are negatively related. In the long run they are largely unrelated problems.
Which of the following has NOT been advanced as a possible explanation for the Great Moderation
Increased globalization
The measure of money than includes checking accounts but not savings account is
M1
During the Great Recession, interest rates stayed low despite a sharply rising deficit. This is because
Monetary policy was keeping interest rates low
In the long run, a decrease in the money supply growth rate
None of the above is correct
Refer to Figure 35-2. If the economy starts at C and 1, then in the short run, a decrease in taxes moves the economy to
None of the above is correct.
The Federal Reserve Chairperson most associated with refocusing monetary policy on anchoring inflation expectations and establishing credibility is
Paul Volcker
During the Great Depression, monetary policy mistakes contributed to the depth of the downturn. What was that monetary policy mistake?
Raised interest rates to protect the gold standard
The Stock Market Boom of 2015 Imagine that in 2015 the economy is in long-run equilibrium. Then stock prices rise more than expected and stay high for some time. Refer to Stock Market Boom 2015. What happens to the expected price level and what impact does this have on wage bargaining?
The expected price level rises. Bargains are struck for higher wages.
Government securities are also called
Treasury securities
Currently, U.S. debt is in high demand because
Treasury securities are a very safe asse
A basis for the slope of the short-run Phillips curve is that when unemployment is high there are
downward pressures on prices and wages
Since the late 1960s, the largest federal budget deficit occurred
during the Great Recession
Quantitative easing is
a monetary policy action designed to affect longer term interest rates directly
Any item that people can use to transfer purchasing power from the present to the future is called
a store of value
The "yardstick" people use to post prices and record debts is called
a unit of account
Most economists believe that a cut in tax rates
has a relatively small effect on the aggregate-supply curve.
The multiplier effect is exemplified by the multiplied impact on
aggregate demand of a given increase in government purchases
The Stock Market Boom of 2015 Imagine that in 2015 the economy is in long-run equilibrium. Then stock prices rise more than expected and stay high for some time. Refer to Stock Market Boom 2015. Which curve shifts and in which direction?
aggregate demand shifts right
Which of the following would cause prices and real GDP to rise in the short run?
aggregate demand shifts right
A negative aggregate demand shock in the short-run will lower
all of the above
A sharp and long-lasting rise in energy prices will, in the short run,
all of the above
Fluctuations of production away from potential output are
all of the above
If the economy begins at potential output when there is a decrease in taxes, then in the short-run
all of the above
In the long run, after wages and prices have fully adjusted, monetary policy
all of the above
Some argue that using stabilization policy can introduce more volatility into the economy because
all of the above
The reaction of output and prices to an aggregate demand shock is
an endogenous reaction
An aggregate demand shock is
an exogenous event
Which of the following would raise the price level in both the short and long run?
an increase in government expenditures
Which of the following policies would be advocated by proponents of stabilization policy when the economy is experiencing severe unemployment?
an increase in government purchases
Automatic stabilizers
are changes in taxes or government spending that increase aggregate demand without requiring policy makers to act when the economy goes into recession.
For nearly all years since the 1960s, the U.S. federal government
has run a budget deficit
The economic shocks and monetary policy actions during the 1970s caused
high and unanchored inflation expectations
A bank's assets equal its liabilities under
both 100-percent-reserve banking and fractional-reserve banking
Following a positive aggregate demand shock, the price rise will
both of the above
A policy change that changes the natural rate of unemployment changes
both the long-run Phillips curve and the long-run aggregate supply curve
The Stock Market Boom of 2015 Imagine that in 2015 the economy is in long-run equilibrium. Then stock prices rise more than expected and stay high for some time. Refer to Stock Market Boom 2015. In the short run what happens to the price level and real GDP?
both the price level and real GDP rise.
In the short run, policy that changes aggregate demand changes
both unemployment and the price level.
When personal income taxes are cut, in the first round of the multiplier process
consumption increases
Refer to Figure 33-5. The shift of the short-run aggregate-supply curve from SRAS1 to SRAS2
could be caused by a decrease in the expected price level
Following an aggregate demand shock, the economy's self-adjustment mechanism will
create price adjustments that eventually return the economy to potential output
Changes in the price of oil
created both inflation and recession in the United States in the 1970s.
In the short-run, policy can be used to lower the unemployment rate at the cost of
higher inflation
Refer to Figure 33-10. If the economy starts at point C, stagflation would be consistent with point
d. D
When the Federal Reserve conducts an open market sale of government securities, we would expect bank reserves to ____________ and the federal funds interest rate to ____________.
decline, increase
An increase in the budget deficit can lead to exchange rate changes that will tend to
decrease exports and increase import
An important macroeconomic consequence of higher government budget deficits is
higher interest rates and lower investment spending
A $75 million open market sale of government securities by the Federal Reserve when the reserve ratio is 10%, will ___________ the money supply by ___________.
decrease, $750 million
In the short-run, when the Federal Reserve increases the federal funds interest rate, aggregate demand __________ because ____________.
decreases, investment spending falls,
In the short-run, when the Federal Reserve lowers the federal funds interest rate
employment, production and inflation increase
In response to a rise in energy prices, eventually wages will
fall because of the initial increase in unemployment
If the reserve ratio increased from 5 percent to 10 percent, then the money multiplier would
fall from 10 to 5
In the long-run expansionary fiscal policy is neutral
false
In the long-run, policy-makers can keep the economy at any unemployment rate as long as they are willing to accept the inflation rate that is consistent with that unemployment rate.
false
The decision lag associated with monetary policy is long
false
When the Federal Reserve conducts open market purchases of government securities, it is purchasing them directly from the Treasury.
false
Permanent tax cuts shift the AD curve
farther to the right than do temporary tax cuts
If one bank lends excess reserves to another bank, the rate that the borrowing bank pays is called
federal funds rate
Currently, U.S. currency is
fiat money with no intrinsic value
If the government deficit this year is $500 billion, then
government debt will increase by $500 billion
A budget deficit occurs when
government expenditures exceed tax revenue in a given year
A shock increases the costs of production. Given the effects of this shock, if the central bank wants to return the unemployment rate towards its previous level it would
increase the rate at which the money supply increases. However, this will make inflation higher than its previous rate
An increase in the MPC
increases the multiplier, so that changes in government expenditures have a larger effect on aggregate demand
If consumption expenditures fall, then in the short run
inflation falls and unemployment rises.
The short-run Phillips Curve shows the relationship between __________ and ____________ when _______________.
inflation, unemployment, the AD curve shifts and SRAS is stable
Which of the following is NOT a basic function of money
interest bearing asset
As a percentage of GDP, the current level of federal debt
is at a post WWII high
The reserve requirement is 4 percent, banks hold no excess reserves and people hold no currency. If the Fed sells $10,000 worth of bonds, what happens to the money supply?
it decreases by $250,000
A reduction in U.S net exports would shift U.S. aggregate demand
leftward. In an attempt to stabilize the economy, the government could increase expenditures
If you purchase a $5000 Treasury Bill from Treasury Direct (the primary market) you are
lending $5000 to the federal government
An open market purchase of government securities by the Federal Reserve will lead to multiple rounds of
loan and deposit expansion
The "natural" rate of unemployment is the unemployment rate toward which the economy gravitates in the
long run, and the natural rate changes over time.
Suppose it has become apparent that the economy has entered a recession. If on the same day, the FOMC met to decide on a monetary action and Congress began deliberations on a tax cut, under most circumstances which would you expect to be implemented first?
monetary policy
In the short-run following a positive aggregate demand shock which of the following is true
most wages have not yet adjusted
The Federal Reserve's budget does not come from Congress and the members of the Board of Governors serve 14-year, staggered terms. These features are intended to
support monetary policy decisions that are determined by economic conditions and not the political needs of Congress or the President
The federal budget deficit increased during the 1980s because
tax rates were lowered and defense spending increased as the U.S. engaged in a cold war with the Soviet Union
A tax cut shifts the aggregate demand curve the farthest if
the MPC is large and if the tax cut is permanent
In 2009 President Obama and Congress increased government spending. Some economists thought this increase would have little effect on output. Which of the following would make the effect of an increase in government expenditures on aggregate demand smaller?
the MPC is small and changes in the interest rate have a large effect on investment
Recessions in Canada and Mexico would cause
the U.S. price level and real GDP to fall
If an aggregate demand shock initially decreases investment spending by $75 billion and the MPC equals .5, then
the aggregate demand curve shifts to the left by $150 billion
If MPC = .75 and government spending increases by $10 billion
the aggregate demand curve shifts to the right by $40 billion
Which of the following tends to make the size of a shift in aggregate demand resulting from an increase in government purchases smaller than it otherwise would be?
the crowding-out effect
If the federal funds interest rate were lowered on the same day that the federal government lowered personal tax rates, which action would you expect to affect spending first?
the fiscal policy action to lower taxes
In conducting monetary policy, the federal funds interest rate that would yield full employment is called
the neutral interest rate
The short-run is defined as
the period during which prices and wages have not yet fully adjusted to a shock
The lag problem associated with fiscal policy is due mostly to
the political system of checks and balances that slows down the process of implementing fiscal policy