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Econ 402 Final Exam Practice problems

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Q9 A 5% increase in all income tax rates

Discretionary fiscal policy

a tax cut that was expected to be temporary becomes permanent. As a result, consumption will____

Increase

If the growth rate of GDP fell to −0.5%, how would this affect the sustainability of Japan's fiscal policy? A lower growth rate will make the debt______

Less sustainable

The occurance of a persistent government budget surplus will result in ____ long-term real interest rates, a _____ capital stocl, _____ labor productivity, and _____ potential GDP

Lower / Larger / higher/ higher

Q5 A higher consumption tax would tend to relatively _____ consumption and____ savings, thereby causing ______ in investment

Reduce / Increase / A decrease

rising uncertainty about the economy causes the desired level of savings to increase, as a result, consumption will____

Decrease

consumers may also be motivated by emotion. unlike investment, however, consumption exhibits no extrem volatility. this may be explained in part by the desire of consumers to ______.

Smooth consumption over time

in the wake of the financial crisis, a reasonable expectation would be that lending standards will be_____, and as a consequence, the ability of consumers to allocate spending over time will be _____.

Tightend / diminished

q25 The Fed views price stability as keeping inflation in the range of 1% to 3%. Should the Fed target a 0% rate of inflation? A. Yes, because market prices would more efficiently allocate resources in the economy. B. No, because a zero percent rate of inflation would risk deflation if the target was not met. C. Yes, because living standards would be higher in the long run. D. Yes, because the economy would be more productive.

q29 An increase in the corporate tax rate is best represented by a movement from A. point A to point C. B. point B to point A. C. point A to point B. D. point C to point A.

q29 Compared to its effectiveness in a closed economy, fiscal policy in an open economy with a fixed exchange rate is A. equally effective; only in an open economy with a floating exchange rate is fiscal policy's effectiveness altered. B. 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. C. less effective since the increase in income generated by an expansionary policy will not be exclusively used to purchase domestically produced output. D. less effective since an expansionary policy's impact on the real interest rate is reinforced by the central bank's commitment to the fixed exchange rate. With a much higher real interest rate, there are significant offsets to fiscal policy from interest rate induced changes in consumption and investment.

q29 Other things equal, the higher the interest rate paid on term deposits, the ________ funds that are available in banks' reserve accounts and the ________ the potential for expanding the money supply. A. fewer; greater B. fewer; lower C. more; greater D. more; lower

q30 In general, if the Fed increases its target for the federal funds rate, A. short−term nominal interest rates will not change and long−term nominal interest rates will also not change. B. short−term nominal interest rates will increase and long−term nominal interest rates will also increase. C. short−term nominal interest rates will not change and long−term nominal interest rates increase. D. short−term nominal interest rates will increase and long−term nominal interest rates will not change.

A positive demand shock with no change in the real interest rate is best represented by ________ in panel (a) and ________ in panel (b). A. a shift from AE3 to AE2; a shift from IS2 to IS1 B. a shift from AE1 to AE2; a movement from point A to point B C. a shift from AE2 to AE3; a shift from IS1 to IS2 This is the correct answer. D. a shift from AE1 to AE3; a movement from point A to point C

Q2 According to the policy trilemma hypothesis, of the three goals generally pursued by policymakers in an open economy, A. it is possible for a country to achieve two of the goals at the same time, but not all three. B. it is possible for a country to achieve all three goals at the same time in the short run, but not in the long run. C. it is only possible for a country to achieve all three goals at the same time in the long run. D. only one of the goals is possible to achieve at any one time.

Assume the economy is initially in equilibrium with real GDP equal to potential GDP. Other things equal, if the economy enters a recession and there are no automatic stabilizers, the IS curve would shift to the ________, and the shift would be equal to ________. A. right; decline in investment spending times the multiplier B. left; decline in investment spending times the multiplier C. right; decline in investment spending D. left; decline in investment spending

CH 12 Q1 Capital flows can cause problems for exchange rate stability. Most countries allow the free movement of capital because whatever costs they may impose are deemed to be: A. borne only by the less affluent members of society. B. of an inconsequential magnitude. C. less than the economic benefits they confer. D. easily passed on to trading partners

Assume the economy is in equilibrium at Y1, where real GDP equals potential GDP. The economy experiences a positive demand shock, and the Fed responds by increasing real interest rates to bring real GDP and inflation back to their original levels. Other things equal, the positive demand shock is best represented by an initial movement from A. point A to point B. B. point D to point C. C. point D to point B. D. point A to point C.

Assume the economy is initially in equilibrium where potential GDP equals real GDP. If the economy experiences a positive demand shock, increasing consumer optimism, and the Fed does not change its target short−term nominal interest rate, the ________ shifts to the right and the output gap will be ________. A. MP curve; negative B. MP curve; positive C. IS curve; negative D. IS curve; positive

By engaging in quantitative easing, the Fed is attempting to reduce the ________, causing the MP curve to ________. A. federal funds rate; shift up B. short−term nominal and real interest rates; shift up. C. unemployment rate and the inflation rate; shift down D. term premium and the real interest rate; shift down

Under a floating exchange-rate system, the downward slope of the IS curve is made ▼ steeper flatter because net exports bear ▼ a positive a negative an indeterminate relationship to the real interest rate. Because changes in the real interest rate do not affect the exchange rate in a fixed exchange-rate system, the IS curve is: A. horizontal for a stretch, then it becomes positively sloped. B. negatively sloped but flatter than it would be if exchange rates were floating. C. negatively sloped but steeper than it would be if exchange rates were floating. D. negatively sloped in a fixed (non-shiftable) position.

Flatter / A negative C

The length of time an individual can collect unemployment insurance is reduced from 99 weeks back to 26 weeks. As a result, ▼ consumption government purchases investment and aggregate expenditure will ▼ decrease increase , the IS curve will ▼ shift leftward shift rightward , and there will be ▼ movement down along movement up along a leftward shift in the Phillips curve.

Consumption / decrease / shift leftward / movement down alone

An example of how a poorly timed monetary policy can negatively affect the economy would be the implementation of A. an expansionary monetary policy in the midst of a positive demand shock. B. a contractionary monetary policy in the midst of a negative demand shock. C. a contractionary monetary policy in the midst of a positive supply shock. D. All of the above. E. A and B only.

Cuts in corporate income taxes affect potential GDP by A. increasing the return from investment in new capital, thereby encouraging greater investment. B. enabling corporations to devote more resources to defeating the enactment of regulations or pro-labor mandates. C. speeding up the pace of technological change. D. All of the above. E. A and C only.

The changes identified in the previous question happen because a lower corporate tax rate A. increases after-tax profits and because any event that causes the desired capital stock to change causes investment to change in the same direction. B. reduces the tax-adjusted user cost of capital and because investment rises and falls as the desired stock of capital rises and falls. C. shifts income from workers to the owners of capital and this stimulates their desire to further accumulate capital. D. All of the above. E. A and B only.

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 ▼ a contractionary / an expansionary stance for monetary policy. Thus interest rates remained low, and by the time rates were increased, the economy was already ▼ overheatingin a recession.

Expansionary / overheating

the government decreases infrastructure spending on roads and bridges by 25%. As a result, _______ and aggregate expenditure will ______, the IS curve will ______, and there will be ______ the Phillips curve.

Government purchases / decrease / shift leftward / move down along

Using standard accounting rules to measure the deficit would cause the debt-to-GDP ratio estimates to be.... This analysis indicates that the fiscal challenges facing the United States may be....

Higher Understated

The open-economy IS-MP model with a fixed exchange rate system incorporates net exports into the ▼ ISIS MPMP curve, and has net exports ▼ not responding responding to changes in the real interest rate because the latter ▼ can't change changes the nominal exchange rate.

IS / responding / change

For the following scenario, what will be the effect on the debt-to-GDP ratio? The growth rate of the labor force decreases. The debt-to-GDP ratio will_____

Increase

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/higher levels of investment, aggregate expenditure ▼ decreases/increases, real GDP ▼ increases/decreases, employment ▼ increases/decreases, and long-term economic growth ▼ increases/decreases. With unstable financial markets, A. net exports rise, which means that it is difficult to maintain interest rate stability and price stability. B. investment falls, which means that it is difficult to maintain high employment and economic growth. Your answer is correct. C. consumption rises, which means that it is difficult to maintain price stability and interest rate stability. D. investment rises, which means that it is difficult to maintain price stability and foreign-exchange market stability.

Lower / decreases / decreases / decreases / increases B

Q23 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 pushes the real interest rate ____, with the result that investment is _____. with the presence of the forward-looking households, a government budget deficit suggest that future taxes may be ____ than otherwise, and this depresses present _____

Smaller Higher / reduced higher / consumption

A reason that the inflation rate did not increase substantially following the recession of 2007−2009 is that A. the Federal Reserve quickly implemented contractionary policy to prevent an increase in the inflation rate. B. the recovery was slow and the unemployment rate remained high through 2012. C. even though the recovery was slow, the U.S. economy benefitted from a small output gap. D. the increase in the monetary base was accompanied by larger−than expected increases in the money supply.

Q7 If neither consumption nor investment changes, an increase in the budget deficit must increase the trade deficit because in an open economy, an increase in the budget deficit (for example, an increase in the_____. must be balanced by_____ in the ______, and if neither consumption nor investment changes, NX must _____. What must happen if there is an increase in the budget deficit in a closed economy? A. A decrease in net exports. B. A decrease in saving. C. An increase in net exports. Your answer is not correct. D. A decrease in investment

left-hand side / an increase / right hand side / decrease D

q2 Which of the following are ways to finance a government budget deficit? (Check all that apply.) A. Lower private investment. B. Reduced interest rates. C. Higher capital inflows from abroad. D. Lower consumption.

A / C / D

Franco Modigliani's life-cycle hypothesis holds that (check all that apply): A. households use financial markets to transfer funds from high-income periods to low-income periods. B. saving occurs during the part of one's life cycle when income is high. C. only changes in transitory income impact consumption. D. households borrow when they are young and dissave when they are old.

A, B, D

Milton Friedman's permanent-income hypothesis holds that (check all that apply): A. the level of consumption expenditure depends on the level of permanent income. B. most of unexpected income windfalls are saved rather than consumed. C. households tend to borrow early in life. D. financial markets are used by households to smooth consumption in response to fluctuations in transitory income.

A, B, D

Which of the following are not among the Fed's three traditional monetary policy tools? (Check all that apply.) A. Interest on bank reserves. B. Reserve requirements. C. Discount loans. D. Temporary lending programs. E. Open market operations.

A:D

A key difference between the two theories has to do with the explanatory role assigned to household _____.

Age

Assuming seigniorage equals zero, the federal debt is ________ and the budget deficit is ________. A. a flow variable representing the total value of government bonds outstanding; a stock variable representing the yearly increase in value of newly issued government bonds B. a stock variable representing the total value of government bonds outstanding; a flow variable representing the yearly increase in value of newly issued government bonds C. a stock variable representing the yearly increase in value of newly issued government bonds; a flow variable representing the total value of government bonds outstanding D. a flow variable representing the yearly increase in value of newly issued government bonds; a stock variable representing the total value of government bonds outstanding

CH 13 Q1 Expenditure and tax multipliers are likely to be large A. when real GDP exceeds potential GDP. B. if the central bank keeps real interest rates constant. C. when the inflation rate is close to zero. D. when the only unemployment in the economy is due to the natural rate of unemployment.

Cordelia Saldinia Debt-to-GDP ratio 172% 65% Average annual economic growth rate 4.7% 3.2% Average inflation rate 6.3% −0.3% Average nominal interest rate 2.5% 4.6% The above table contains data for the nations of Cordelia and Saldinia for 2012. Assume seigniorage is zero. Based on the data in the table, the primary budget deficit necessary to make fiscal policy sustainable in Saldinia is ________ of GDP. A. −5.3% B. −1.1% C. 1.1% D. 6.5%

Expansionary monetary policy causes a ________ the MP curve and a ________ the aggregate demand curve. A. movement to the right along; shift to the right of B. downward shift of; shift to the right of Your answer is correct. C. movement to the left along; movement down along D. upward shift of; shift to the right of

Expectations about future profitability A. only affect the level of GDP in the future, but can affect the level of investment in the present. B. can affect the level of investment and GDP in the present. C. only affect the level of investment in the future, but can affect the level of GDP in the present. D. only affect the level of investment and GDP in the future.

In what ways are the short-run and long-run effects of this deficit reduction likely to differ? A. The short-run effects will be the same as the long-run effects, but smaller in magnitude. B. In the short-run both saving and investment are likely to fall while the impact on the real interest rate hinges on the response of the central bank. C. The short-run effects will be the exact opposite of the long-run effects. D. The effects in the short-run are indeterminate.

q9 According to the permanent−income hypothesis, a permanent increase in a person's income will A. be smoothed out to where the increases in consumption and savings are roughly equal. B. increase consumption more than savings. C. have the same effect on consumption as a transitory increase in income. D. increase savings more than consumption.

Consumption C = $1.0 + 0.80YD Investment = $1.5 Government purchases = $2.2 Net exports = −$0.1 Taxes = $0 Government transfer payments = $0 (all values are in billions of dollars) Refer to Table 10.1. Suppose that all of the information given in the Table remains the same except that taxes increase by $1.0 billion and transfers increase by $1.5 billion. Equilibrium real GDP for this economy is equal to A. $6.25 billion. B. $17 billion. Your answer is not correct. C. $25 billion. This is the correct answer. D. $47 billion.

Q13 If the level of real GDP is initially Y3, firms will ________ production until equilibrium is reached at ________. A. decrease; Y1 B. decrease; Y3 C. increase; Y1 D. increase; Y3

The intertemporal budget constraint tells us that A. household consumption is based on permanent income and not transitory income. B. the income earned in a lifetime will be evenly divided between consumption and saving. C. the present value of lifetime consumption equals the present value of lifetime income. D. consumption smoothing only occurs in years when income is greater than consumption.

q17 A decrease in the depreciation rate is best represented by a movement from A. point B to point A. B. point A to point C. C. point C to point A. D. point A to point B.

q19 The debt−to−GDP ratio decreases when the primary deficit ________ or when seigniorage ________. A. increases; increases B. increases; decreases C. decreases; increases D. decreases; decreases

Hector's wealth is zero, he expects to work for another 45 years at a constant salary of $80,000 and live for another 60 years. If Hector receives an unexpected $20,000 increase in salary his first year of work and he completely smooths consumption over his lifetime, his marginal propensity to consume is A. 0.6. B. 0.67. C. 0.75. D. 0.8.

Suppose that expectations are not adaptive and that decreases in the money supply cause long-run inflationary expectations to decrease. In this case, when the Fed decreases the money supply, long-term real interest rates ▼ decrease / increase / remain unchanged. How does the link between money supply decreases and expected inflation affect the Fed's ability to affect the economy through the interest rate channel? Since a decrease in the money supply can decrease long-run inflationary expectations, this implies that A. the Fed has complete control over long-term real interest rates. B. the Fed's attempts to affect long-term real interest rates will be reinforced, with changes in the real interest rate being larger than desired in the same direction. C. the Fed has no ability to affect short-term nominal interest rates. D. the Fed's ability to affect real interest rates may be limited, especially for longer-term rates.

remain unchanged D

In Japan, government debt reached 226% of GDP during 2010. Economic growth in Japan has averaged just 0.7% per year, and inflation (calculated as the growth rate of the GDP deflator) has averaged −0.7%. The Ministry of Finance reported that the average nominal interest rate that the government paid to borrow for 10 years was 1.2%. The level of the primary deficit required to make Japan's fiscal policy sustainable if the growth rate of GDP falls to −0.5% is nothing%. (Round your response to two decimal places and include a minus sign if appropriate.)

-5.42 0=PDtPtYt+[Real interest rate−(Growth rate of real GDP)]×Debt-to-GDP ratio, where the real interest rate, the growth rate of real GDP, and the debt-to-GDP ratio are all in decimal form. Be sure to convert your answer to a percent

A credit−rationed household is more likely to immediately ________ of a one−time tax rebate than is a household that is not credit rationed. A. spend a larger portion B. spend none C. spend a smaller portion D. save a larger portion

A decrease in the real interest rate acts as ________ for lenders and as ________ for borrowers. A. a decrease in wealth; an increase in wealth B. an increase in wealth; a decrease in wealth C. an increase in wealth; an increase in wealth D. a decrease in wealth; a decrease in wealth

A shift from MP1 to MP2 will occur if A. the term structure effect increases. B. the default−risk premium decreases. C. the Fed decreases its target for the short−term nominal interest rate. D. the expected inflation rate increases.

All else equal, a decrease in income taxes would best be represented by a movement from A. point B to point A. B. point B to point C. C. point A to point B. D. point C to point B.

q24 Consider the following statement: "The only way for a country with a budget deficit to have sustainable fiscal policy in the long run is to cut government spending." Do you agree with this statement? Briefly explain. A. No, although spending cuts are part of a sustainable fiscal policy for a country with a deficit, other options include tax increases, moderate money supply increases, and economic growth. B. No, although spending cuts are part of a sustainable fiscal policy for a country with a deficit, other options include tax increases, moderate money supply decreases, and economic growth. C. Yes, in the long run, tax increases are not suitable for sustainable fiscal policy because they impede economic growth. D. Yes, in the long run, moderate changes in the money supply are not suitable for sustainable fiscal policy because they are not very effective

q26 From 1980 through 2010, the debt−to−GDP ratio in the United States A. has remained about average compared to countries in the OECD. B. is considered high by U.S. historical standards. C. has more than quadrupled. D. has slowly declined.

Q11 Why is it important to have a central bank to act as a lender of last resort? Without a lender of last resort, A. it would be more likely for banks and other financial institutions to have liquidity problems and bank runs. B. the very large number of discount loans that are typically requested in the U.S. during normal times would not be able to be granted. C. investment bankers would exhibit overly risky behavior. D. bank panics would become uncommon.

A??

As a percentage of GDP, the federal government expenditure which is expected to increase the most between 2012 and 2042 is A. Medicare and Medicaid. B. the net interest on the federal debt. C. Social Security. D. national defense.

Assume that the term structure effect and the default−risk premium remain unchanged and that households and firms have adaptive expectations. At the beginning of 2013, a bank is offering car loans at a nominal interest rate of 7% and the expected rate of inflation is 2 %, and at the beginning of 2014, the bank decreases the nominal interest rate to 5%. The real interest rate at the beginning of 2014 is A. 2%. B. 3%. C. 5%. D. This cannot be determined without being given the expected inflation rate for 2012.

One problem that became clear during the financial crisis of 2007-2009 was that lending standards allowed some borrowers to falsify information about their income and creditworthiness. How does this problem of falsifying information relate to asymmetric information? (Check all that apply.) A. Lenders had the "upper hand," but failed to use it. B. Borrowers had better information than lenders. C. Lenders likely faced high costs in determining which households were likely to repay a loan. D. It shows the need for government regulations to make information symmetric.

B/C

q6 Of the three three primary tax sources of revenue for the U.S. federal government, which of the following has decreased the most as a percentage of GDP since 1953? A. sales and excise taxes B. corporate income taxes C. individual income taxes D. social insurance taxes

B??

Q8 Since the housing bubble burst and the economy returned to its initial, pre−bubble level before the corrective policy changed output, the economy actually moved from ________ after the bubble burst.

B???

Cuts in taxes on dividends and capital gains affect potential GDP by A. encouraging more proprietorships to incorporate. B. shifting income to wealthier households who generally are more long-term oriented. C. increasing the return to saving and thus the level of investment. D. None of the above.

q6 Hector's wealth is zero, he expects to work for another 45 years at a constant salary of $80,000 and live for another 60 years. If yearly taxes are $20,000 and Hector completely smooths consumption over his lifetime, Hector's annual consumption is ________ less than it would be if yearly taxes were zero. A. $5,000 B. $7,500 C. $15,000 D. $20,000

q10 If a household is credit rationed, the MPC out of current disposable income is ________ compared to the MPC out of current disposable income if a household is not credit rationed. A. lower B. the same C. higher D. negative

C (higher) ?? Maybe the same

Q12 When the Fed makes an open market purchase, long−term real interest rates will ________, which will ________ GDP. A. decrease; decrease B. increase; increase C. decrease; increase D. increase; decrease

C???

payroll taxes are increased on workers who earn over $100,000. As a result ---- and aggregate expenditures will _____, this IS curve will ______ and there will be ______ the Phillips curve.

Consumption / decrease / shift leftward / movement down along

Because a cyclically adjusted surplus is______. Also tax cuts are politically _______ and the government might believe that consumption might be a _____ effective allocation of resources than government spending. Shortly after the tax cuts were passed, various changes occurred that policymakers could not have predicted, such as the terrorist attacks on September 11, 2001. What happened to the government's budget surplus? A. The budget balance became a deficit, both absolutely and cyclically adjusted. B. The budget balance remained a surplus absolutely and became a deficit cyclically adjusted. C. The budget balance became a deficit absolutely and remained a surplus cyclically adjusted. D. The budget balance remained a surplus, both absolutely and cyclically adjusted.

Contractionary / popular / more A

During recessions, the value of collateral ____ and corporate profits ____, so firms _____ the cash flow to finance new investment projects. if there is credit rationing, firms may also ____ access to loans. these two factors mean that investment will ____ further with the business cycle than it might otherwise, which is a concept know as the ______.

Decrease / decrease / do not have / lose / decrease / the financial accelerator

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. Decrease the discount rate. Reserve requirements.

In order to increase bank reserves the Fed would engage in open market purchases, decrease the discount rate, and lower the required reserve ratio.

As a result of this change, the desired capital stock will ____ and the level of investment will ____.

Increase / increase

Suppose the economy is in a recession and the government decides it needs to reduce the budget deficit. Other things equal, this would tend to A. increase the output gap and make the recession worse. B. decrease the output gap and make the recession worse. C. help to eliminate the recession, but at the cost of a much higher inflation rate. D. keep output from declining further, but increase the real interest rate and the inflation rate.

Under a fixed exchange rate system, the central bank cannot increase the output gap with expansionary policy and still maintain the fixed exchange rate if the economy is at A. point A. B. point B. Your answer is correct. C. point C. D. point X.

q18 Hector's wealth is zero, he expects to work for another 45 years at a constant salary of $80,000 and live for another 60 years. Assuming taxes are zero, if Hector receives an unexpected $20,000 increase in salary his first year of work and he completely smooths consumption over his lifetime, his annual consumption is A. $67,500 B. $75,000. C. $80,000. D. $111,111.

ch16 Q1 In the short run, such a change, all other things equal, will cause current consumption to ____ and current savings to _____ A longer-term impact will see capital formation ____ and a ____ future GDP

decrease / increase accelerate / higher than otherwise

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 ▼ sale / purchase of government securities to ▼ decrease / increase bank reserves, thereby increasing liquidity and making ▼ more / fewer loanable funds available. Evaluate the effectiveness of the bank lending channel in stimulating economic activity during this period. A. 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. B. The bank lending channel was ineffective in stimulating economic activity because short-term nominal interest rates were equal to 0%, causing monetary policy to be completely ineffective. C. Since short-term nominal interest rates were equal to 0%, the bank lending channel could only be effective when combined with quantitative easing, so it was not effective in stimulating economic activity. D. The bank lending channel was very effective in stimulating the economy during the 2007−2009 financial crisis.

purchase / increase / more A

The debt−to−GDP ratio increases when the primary deficit ________ or when seigniorage ________. A. increases; decreases B. decreases; decreases C. decreases; increases D. increases; increases

The dollar value of the U.S. public debt is the highest in U.S. history and the highest, in absolute terms, in the world. Is this fact a reason to be concerned about the debt? A. No, because the debt-to-GDP ratio for the United States is smaller than many other countries. B. Yes, because it means, unequivocally, that the current fiscal policy is not sustainable. C. No, because the dollar is strong and the United States will be able to pay back its debt in a short period of time. D. Yes, because it implies that the debt-to-GDP ratio for the United States is larger than many other countries.

The economy is in a recession due to a decline in investment spending. The government would A. increase government purchases, thereby increasing demand and moving real GDP closer to potential GDP. B. increase taxes, thereby increasing demand and moving real GDP closer to potential GDP. C. decrease government purchases, thereby increasing demand and moving real GDP closer to potential GDP. D. decrease taxes, thereby decreasing demand and moving real GDP closer to potential GDP.

The federal government debt refers to A. the total value of U.S. Treasury bonds outstanding. B. the accumulation of past budget deficits. C. government spending plus transfer payments minus tax revenues. D. tax revenues minus government spending and transfer payments.

To increase the money supply, the Federal Reserve could A. decrease reserve requirements. B. lower the discount rate. C. engage in an open market sale. D. decrease income tax rates.

Tobin's q is the ratio of: A. the market value of a firm to the replacement cost of its capital. B. the replacement cost of a firm's capital to the firm's market value. C. the market value of a firm to the user cost of its capital. D. the present value of a firm's capital to its replacement cost.

Using the government's budget constraint, the primary budget deficit is expressed as: A. PDt=Gt+TRt−Tt. B. PDt=Gt−TRt+Tt. C. PDt=Gt−TRt−Tt. D. PDt=Gt+TRt+Tt

The growth rate of non-residential fixed investment was 19.0% during the third quarter of 2011, but just 3.6% during the second quarter of 2012. Is this decrease in the growth rate of investment consistent with President Bullard's concerns? A. No, the fact that investment was strong just two quarters prior suggests that those concerns are misplaced. B. Yes, it shows that as 2013 drew closer, firms sharply curtailed investment projects.

The increase in the federal deficit due to the 2009 stimulus package may have had a smaller impact on the economy due to forward−looking households and firms A. waiting for the real interest rate to fall before borrowing to make long−term investments. B. reducing consumption and investment expenditures in anticipation of future tax increases. C. taking advantage of the strong U.S. dollar to purchase more imported goods. D. purchasing more treasury securities to finance the stimulus package and purchasing fewer goods and services.

The personal savings rate for U.S. households rose from 3.2% in November 2011 to 4.2% in July 2012. Is this increase consistent with your answer to the previous question? A. No, the savings rate is impacted by far too many variables to attribute a change to a single event. B. Yes, it indicates clearly that households sought to raise their wealth by lifting their saving effort.

Three policy lags limit the effectiveness of monetary policy: recognition lags, implementation lags, and impact lags. Of these three policy lags, fiscal policy is impacted by A. only implementation and impact lags. B. all three policy lags. C. only recognition and implementation lags. D. only recognition and impact lags.

Through open market operations, the Fed A. has influence over, but cannot directly control, the supply of reserves and the demand for reserves in the banking system. B. controls the supply of reserves, but not the demand for reserves, in the banking system. Your answer is correct. C. controls the supply of reserves and the demand for reserves in the banking system D. controls the demand for reserves, but not the supply of reserves, in the banking system

To increase the money supply, the Federal Reserve could A. increase reserve requirements. B. engage in an open market purchase. C. raise the discount rate. D. decrease income tax rates.

Q14 An increase in the real interest rate outside of the United States will ________ the demand for the dollar and ________ the demand for foreign financial assets. A. decrease; increase B. increase; decrease C. decrease; decrease D. increase; increase

q19 If the level of real GDP is initially Y2, firms will ________ production until equilibrium is reached at ________. A. decrease; Y1 B. decrease; Y2 C. increase; Y2 D. increase; Y1

If the level of real GDP is initially Y2, spending is ________ production and there is an unexpected ________ in inventories. A. greater than; increase B. less than; increase C. less than; decrease D. greater than; decrease

What are the components of aggregate expenditure? A. AE = C + I + NX B. AE = C + I + G + NX C. AE = C + I + G + MPC D. AE = C + I + G

A movement from point A to point B could be caused by A. a negative demand shock. B. an increase in the expected rate of inflation. C. an increase in the default−risk premium. This is the correct answer. D. a decrease in the term premium investors expect in the future.

Other things equal, if planned investment spending is greater than actual investment spending, then aggregate expenditure will be ________ real GDP and inventories will ________. A. greater than; rise B. less than; fall C. greater than; fall D. less than; rise

The MP curve is derived from the money market model on the assumption that the central bank maintains a fixed target for the short-term nominal interest rate. Which of the following describes the sequence by which the MP curve is derived from the money market model? A. ↑RGDP → ↑Money supply → ↑Demand for money → ↑Output gap → constant real interest rate. B. ↑Demand for money → ↑RGDP → ↑Output gap → ↑Money supply → constant real interest rate. C. ↑RGDP → ↑Output gap → ↑Demand for money → ↑Money supply → constant real interest rate. Your answer is correct. D. ↑RGDP → ↑Demand for money → ↑Money supply → ↑Output gap → constant real interest rate

A decrease in the real interest rate outside of the United States will ________ the demand for the dollar and ________ the demand for foreign financial assets. A. increase; increase B. decrease; increase C. decrease; decrease D. increase; decrease

A decrease in the unemployment rate which is accompanied by an increase in the inflation rate is represented by a ________ the Phillips curve. A. upward shift of B. downward shift of C. movement down D. movement up

If the inflation rate in 2013 was 2.5 percent, and because of that people expect the inflation rate in 2014 will also be 2.5%, these people are said to have A. expectations of stagflation. B. expectations of supply shocks. C. rational expectations. D. adaptive expectations.

Q18 Negative demand shocks have a tendency to ________ real GDP relative to potential GDP and ________ the inflation rate. A. increase; increase B. increase; decrease C. decrease; increase D. decrease; decrease

Explain how the IS curve represents equilibrium in the goods market. The IS curve shows the combination of: A. the real interest rate and consumer spending that represents when the goods market is in equilibrium. B. the nominal interest rate and investment that represents when the goods market is in equilibrium. C. investment and nominal GDP that represents when the goods market is in equilibrium. D. the real interest rate and real GDP that represents when the goods market is in equilibrium The IS curve is downward sloping because a lower interest rate causes ▼ an increase a decrease in aggregate expenditure and a ▼ lower higher equilibrium level of real GDP.

D an increase; higher

Assume the economy is initially in equilibrium where potential GDP equals real GDP. If the economy experiences a ________ demand shock and the Fed does not change its target short−term nominal interest rate, the IS curve shifts to the left and real GDP will be ________ potential GDP. A. positive; less than B. negative; greater than C. negative; less than D. positive; greater than

Q21 Equilibrium in the goods market occurs where A. real GDP equals nominal GDP. B. autonomous consumption equals induced consumption. C. aggregate expenditure equals real GDP. D. aggregate expenditure equals autonomous consumption.

Explain how the equilibrium real interest rate, net capital outflows, and the level of net exports are determined in an open economy. Complete the table below by selecting the phrase from the right (labeled A through F) that completes each of the statements on the left. Do this by inserting the appropriate letter (A, B, etc.) into each statement's response box. Note: a letter may be used more than once. 1. In an open economy the equilibrium real interest rate is set by ... Upper CC 2. Given the real interest rate, the relative attractiveness of domestic assets is determined, and this sets the level of ... 3. Finally, net exports become determined since they are, by definition, equal to ...

the intersection of the IS and MP curves Net capital outflows Net capital outflows

Q6 Based on the experience of countries leaving the gold standard and devaluing their currencies during the Great Depression, the ultimate effect on the Greek economy of abandoning the euro may be A. a reversal of its economic decline. B. an immediate restoration of full employment. C. a continuation of its downward spiral. D. an eruption of hyperinflation.

The goods market is in equilibrium if: A. aggregate expenditure is less than real GDP. B. there are no unexpected changes in inventories. Your answer is correct. C. the value of goods and services demanded is less than the value of goods and services produced. D. aggregate expenditure equals nominal GDP per capita.

Under a fixed exchange rate system, at low domestic real interest rates net capital outflows are ________, so the central bank ________ foreign−exchange reserves. A. positive; acquires B. positive; loses C. negative; acquires D. negative; loses

q7: The housing market crash that accompanied the 2007−2009 recession has had severe negative effects on the U.S. economy. Since December 2008, the target federal funds rate has been 0.0−0.25%. Assuming the Fed keeps the real interest rate constant, a recovery in the housing market would cause the ________, and the output gap would ________. A. IS curve to shift to the left; become more negative B. IS curve to shift to the right; become less negative C. MP curve to shift down; become more negative D. MP curve to shift up; become less negative

q9 A decrease in the real interest rate outside of the United States will cause net capital outflows to ________ and cause the dollar to ________ relative to other currencies.

What is the equation for the output gap Phillips curve? A. πt=πet−aUt−UN−st B. πt=πet+bYt−st C. πt=πet−bYt−st D. πt=πet+aUt−UN+st A positive supply shock will cause: A. movement up along the Philip's curve. B. an upward shift of the output gap Philips curve. C. a downward shift of the output gap Philips curve. D. movement down along the Philip's curve.

B B

Consider the following statement: "Central banks control only short-term interest rates, but long-term interest rates are most important for economic activity. Therefore, monetary policy is not important in determining output." Do you agree with this statement? Briefly explain. A. Uncertain. Although it is true that only long-term interest rates are important for economic activity, it is not the case that central banks control only short-term interest rates. B. Agree. Monetary policy is not important in determining output. C. Disagree. Short-term interest rates are also important for economic activity and central banks have effects on long-term interest rates through short-run actions, particularly with regard to the formation of inflation expectations and expectations about future interest rates. Your answer is correct. D. Uncertain. Although it is true that central banks can only influence short-term interest rates, it is not the case that only long-term interest rates are important for economic activity

Other things equal, when the real interest rate rises, C, I and NX ________ and real GDP will ________ relative to potential GDP. A. increase; increase B. decrease; increase C. decrease; decrease D. increase; decrease

Q16 The oil shock of 2007−2008 saw the price of oil rising from less than $60 a barrel in March 2007 to over $145 a barrel in July 2008, and decreasing again to just over $30 a barrel in December 2008. Assuming the economy was at potential GDP prior to the oil shock, the decrease in the price of oil, such as what occurred between July 2008 and December 2008, acts as a positive supply shock, resulting in A. a downward shift of the Phillips curve. B. a movement down along the Phillips curve. C. an upward shift of the Phillips curve. D. a movement up along the Phillips curve.

Q17 A decrease in the unemployment rate which is accompanied by an decrease in the inflation rate is represented by a ________ the Phillips curve. A. movement up B. upward shift of C. downward shift of D. movement down

Q5: A shift from MP1 to MP3 will occur if A. investors increase the term premium they require on long−term bonds. B. investors increase the short−term interest they expect in the future. C. the Fed decreases its target for the short−term nominal interest rate. D. the expected inflation rate decreases.

Suppose the economy is in equilibrium with an output gap equal to zero and the actual inflation rate equals the expected inflation rate. If the economy experiences a negative demand shock, the output gap will ________ and the inflation rate will ________. A. increase; increase B. increase; decrease C. decrease; decrease D. decrease; increase

A movement from point C to point B could be caused by A. an increase in consumer confidence accompanied by a decrease in the target interest rate. B. a decrease in consumer confidence accompanied by an increase in the expected rate of inflation. C. a positive demand shock accompanied by a decrease in the default−risk premium. D. a negative demand shock accompanied by an increase in the term structure effect

q11 What is different about the MP curve in a fixed exchange rate system as compared to a floating exchange rate system? A. With a fixed exchange rate system the MP curve is downward sloping and then horizontal, while in a floating exchange rate system the MP curve is entirely horizontal. B. There is no difference; the MP curve is horizontal in both systems. C. With both systems the MP curve is downward sloping, but in the fixed exchange rate system a lower limit exists to its leftward shifts. D. With both systems the MP curve is horizontal, but in the fixed exchange rate system a lower limit exists to its downward shifts.

q20: Assume the economy is initially in equilibrium where potential GDP equals real GDP. If the expected inflation rate, the term structure effect, and the default−risk premium are constant and the Fed wants to lower the inflation rate, the Fed could ________ the target short−term nominal interest rate, which will result in real GDP being ________ potential GDP. A. decrease; less than B. increase; less than C. decrease; greater than D. increase; greater than

q15 C = $5 million + 0.9(1 − 0.1)Y I = $7 million G = $6 million NX = $1 million Based on the above data, the value of the expenditure multiplier is

5.26

All of the following are possible private−sector adjustments to an increase in the government's budget deficit except A. decreasing expenditures on transfer programs. B. increasing private savings. C. increasing the trade deficit by increasing imports and/or decreasing exports. D. decreasing investment.

An increase in the real interest rate is best represented by a movement from A. point A to point C. B. point C to point A. C. point B to point A. D. point A to point B.

Assume the economy is initially in equilibrium with real GDP equal to potential GDP. Other things equal, the economy entering a recession would best be represented as a movement from ________ if there are no automatic stabilizers, and from ________ if there are automatic stabilizers. A. point A to point C; point A to point B B. point A to point C; point A to point B to point A C. point A to point B; point A to point C D. point A to point B; point A to point C to point A

At the time the tax cuts were enacted, most news coverage described them as temporary. Suppose that the public believed that the tax cuts were temporary. What would be the consequences for consumption of letting the tax cuts expire as scheduled? A. Consumption would fall only marginally, if at all. B. Consumption would drop by the full amount of the temporary "gift." C. Too many variables affect consumption to reach a determinate assessment.

Briefly explain the differences in your answers to parts (a) and (b) of this question. A. The explanation is straightforward: when income changes permanently, consumption changes markedly; when temporary changes in income occur, consumption is only marginally affected. B. Whenever households have additional income, they spend it, regardless of how long it will endure. C. Consumption behavior is too random to explain logically.

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. A. Disagree. While the President appoints the Chairman, the Chairman is not the only voice or power in the Fed. B. Disagree. Other Board of Governors and FOMC members serve longer terms and are more connected to political influence than the Chairman. C. Agree. The president is essentially in control of the Fed. D. Disagree. The Chairman must be confirmed by Congress, so the Fed is under the control of both Congress and the president.

Consider the following statement: "Because the government can always print more money, the size of the budget deficit doesn't matter." Do you agree with this statement? Briefly explain. A. No, printing money raises nominal interest rates and increases payments on government debt. B. Yes, the government can print money and use it to make debt payments, thus reducing the size of the budget deficit. C. Yes, printing money reduces the value of the deficit and makes it easier for the government to repay the debt. D. No, printing money increases the value of the deficit and makes it harder for the government to repay the debt.

Other things equal, by decreasing the interest rate paid on banks' required reserve deposits, the Fed can ________ the level of reserves banks are willing to hold, which would result in a(n) ________ in the money supply A. decrease; increase B. increase; decrease C. increase; increase D. decrease; decrease

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? A. 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. B. Yes. Although the surcharge was temporary, the change in income was permanent. Consumption spending might have decreased slightly, but not enough to prevent the economy from overheating and causing inflation to accelerate. C. No. Since the surcharge was known to be temporary, it is likely that spending would change by a considerable amount, and thus the policy would not be greatly effective. D. Yes. Although the surcharge was temporary, the change in income was permanent. Consumption spending must have decreased, preventing the economy from overheating and causing inflation to accelerate.

Gross federal debt is ________ gross federal debt held by the public. A. greater than B. the same as C. the negative equivalent of D. less than

Hector's wealth is zero, he expects to work for another 45 years at a constant salary of $80,000 and live for another 60 years. If yearly taxes are $20,000 and Hector completely smooths consumption over his lifetime, Hector's average annual saving is ________ less than it would be if yearly taxes were zero. A. $5,000 B. $7,500 C. $15,000 D. $20,000

If a person completely smooths consumption over his lifetime, then consumption is best represented by which of the following? A. (wealth + lifetime income) / the number of years the person expects to live B. (wealth + lifetime income) / the number of years the person expects to work C. wealth / the number of years the person expects to live D. lifetime income / the number of years the person expects to work

If consumers believe that deficit reduction must occur in this way, they might change their current behavior by: A. increasing their level of saving now, which in the long run can increase the capital stock and lead to higher GDP. B. reducing their level of saving and increasing investment spending to stimulate higher GDP in the long run. C. increasing consumer spending to stimulate GDP in the short run. D. refusing to make payments to Social Security and Medicare programs. E. A and D only. F. All of the above.

If the federal government tries to make fiscal policy sustainable by increasing taxes on wages, the opportunity cost of leisure will ________ and will result in ________ potential GDP. A. decrease; lower B. decrease; higher C. decrease; higher D. increase; lower

Is it possible that expectations of a recession in 2013 affected consumption expenditures in 2012? A. Yes, an increase in uncertainty about the future can increase precautionary saving and lead to slower growth in consumption. B. No, unlike investment, consumption expenditures are insensitive to expectations. C. No, consumption expenditures have actually increased during some recessions so it is not likely that the mere expectation of a recession would affect consumption expenditures.

John Maynard Keynes described periods of irrational pessimism and optimism that affect the investment behavior of firms as animal spirits. When considering the investment behavior of firms, animal spirits can be thought of as changes in the A. expected marginal product of capital. B. capital stock. C. actual marginal product of capital. D. user cost of capital.

Maryanne expects to work for another 30 years and expects to live another 10 years after she retires. If Maryanne completely smooths consumption over her lifetime, her marginal propensity to consume out of wealth is A. 0.025. B. 0.033. C. 0.075. D. 0.10.

Other things equal, an increase in transfer payments will ________ consumption expenditures, which leads to ________ in output and employment. A. increase; an increase B. decrease; a decrease C. increase; a decrease D. decrease; an increase

Q13 Why are the terms of members of the Board of Governors both very long and staggered? Terms are long and staggered A. to insulate the Board of Governors from political influence. B. so that each president of the U.S. can appoint a full board. C. to ensure that each member will serve during all phases of the business cycle. D. All of the above.

Q14 A decrease in the discount rate ________ bank reserves and ________ the federal funds rate. A. increases; lowers B. decreases; raises C. decrease; lowers D. increases; raises

Q19 The automatic budget deficits and budget surpluses that occur in the federal budget over the business cycle A. stabilize the economy. B. decrease potential GDP. C. destabilize the economy. D. increase potential GDP.

Q2 All else equal, a decrease in government purchases would best be represented by a movement from A. point A to point B. B. point B to point C. C. point C to point B. D. point B to point A.

Q3 In a market economy, uncertain levels of inflation A. make prices less useful as signals for resource allocation. B. prompt firms to enter into fewer short−term contracts, and more long−term contracts, with suppliers. C. are more beneficial to lenders than to borrowers, as lenders have a tendency to overestimate the expected inflation rate. D. balance out income redistribution in the long run.

Suppose that despite what they read in the news coverage, the public believed that the tax cuts would be permanent. In that case, what would be the consequences of letting the tax cuts expire as scheduled? A. Consumption would decline by a significant amount. B. Consumption would rise as households welcomed a less reckless fiscal policy. C. Consumption would not be affected.

Suppose the economy is in a recession and the government decides it needs to reduce the budget deficit. Other things equal, this would tend to A. shift the IS curve further to the left. B. shift the MP curve up. C. shift the MP curve further down. D. shift the IS curve to the right.

Suppose the economy is initially at full employment with real GDP equal to potential GDP, and the Fed does not target interest rates, allowing the real interest rate to change like it did during the Great Depression. This would be reflected as a movement from ________ in the IS−MP model and ________ the Phillips curve. A. point X to point Y; a movement down B. point Y to point Z; a movement down C. point Y to point X; a movement up D. point Z to point Y; a movement up

Suppose the government cuts taxes by $300 million dollars this year and must pay off its debt next year by increasing taxes by $300 million. According to Ricardian equivalence, private saving will ________ this year and ________ next year, all else equal. A. increase by $300 million; decrease by $300 million B. not change; not change C. increase by $300 million; not change D. increase by $150 million; decrease by $150 million

The Ricardian equivalence suggests that forward looking households ________ the future taxes required to pay off government debt, so that reductions in lump−sum taxes have ________ effect on the economy. A. fully anticipate; no B. are unaware of; a positive C. fully anticipate; a multiplied D. are unaware of; a negative

The White House's deficit commission has proposed several ways for the government to reduce the federal budget deficit, including raising the retirement age for Social Security. Other things equal, raising the retirement age for Social Security would tend to ________ the supply of labor and ________ the equilibrium wage rate. A. increase; lower B. decrease; raise C. increase; raise D. decrease; lower

Which of the following would not be considered an automatic stabilizer? A. legislation increasing funding for job retraining passed during a recession. B. rising corporate income tax revenues due to an expanding economy. C. decreasing unemployment insurance payments due to increased employment during an expansion. D. increasing food stamp payments due to more people becoming unemployed during a recession.

q10 When the nominal interest rate is not constant, an increase in the growth rate of the money supply ________ the inflation rate, and ________ the debt−to−GDP ratio. A. increases; has an ambiguous effect on B. increases; increases C. increases; decreases D. decreases; increases

q12 If the government decreased income taxes by $500 billion and does not pursue a policy change, which of the following would require the private sector to adjust in order to finance the tax decrease? A. Issue $500 billion in new Treasury Bonds. B. Increase other taxes by $500 billion. C. Reduce transfer payments by $500 billion. D. Reduce expenditures on programs such as education or defense by $500 billion.

q19 Tobin's q is the ratio of the A. market value of a firm to the replacement cost of its capital. B. current stock price of a firm to the number of outstanding shares of stock in the firm. C. current stock price of a firm to the total earnings of the firm. D. dividend payments of a firm to the current stock price of the firm.

q20 Hector's wealth is zero, he expects to work for another 45 years at a constant salary of $80,000 and live for another 60 years. Assuming taxes are zero, if Hector completely smooths consumption over his lifetime, his annual consumption is A. $60,000. B. $62,222. C. $80,000. D. $106,667.

q23 Federal government expenditures on goods and services $455 million Transfer payments $85 million Tax revenue $405 million Interest payment on existing debt $60 million Seigniorage $10 million Newly−issued government bonds $185 million The data in the table represents budget figures for the nation of Arugula for 2011. Refer to Table 13.1. The primary budget deficit for Arugula in 2011 is A. $135 million. B. $195 million. C. $380 million. D. $600 million.

q27 Since 1990, the growth rate of real gross private investment in the United States has been relatively ________ and the growth rate of real personal consumption has been relatively ________. A. volatile; stable B. stable; stable C. volatile; volatile D. stable; volatile

q28 Suppose the economy is initially at full employment with real GDP equal to potential GDP, and the expected inflation rate equal to the actual inflation rate. If the economy then experiences a negative demand shock, and the Fed responds to the results of the demand shock with an appropriate monetary policy, the Fed response will result in a A. shift from MP1 to MP2. B. shift from MP2 to MP1. C. shift from IS1 to IS2. D. shift from IS2 to IS1.

q3 Assume the economy is initially in equilibrium with real GDP equal to potential GDP. Other things equal, if the economy enters a recession, automatic stabilizers A. reduce the magnitude of the multiplier and reduce the size of the decline in real GDP. B. raise the interest rate to prevent the output gap from falling below equilibrium. C. reduce the decline in investment expenditures and therefore increase the real short−term interest rate. D. cause any decrease in real GDP to be offset by an equal decrease in the inflation rate.

q4 According to the life−cycle hypothesis, if a person wants consumption to be constant over her lifetime, she will smooth consumption by initially ________ over her lifetime. A. borrowing, then saving, then dissaving B. saving, then dissaving, then borrowing C. dissaving, then borrowing, then saving D. saving; then borrowing; then dissaving

q4 When the nominal interest rate is constant, ________ in the growth rate of the money supply ________ the inflation rate, and ________ the debt−to−GDP ratio. A. a decrease; decreases; increases B. an increase; increases; increases C. a decrease; decreases; decreases D. an increase; decreases; increases

q5 An increase in uncertainty about the future will tend to ________ precautionary saving and ________ the desired level of wealth for households. A. increase; increase B. decrease; decrease C. increase; decrease D. decrease; increase

Which of the following is not a reason why debt is usually measured using the debt-to-GDP ratio rather than the absolute amount of debt? A. The absolute amount of debt is a good indicator of the government's ability to pay back the debt. B. The debt-to-GDP ratio is a useful measure in calculating whether fiscal policy is sustainable. C. The absolute amount of debt is not a useful measure in calculating whether fiscal policy is sustainable. D. The debt-to-GDP ratio is better at measuring whether the debt is large or small. If the debt-to-GDP ratio is _______, a fiscal policy is considered sustainable. If the debt-to-GDP ratio is _______, a fiscal policy is considered unsustainable. A. constant or decreasing; increasing B. increasing or decreasing; constant C. constant or increasing; decreasing D. increasing; constant or decreasing

A A

q20 The main reason for the projected increases in the U.S. budget deficit in coming years is the: A. escalating size of entitlement programs such as Social Security and Medicare. B. increasing size of the trade deficit. C. reduction in tax collections. D. decrease in net interest payments. The current fiscal policy of the federal government is unsustainable due to: A. increased government revenue expected in the future. B. decreased net interest payments. Your answer is not correct. C. increased government expenditure on entitlement programs. This is the correct answer. D. diminishing interest payments in the future by countries owing debt to the United States.

A C

Which of the following were shocks that the U.S. economy experienced during the 2007−2009 period? (Check all that apply.) A decrease in real estate values, which affected the IS curve. B. A decrease in real estate values, which affected the MP curve. C. A financial crisis, which increased the risk premium investors required before making loans. D. A surge in oil prices, which affected both the Phillips curve and IS curve. E. A financial crisis, which decreased the risk premium investors required before making loans. F. A surge in oil prices, which affected both the Phillips curve and MP curve. G. A decrease in real estate values, which affected the Phillips curve. H. A surge in oil prices, which affected only the Phillips curve

A,C,H

Assume the economy is initially at equilibrium at potential GDP of $250 billion. If the MPC = 0.50 and the difference between AE1 and AE2 represents a $75 billion decrease in planned investment spending, real GDP at Y2 will be equal to A. $100 billion. B. $125 billion. C. $175 billion. D. $212.5 billion.

The conventional view among economists is that persistent budget deficits lead to ________ real interest rates and ________ private investment. A. lower; crowd in B. higher; crowd out C. higher; crowd in D. lower; crowd out

A decrease in the inflation rate will lead to a ________ nominal interest rate, which will ________ the debt−to−GDP ratio. A. lower; raise B. lower; reduce C. higher; raise D. higher; reduce

A recession tends to cause the federal budget deficit to ________ because tax revenues ________ and government spending on transfer payments ________. A. decrease; rise; falls B. increase; fall; rises C. increase; rise; falls D. decrease; fall; rises

CH15 Q1 The value of bonds outstanding A. changes only when the government runs a budget deficit or surplus if the federal debt is zero. B. increases when the government runs a budget deficit and decreases when the government runs a budget surplus. C. is independent of the government running either a budget deficit or a budget surplus. D. decreases when the government runs a budget deficit and increases when the government runs a budget surplus.

Capital flows can cause problems for exchange rate stability. Most countries allow the free movement of capital because whatever costs they may impose are deemed to be: A. borne only by the less affluent members of society. B. less than the economic benefits they confer. C. easily passed on to trading partners. D. of an inconsequential magnitude

Federal government expenditures on goods and services $455 million Transfer payments $85 million Tax revenue $405 million Interest payment on existing debt $60 million Seigniorage $10 million Newly−issued government bonds $185 million The data in the table represents budget figures for the nation of Arugula for 2011. Refer to Table 13.1. The budget deficit for Arugula in 2011 is A. $135 million. B. $195 million. C. $380 million. D. $600 million.

Hector's wealth is zero, he expects to work for another 45 years at a constant salary of $80,000 and live for another 60 years. Yearly taxes are $20,000, and Hector received a one−time tax rebate of $5,000 during his first year of work. Shortly after the tax rebate is announced, the government unexpectedly announces that the one−time tax rebate will actually become a permanent tax reduction. If Hector completely smooths consumption over his lifetime, his annual consumption will increase by ________ due to the tax rebate becoming permanent in the following year. A. $2,733.33 B. $3,666.67 C. $3,750.00 D. $5,000.00

Holding everything else constant, if total factor productivity ________ or if the labor force growth rate ________ the debt−to−GDP ratio will increase. A. increases; increases B. decreases; decreases C. increases; decreases D. decreases; increases

How might consumer expectations of future Social Security cuts make the process of deficit reduction easier or more difficult? A. Consumers might decrease saving, thereby reducing aggregate demand, which increases GDP and tax collections, making deficit reduction easier. B. Consumers might increase saving, thereby reducing aggregate demand, which reduces GDP and tax collections, making deficit reduction more difficult. C. Consumers might decrease spending, thereby increasing aggregate demand, which increases GDP and tax collections, making deficit reduction easier. D. Consumers might increase spending, thereby reducing aggregate demand, which reduces GDP and tax collections, making deficit reduction more difficult.

If exchange rates are floating, the Fed increasing its target inflation rate will cause the dollar to ________ relative to other currencies and cause net capital outflows to ________ . A. appreciate; decrease B. depreciate; increase C. depreciate; decrease D. appreciate; increase

If the MPC is 0.9 and the tax rate is 15%, a $100 increase in autonomous investment will increase equilibrium income by A. $131. B. $426. C. $599. D. $850

If the government is running a cyclically adjusted budget deficit, ________ fiscal policy is ________ because aggregate expenditure is increasing. A. contractionary; appropriate B. discretionary; expansionary C. discretionary; contractionary D. expansionary; ineffective

One option the government has to restore funding to transfer programs such as Social Security is to raise or eliminate the income cap on Social Security payments. Other things equal, this would result in ________ in the after−tax return to capital goods and cause firms and households to accumulate ________ capital. A. a decrease; more B. a decrease; less C. an increase; less D. an increase; more

Other things equal, a decrease in the personal income tax rate will ________ disposable income, which leads to ________ in output and employment. A. decrease; a decrease B. increase; an increase C. decrease; an increase D. increase; a decrease

Q10: Quantitative easing is a central bank policy that attempts to stimulate the economy by possibly A. making discount loans to nonfinancial corporations. B. buying long−term securities. C. selling treasury securities. D. slowly reducing the required reserve ratio.

Q13 Briefly explain whether you agree with the following statement: "A firm would never increase investment during a recession if its sales are currently very low." A. Agree. New capital goods acquired at a time when sales are low will remain idle, causing the firm to lose even more money than it currently does. B. Disagree. Since the capital goods that investment procures last many years, a firm must consider the profits to be earned from those goods in the future when deciding whether to invest. C. Agree. A firm with low current sales has insufficient revenues to acquire new capital goods. D. Disagree. When sales are low and the economy is doing poorly, capital goods will be inexpensive and thus a good bargain for a firm.

Q23 Economists initially viewed the Phillips curve as a structural relationship, meaning that the relationship between the two measured variables A. can change only slightly over time. B. will not change over time. C. can change greatly over time. D. will change in the short run but not in the long run.

Q24 Suppose the economy is in equilibrium with an output gap equal to zero and the actual inflation rate equals the expected inflation rate. If the economy experiences a positive demand shock, real GDP will become ________ potential GDP and the economy will move to the ________ along an existing Phillips curve. A. greater than; left B. greater than; right C. less than; left D. less than; right

Q25 Once economists take into consideration changes in the expected inflation rate and supply shocks, the Phillips curve A. accurately explains the short−run and long−run trade−offs between unemployment and inflation. B. remains a useful tool for explaining the short−run trade−off between unemployment and inflation. C. only remains useful when explaining the long−run trade−off between unemployment and inflation. D. is no longer a useful tool for explaining any trade−off between unemployment and inflation.

Q28 Assume the economy is in equilibrium at Y1, where real GDP equals potential GDP, and then the economy experiences a positive demand shock. Other things equal, the positive demand shock is best represented by a(n) A. downward shift of the Phillips curve. B. movement up along the Phillips curve. C. upward shift of the Phillips curve. D. movement down along the Phillips curve.

Q29 Under a fixed exchange rate system at high domestic real interest rates net capital outflows are ________, so the central bank ________ foreign−exchange reserves. A. negative; loses B. negative; acquires C. positive; loses D. positive; acquires

Suppose that firms believe that the U.S. will enter a recession in 2013 due to tax increases and government spending cuts. The effect of this belief on investment spending and real GDP in 2012 would most likely be A. positive since capital goods prices are likely to be depressed. B. negative since the expected profitability of new capital goods would be diminished. C. negative since new businesses never open during recessions. D. indeterminate since too many other variables are involved.

Suppose the economy is initially at full employment with real GDP equal to potential GDP, and the expected inflation rate equal to the actual inflation rate. If the economy then experiences a negative demand shock, and the Fed responds to the results of the demand shock with an appropriate monetary policy, this would best be represented by a movement from A. point C to point B to point A. B. point A to point B to point C. C. point A to point C to point B. D. point C to point A to point B.

The Federal Open Market Committee consists of A. 12 members, each of which is the president of one of the 12 reginal Federal Reserve banks. B. the seven members of the Board of Governors , the president of the Federal Reserve Bank of New York, and 4 other Federal Reserve Bank presidents. C. the chairman of the Fed, the chairman of the president's council of economic advisors, the U.S. Treasury Secretary, and 4 of the 12 Federal Reserve Bank presidents who serve on a rotating basis. D. the seven members of the Board of Governors , the Chairman of the Fed, the U.S. Treasury Secretary, and the president of the Federal Reserve Bank of New York.

What might the failure to anticipate the recession imply about the effectiveness of fiscal policy in preventing or reducing the severity of the recession? A. Even if fiscal policymakers are able to recognize the signs that lead into a recession, fiscal policy cannot be effective in preventing them because fiscal policy has little impact on those events. B. If fiscal policymakers are unable to recognize the signs that lead into a recession, fiscal policy cannot be effective in preventing them and may have little impact on the severity of crises. C. Fiscal policymakers and economists are two different groups of people. Fiscal policymakers come into action once there is a financial crisis or a recession. Their effectiveness is completely independent of economists' predictions. D. Fiscal policymakers can design instruments, such as automatic stabilizers, long before financial crises begin that can prevent and reduce the severity of financial crises. Their effectiveness is completely independent of economists' predictions.

When the Fed makes an open market ________, the target short−term nominal interest rate will increase, which will ________ GDP. A. purchase; decrease B. sale; decrease C. purchase; increase D. sale; increase

Which of the goals pursued by policymakers in an open economy is desirable because it can help reduce the volatility of economic activity? A. appreciation of the domestic currency B. free capital flows C. exchange−rate stability D. monetary policy independence

With its goal of price stability, the Fed attempts to A. counteract periods of inflation with periods of deflation. B. achieve a low, stable inflation rate. C. keep the inflation rate from falling below 5% and rising above 10%. D. maintain an inflation rate of zero.

if the substitution effect is stronger than the income effect, a decrease in real interest rates will ________ current consumption for households who are lenders and will ________ current consumption for households who are borrowers. A. increase; decrease B. increase; increase C. decrease; increase D. increase; have an unclear effect on

q11 In the United States, the growth rate of expenditures has been most volatile for A. services. B. durable goods. C. nondurable goods. D. The volatility has been roughly equal for all three categories of consumption expenditures.

q14 The income and substitution effects move in ________ for lenders and in ________ for borrowers. A. opposite directions; opposite directions B. opposite directions; the same direction C. the same direction; the same direction D. the same direction; opposite directions

q15 What does it mean to say that fiscal policy is sustainable? A. A fiscal policy is sustainable if the real interest rate is greater than the growth rate of real GDP. B. A fiscal policy is sustainable if it leads to a constant or decreasing debt-to-GDP ratio. C. A fiscal policy is sustainable only if the government has a primary deficit of zero. D. All of the above.

q16 An increase in real interest rates will ________ current consumption for households who are lenders and will ________ current consumption for households who are borrowers. A. decrease; have an unclear effect on B. have an unclear effect on; decrease C. decrease; increase D. increase; decrease

q16 The cyclically adjusted budget deficit or surplus measures what the deficit or surplus would be if the economy was A. no longer in a business cycle. B. at potential GDP. C. in the expansion phase of the business cycle. D. in the recession phase of the business cycle.

q18 Holding all else constant, an increase in consumption taxes, such as sales taxes or a VAT, will ________ the price of consumption goods and ________ output. A. decrease; increase B. increase; decrease C. decrease; decrease D. increase; increase

q20 Assume the economy is initially in equilibrium with real GDP equal to potential GDP. Other things equal, if the economy enters a recession, the inflation rate would ________ and the output gap would ________ if there are, as opposed to are not, automatic stabilizers in the economy. A. not change; not change B. decrease less; decrease less C. decrease more; decrease more D. decrease more; decrease less

q22 The Vuvuza Corporation currently has 10 million shares of stock outstanding, the stock is trading for $42 per share, and its stock of capital goods is valued at $70 million. Based on the Tobin's q value for the Vuvuza Corporation, we would expect Vuvuza to A. cut back on current production. B. increase its capital stock. C. depreciate more of its assets. D. issue more shares of stock to be able to afford to finance investment expenditures.

q23 Assume that the Fed knows a demand shock has occurred in the economy. It takes the Fed 2 months to adjust policy to the shock, and it takes the economy 14 months for the policy change to affect the economy. The 2 month time period refers to the ________, and the following 14 month time period refers to the ________. A. policy lag; recognition lag B. implementation lag; impact lag C. policy lag; implementation lag D. recognition lag; implementation lag

q24 Hector's wealth is zero, he expects to work for another 45 years at a constant salary of $80,000 and live for another 60 years. If yearly taxes are $20,000 and Hector completely smooths consumption over his lifetime, his annual consumption is A. $37,500. B. $45,000. C. $60,000. D. $70,000

q24 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? A. a decrease in employment B. an increase in the inflation rate C. deflation D. a negative output gap

q25 How do automatic stabilizers affect the IS-MP model? Include the Phillips curve in your discussion. A. Automatic stabilizers shift the IS curve and the Phillips curve slightly to the right, while they shift the MP curve slightly to the left. B. Due to automatic stabilizers, changes in the IS curve are not as great. Likewise, movements along the Phillips curve are smaller. C. Automatic stabilizers shift the IS curve, MP curve, and the Phillips curve slightly to the right to combat against forces that move the curves in the opposite direction. D. Automatic stabilizers shift the IS curve, MP curve, and the Phillips curve slightly to the left to combat against forces that move the curves in the opposite direction.

q26 Forward−looking households may reduce consumption expenditures today if they believe that the government is currently A. experiencing a balanced budget, and will therefore not be implementing any fiscal policy to stabilize the economy. B. borrowing to run a budget deficit, and to pay back these loans in the future may require higher taxes. C. running a budget surplus, and the increase in the government's supply of money will generate inflation in the future. D. cutting federal spending to decrease the budget deficit, which will raise the real interest rate, the inflation rate , and the unemployment rate.

q26 Suppose oil prices suddenly begin to rise and the Fed announces that the increase in oil prices are not expected to generate excessive inflation. If the Fed is incorrect in its assumption that rising oil prices will not generate excessive inflation and the inflation rate increases before the Fed takes corrective action, then other things equal, this would result in ________ and ________. A. the IS curve shifting to the left; a movement down the Phillips curve B. the IS curve shifting to the right; a movement up the Phillips curve C. the MP curve shifting up; a movement up the Phillips curve D. the MP curve shifting down; a movement down the Phillips curve

q27 Suppose that after a negative supply shock, the economy is at point X in the IS−MP model and at point B on the Phillips curve. If the Fed has a goal of high employment and therefore does not adjust interest rates, the economy would ________ in the IS−MP model and ________ on the Phillips curve. A. move to point Z; move to point C B. remain at point X; remain at point B C. move to point Z; move to point A D. remain at point X; move to point C

q30 What is fiscal policy? Who is responsible for conducting fiscal policy? Fiscal policy refers to changes that A. the Federal Open Market Committee makes to the federal funds rate, and the discount rate that are intended to achieve macroeconomic policy objectives. B. the federal government makes to taxes, purchases of goods and services, and transfer payments that are intended to achieve macroeconomic policy objectives. C. the Federal Reserve makes to taxes, purchases of goods and services, and transfer payments that are intended to achieve macroeconomic policy objectives. D. the Federal Reserve makes to taxes, the federal funds rate, and the discount rate that are intended to achieve macroeconomic policy objectives.

q5 If the government issues new government bonds to finance a budget deficit, the supply of loanable funds will ________ and the equilibrium amount of investment will ________. A. decrease; increase B. decrease; decrease C. increase; decrease D. increase; increase

q7 An increasing federal budget deficit will ________ the federal government debt as this will ________ the total value of U.S. Treasury bonds outstanding. A. increase; decrease B. increase; increase C. not impact; not change D. not impact; be offset by

q7 Maryanne expects to work for another 30 years and expects to live another 10 years after she retires. If Maryanne completely smooths consumption over her lifetime, for every $1,000 increase in wealth, she will use ________ for consumption each year. A. $10.00 B. $25.00 C. $100 D. $333

q9 When the central bank increases the monetary base, the purchasing power of previously existing currency ________, and this essentially transfers wealth ________. A. decreases; from the government to those who own existing currency B. decreases; from those who own existing currency to the government C. increases; from the government to those who own existing currency D. increases; from those who own existing currency to the government

Hector's wealth is zero, he expects to work for another 45 years at a constant salary of $80,000 and live for another 60 years. Assuming taxes are zero, if Hector receives a $20,000 bonus during his first year of work and he completely smooths consumption over his lifetime, his annual consumption is A. $60,000. B. $60,333. C. $80,444. D. $107,000.

If households are forward looking, the increased budget deficits will cause their spending and saving choices to A. change such that spending rises and saving falls. B. change such that spending falls and saving rises. C. remain unaffected. D. there is insufficient information to make a prediction. these spending and savings choices will ____ the effectiveness of fiscal policy

B Reduce

q20 The charters of the First and Second Banks of the United Stated were not renewed largely because: A. they were opposed by Treasury Sectretary Alexander Hamilton B. Many advocates of a limited federal government distrusted the banks' power. C. they had a tendency to extend excessive amounts of loans to farmers and small business owners. D. they did not adequately perform the functions of a central bank. When and why did Congress create the Federal Reserve System? The Federal Reserve System was created in: A. 1907 to have a lender of last resort to add liquidity to the banking system. B. 1913 to act as the central bank of the United States. C. 1913 in order to have a single unified central bank based in Washington, DC. D. 1907 in order to stop bank runs.

B b

q28 If the MPC is 0.8 and the tax rate is 20%, the expenditure multiplier will equal A. 1.19. B. 2.78 C. 4.0. D. 6.0.

B 1/ (1-.8(1-.2))

C = $40 million + 0.6(1 − 0.2)Y I = $35 million G = $31 million NX = −$6 million Based on the above data, the value of the expenditure multiplier is A. 1.14. B. 1.92. C. 2.08. D. 8.33.

B multiplier for investments: delt(Y)/delt(I) = (1) / (1-(1-t)MPC

An expansionary monetary policy in an open economy with fixed exchange rates: A. unambiguously increases output and decreases the real interest rate. B. may or may not increase output and may or may not decrease the real interest rate. C. increases both output and the real interest rate. D. is incapable of stimulating the economy. Under a floating exchange-rate system, when expansionary monetary policy occurs in an open economy, the real interest rate ▼ and output: A. decreases but by more than in a closed economy. B. increases but by less than in a closed economy. C. increases by an amount equivalent to that in a closed economy. D. increases but by more than in a closed economy.

B Decreases D

Monetary policy affects aggregate expenditure by changing A. the quantity of money balances held by households and firms. B. borrowing costs for households and firms. C. the balance sheets of households and firms. D. inflation expectations and, consequently, the spending plans of households and firms. The Fed can use monetary policy to fight a recession by A. increasing bank reserves and the money supply. B. conducting open market purchases of government bonds. C. lowering its target for the federal funds rate. D. All of the above. E. A and B but not C.

B Monetary policy affects aggregate expenditure by changing borrowing costs for households and firms. It does this by altering the real interest rate. D

In 2009, the stock market value of most firms was lower than it was in 2006. Why would the market value of most firms have fallen? (Check all that apply.) A. A collapse in the fundamental value of firms. B. The perception of higher risks associated with investing in stocks. C. Investor pessimism regarding the future growth rate of profits. D. The government's inability to prevent price declines.

B / C

q8 The U.S. recovery from the 2007-2009 recession was relatively slow through 2012. While there are many reasons for the slow recovery, the high degree of uncertainty about future economic conditions contributed to the slow recovery by (check all that apply): A. inducing the federal government to curtail spending in anticipation of declining tax revenue. B. inducing younger households to refrain from borrowing against what came to be seen as less certain future incomes. C. calling into question future increases in asset values for households and firms alike. D. causing firms to have doubts about the future profitability of investment projects

B / C / D

Describe the relationship between central bank independence and inflation rates. A. There is no discernable relationship between central bank independence and the inflation rate. B. The greater the degree of central bank independence, the lower the inflation rate. C. A low inflation rate permits a central bank to act more independently. D. The greater the degree of central bank independence, the higher the inflation rate. Reasons for this relationship include the A. ability of independent central banks to focus on the long term. B. emphasis politicians tend to place on short term results. C. resistance independent central banks can muster against external pressure. D. All of the above.

B / D

In 2010, the European Central Bank (ECB) purchased bonds issued by Greece and other euro zone economies with excessive government debt. This bailout raised a number of concerns, as discussed in the Economist: "Even as the bank's dealers were pushing cash into the bond markets of selected euro-zone countries, its president...was trying to reassure Germans that the ECB had not lost...its independence." Source: "After the Fall," Economist, May 10, 2010. What risks would be created by a loss of ECB independence? A. Politicians may be concerned with long-term benefits without regard for potential short-term costs. B. The ECB might be subject to political pressure, which could in turn create political business cycles. C. If the ECB were controlled by elected officials, particularly just before an election, those officials might pressure the ECB to sell government bonds, which would increase the money supply and temporarily increase real GDP and employment, but at the risk of increasing inflation in the long run. D. Complete control of the ECB by elected officials decreases the likelihood of fluctuations in the money supply caused by political pressure. Does it matter what people think of ECB independence? If the ECB is viewed as less independent, A. it will be subject to less political influence. B. it will make monetary policy completely ineffective. C. it will enhance its ability to pursue monetary policies. D. it will detract from the credibility of its policies.

B / D

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.) A. expansionary fiscal policy B. discretionary fiscal policy C. contractionary fiscal policy D. automatic stabilizer

B&C

. In saying that the economy can "spontaneously fail," Shiller likely meant that A. the class-based inequality inherent in capitalism produces random but recurrent "blowups." B. it is susceptible to sudden, severe, and destabilizing shocks. Your answer is correct. C. most economic expansions are built on a "house of cards" of easy credit. D. too many economic decision makers are irrational. b. How can the government stimulate the economy and make everyone better off? A. Everyone can be made better off if the government engages in expansionary fiscal (tax cuts and spending increases) and monetary policy (lower borrowing costs). B. The government can stimulate the economy and simultaneously make everyone better off by creating a national version of Alaska's annual oil dividend. C. It isn't possible to make everyone better off, but broad measures of stimulus include an incomes policy (wage and price controls) and wealth redistribution. D. It isn't possible to make everyone better off, but broad measures of stimulus include monetary easing (a lower real interest rate) and fiscal expansion (tax cuts and spending increases). Your answer is correct. c. Would you expect that the government policies you described in part (b) would make people better off in just the short run or in both the short run and the long run? A. Both short run and long run. B. Only the short run.

B, D, A

If the MPC = 0.80, the tax multiplier is A. −2. B. −4. C. −5. D. −8.

Q19 Assume the economy is in equilibrium at Y1 = 0. Other things equal, a surge in household wealth will result in a movement from point ________ to point ________. A. A;B B. B;A C. A;C D. A;D

A fiscal policy is considered sustainable when the debt−to−GDP ratio is ________, and it is considered unsustainable when the debt−to−GDP ratio is ________. A. constant or increasing; decreasing B. constant; increasing or decreasing C. constant or decreasing; increasing D. decreasing; constant or increasing

According to the permanent−income hypothesis, a transitory increase in a person's income will A. increase consumption more than savings. B. be smoothed out to where the increases in consumption and savings are roughly equal. C. increase savings more than consumption. D. have the same effect on consumption as a permanent increase in income.

All else equal, if the economy is in a recession, expansionary fiscal policy would result in a movement from A. point A to point B. B. point C to point B. C. point B to point A. D. point B to point C.

Aside from spending cuts, does Greece have any other alternatives for reducing its deficit? A. Yes, it can raise taxes to generate revenue, block imports to stop the outflow of euros, and repudiate its debt to end its interest payments. B. No, spending cuts are the only means by which deficit reductions can be achieved since tax law is set by the European Parliament rather than the Greek government. C. Yes, tax increases can generate additional revenues to complement the spending cuts in reducing the deficit.

Assume that seigniorage and the government's primary deficit are both zero. A change in the debt−to−GDP ratio depends on just A. the growth rate of the money supply and the nominal interest rate. B. the growth rate of nominal GDP and the rate of inflation. C. the growth rate of real GDP and the real interest rate. D. the rate of inflation and total factor productivity.

C = $5 million + 0.9(1 − 0.1)Y I = $7 million G = $6 million NX = $1 million Based on the above data, the equilibrium level of GDP is A. $20.9 million. B. $23.5 million. C. $100 million. D. $111.8 million.

Debt-to-GDP ratio 172% 65% Average annual economic growth rate 4.7% 3.2% Average inflation rate 6.3% −0.3% Average nominal interest rate 2.5% 4.6% The above table contains data for the nations of Cordelia and Saldinia for 2012. Assume seigniorage is zero. Based on the data in the table, fiscal policy in Cordelia is ________ and the debt in Saldinia is ________. A. unsustainable; sustainable B. unsustainable; unsustainable C. sustainable; unsustainable D. sustainable; sustainable

Given a real interest rate, a decrease in taxes on saving ________ the after−tax real interest rate and ________ the incentive to save. A. decreases; increases B. decreases; reduces C. increases; increases D. increases; reduces

Household consumption as a percentage of GDP in the United States is A. less than that in other high−income countries. B. equal to that in middle−income countries. C. greater than the average for countries around the world. D. greater than that in low−income countries.

How will this affect Japan's deficit and debt in the short run? A. Both the deficit and the debt will remain unchanged. B. The deficit will rise but the debt will remain unchanged. C. Both the deficit and the debt will increase. D. The deficit will rise but the debt will fall.

Q19 Suppose the economy is initially above potential GDP, and the actual inflation rate is greater than the expected inflation rate. If the Fed wants to achieve the goal of price stability, this would be represented by a A. shift from IS1 to IS2. B. shift from MP2 to MP1. C. shift from MP1 to MP2. D. shift from IS2 to IS1.

How would your answer be different if the surcharge were permanent? A. Although the surcharge would be permanent, the change in income would be temporary. Consumption spending might increase slightly, causing the economy to overheat and causing inflation to accelerate. B. If the surcharge were permanent, it is less likely that spending would decrease by a considerable amount, and thus the policy would be greatly ineffective in preventing the economy from overheating and causing inflation to accelerate. C. 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. Your answer is correct. D. Although the surcharge would be permanent, the change in income would be temporary. Consumption spending might decrease slightly, but not enough to prevent the economy from overheating and causing inflation to accelerate.

If a firm expects that consumer preference for its product will increase in the future, this is best represented by a movement from A. point B to point A. B. point C to point A. C. point A to point B. D. point A to point C

If exchange rates are floating, an expansionary fiscal policy and the typical Fed response to the change in inflation caused by the fiscal policy would best be represented by a movement from ________ in panel (a) and a corresponding movement from ________ in panel (b). A. point A to point D; point X to point Y B. point B to point C; point Y to point X C. point D to point A; point Y to point X D. point C to point B; point X to point Y

If the MPC = 0.8, an increase in investment spending from $35 billion to $38 billion will increase real GDP by A. $3 billion. B. $3.75 billion. C. $15 billion. D. $24 billion

In making its decision to halt production of this factory, GE faced the trade-off between A. the interests of shareholders and the interests of the environment. B. profits and losses. C. small losses and large losses. D. None of the above

Productivity and long-run growth may increase if deficits are used to fund: A. consumption spending because deficits will reduce interest rates and make it easier to borrow. B. entitlement spending because more money can then be diverted toward consumption spending. C. the capital stock because increases in the capital stock lead to productivity increases along with long-run growth. D. tax breaks because the economy is stimulated and will lead to long-run growth.

Q21 During the housing market and financial crises of 2007 and 2008, the Fed increased the volume of discount loans in an attempt to A. stabilize prices and reduce the growing inflation rate. B. eliminate structural unemployment to lower the unemployment rate. C. reassure financial markets and promote financial market stability. D. attract foreign investment and stabilize interest rates.

Q22 An increase in the real interest rate in the United States will cause the dollar to ________ relative to other currencies and ________ net exports and real GDP. A. depreciate; reduce B. depreciate; increase C. appreciate; reduce D. appreciate; increase

Q5 Would you expect a consumption tax to have a different effect on consumer savings than an income tax? A. No. A higher consumption tax would tend to relatively reduce consumption and increase savings. A higher income tax would reduce disposable income and thus would also reduce consumption and increase savings. B. No. A higher consumption tax would tend to relatively reduce consumption as well as savings. A higher income tax would reduce disposable income and thus would also reduce consumption as well as savings. C. 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. D. Yes. A higher consumption tax would tend to reduce consumption as well as savings. However, a higher income tax would reduce disposable income and thus would relatively reduce consumption and increase savings.

Q8 One option the government has to restore funding to transfer programs such as Social Security is to raise or eliminate the income cap on Social Security payments. Other things equal, this would result in ________ in the opportunity cost of leisure and cause households to supply ________ labor. A. an increase; more B. a decrease; more C. a decrease; less D. an increase; less

Q9 Kocherlakota's reasoning may have been that A. low and stable inflation is incompatible with low and stable interest rates. B. a prolonged period of low interest rates would fuel higher inflation by stimulating aggregate expenditures. C. a lengthy commitment to low rates would preclude Fed action to tighten monetary policy in response to an increase in the inflation rate. D. All of the above are correct

Suppose that after a negative supply shock, the economy is at point X in the IS−MP model and at point B on the Phillips curve. If the Fed has a goal of price stability, the economy would ________ in the IS−MP model and ________ on the Phillips curve. A. move to point Z; move to point A B. remain at X; move to point A C. move to point Y; move to point C D. move to point Y; remain at point B

The Federal Reserve was established in 1913 to A. prevent inflation by decreasing the money supply. B. prevent bad loans by requiring banks to hold reserves. C. stop bank panics by acting as lender of last resort. D. stimulate the economy by increasing bank reserves.

The Vuvuza Corporation currently has 10 million shares of stock outstanding, the stock is trading for $42 per share, and its stock of capital goods is valued at $70 million. The Tobin's q value for the Vuvuza Corporation is A. 0.14. B. 1.7. C. 6. D. 7.

The estimates of the magnitude of government spending increase needed to have ended the 2007−2009 recession in the United States vary, based on the actual size of the expenditure multiplier, and range from A. $250 million to $1 billion. B. $50 billion to $250 billion. C. $400 billion to $2.5 trillion. D. $5 trillion to $15 trillion.

The growth rate of non-residential investment steadily fell from 8.0% in 2006 to -18.1% in 2009. Is this decline consistent with Tobin's q model of investment? A. Yes, the value of Tobin's q would have risen for most firms, a signal to reduce the size of capital stocks. B. No, the value of Tobin's q would have fallen for most firms, a signal to increase the size of capital stocks. C. Yes, the value of Tobin's q would have fallen for most firms, a signal to reduce the size of capital stocks. This is the correct answer. D. No, the value of Tobin's q would have risen for most firms, a signal to increase the size of capital stocks.

Using economic efficiency as the standard, most economic models imply that ________ when trying to reduce the debt. A. increasing taxes is preferable to reducing government expenditure. B. reducing government expenditure is no more effective than increasing taxes. C. reducing government expenditure is preferable to increasing taxes. D. increasing taxes is equally efficient as reducing government expenditure.

When economists characterize households and firms as forward looking, they mean that A. households and firms can only change the future so that must be their decision-making focus. B. past as well as present events are not relevant to decisions that households must make. C. households and firms make decisions about how much to consume and invest based in part on expectations about the future. Your answer is correct. D. All of the above

Which of the following fiscal policies might have been implemented earlier if the recession had been anticipated? A. increase taxes B. decrease transfer payments C. decrease taxes D. decrease government spending

q10 The goal of fiscal policy is to ________, and typically focuses on ________. A. balance the federal budget; tax rates and tax revenues B. stabilize the supply of money in the economy; price stability C. reduce the severity of economic fluctuations; employment and production D. eliminate balance of payments deficits or surpluses; exchange rate stability

q11 All else equal, an increase in corporate taxes would best be represented by a movement from A. point C to point B. B. point B to point C. C. point A to point B. D. point B to point A.

q13 If the primary goal of the government is full employment, was increasing the national sales tax in 1997 a wise policy? A. No, increasing the national sales tax decreases government purchases and increases unemployment. B. Yes, increasing the national sales tax increases employment due to increased government purchases. C. No, a fall in consumption due to the sales tax reduces real GDP further and increases unemployment. D. Yes, increasing the national sales tax increases real GDP and thus employment.

q15 Other things equal, the ________ the real interest rate, the ________ the potential pool of borrowers. A. lower; less qualified B. higher; less risky C. higher; more risky D. lower; smaller

q16 The White House's deficit commission has proposed several ways for the government to reduce the federal budget deficit, including freezing salaries of federal workers. Other things equal, freezing salaries of federal workers would tend to ________ the opportunity cost of leisure and ________ the supply of labor. A. decrease; increase B. increase; increase C. decrease; decrease D. increase; decrease

q17 A key reason that most people did not anticipate the severity of the recession of 2007−2009 is that A. they were more worried about rising inflation than about falling real GDP. B. they thought the Fed would reduce the target for the federal funds rate to a lower level. C. they failed to see the financial crisis coming. D. they did not believe that the federal government would actually bail out large financial institutions.

q21 Tobin's q is the ratio of: A. the market value of a firm to the user cost of its capital. B. the replacement cost of a firm's capital to the firm's market value. C. the market value of a firm to the replacement cost of its capital. D. the present value of a firm's capital to its replacement cost. Tobin's q links financial markets to investment by attributing the ability to assign market value and hence determine the profitability of additional capital goods (i.e., investment) to

q26 The expected real cost to a firm of using an additional unit of capital during a period of time is the A. marginal product of capital. B. marginal cost of capital. C. user cost of capital. D. opportunity cost of capital.

q29 In what ways are the short-run and long-run effects of this deficit reduction likely to differ? A. The short-run effects will be the same as the long-run effects, but smaller in magnitude. B. The short-run effects will be the exact opposite of the long-run effects. C. In the short-run both saving and investment are likely to fall while the impact on the real interest rate hinges on the response of the central bank. D. The effects in the short-run are indeterminate.

q3 An increase in expected output in the future is best represented by a movement from A. point C to point A. B. point B to point A. C. point A to point B. D. point A to point C.

q3 What is the difference between gross federal debt and gross federal debt held by the public? A. Gross federal debt is the total dollar value of all currency and bonds issued by the U.S. government while gross federal debt held by the public includes only the currency and bonds held outside the federal government. B. Gross federal debt held by the public is essentially the total dollar value of outstanding Treasury bonds held by the American public while gross federal debt also includes those bonds held by foreigners. C. Gross federal debt is essentially the total dollar value of outstanding Treasury bonds while gross federal debt held by the public includes only those bonds held outside the federal government. D. Gross federal debt held by the public is essentially the total dollar value of outstanding Treasury bonds while gross federal debt includes only those bonds held outside the federal government.

q30 If the federal government tries to make fiscal policy sustainable by increasing seigniorage, the economy would experience ________ and will result in ________ potential GDP. A. an increase in the growth rate of the money supply; higher B. a decrease in the growth rate of the money supply; lower C. an increase in inflation; lower D. a decrease in the real interest rate; higher

q8 If exchange rates are floating, fiscal policy designed to reduce the federal deficit and the typical Fed response to the change in inflation caused by the fiscal policy would best be represented by a movement from ________ in panel (a) and a corresponding movement from ________ in panel (b). A. point B to point C; point Y to point X B. point C to point B; point X to point Y C. point A to point D; point X to point Y D. point D to point A; point Y to point X

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 A. be diminished by real interest rate induced changes in consumption and investment. B. be enhanced by real interest rate induced changes in consumption and investment. C. be enhanced since the real interest rate doesn't change in a small open economy. D. be altered in an indeterminate way. Compared to its effectiveness in a large closed economy, fiscal policy in a large open economy is______.

C Diminished

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 A. give all the power to large cities and no power to those living in rural areas. B. concentrate power in the west. C. adequately represent the interests and needs of the country at the time. D. concentrate power in the hands of the officials running the central bank in Washington, DC. Some argue that Fed districts should change. Why might this change make sense? A. District banks should be redistributed to better recognize economic activity today. B. At the time of the creation of the Fed, the northeastern part of the country was relatively undeveloped. C. At the time of the creation of the Fed, most economic activity was centered in the western part of the country. D. The district covered by the San Francisco Fed is incredibly small.

C A

How is a monetary policy of maintaining low interest rates likely to affect the sustainability of fiscal policy? A. Monetary policy has bearing on the sustainability of fiscal policy which, instead, depends solely on the rates of government spending and taxation relative to GDP. B. A policy of low interest rates will discourage saving, increase the real interest rate, and therefore reduce the sustainability of fiscal policy. C. Low interest rates will reduce the interest payments the government must make on its debt and thus will increase the sustainability of fiscal policy. D. The Fed controls nominal interest rates rather than real interest rates, and it is only the latter that impact the sustainability of fiscal policy.

C A policy of low interest rates will reduce the interest payments the government must make on its debt and, assuming all else constant, will therefore increase the sustainability of fiscal policy

The budget deficit is: A. the total amount of Treasury bonds plus other securities issued by federal agencies. B. the difference between government purchases of goods and services plus transfer payments. C. the difference between government expenditure and tax revenue. D. the total amount of bonds and other debt that a government has outstanding. The primary budget deficit is: A. the difference between government purchases of goods and services minus transfer payments. B. the total amount of Treasury bonds plus other securities issued by federal agencies. C. the difference between government purchases of goods and services minus transfer payments minus tax revenue. D. the difference between government purchases of goods and services plus transfer payments minus tax revenue. Using the government's budget constraint, the budget deficit is expressed as: A. ΔBt−Gt+ΔMBt+Tt=TRt−iBt−1. B. Gt+iBt−1=TRt+Tt+ΔBt+ΔMBt. C. Gt+TRt−Tt+itBt−1=ΔBt+ΔMBt. D. Gt+TRt=Tt+ΔBt+ΔMBt+iBt−1.

C D C

q14 The "fiscal challenges" faced by the United States in 2012 were evidenced by its A. All of the above. B. inability to meet interest payments on the national debt. C. large budget deficit. D. difficulty in selling Treasury bonds to investors. Bernanke's admonition that inadvisable actions not be taken given the "fragility of the recovery" likely reflected his worry that Congress might A. pursue a too contractionary fiscal policy. B. initiate tax hikes that could reduce consumption and undermine investment. C. impose a sharp reduction in federal spending. D. All of the above. E. A and C only.

C / D

Q16 The Federal Reserve System consists of A. a main central bank located in New York, with 11 additional branch banks located across the country. B. 12 independent banks in the 12 Federal Reserve districts, each of which are owned and controlled by the federal government. C. 12 Federal Reserve Banks, each of which have a degree of independence from the U.S. government. D. one Federal Reserve Bank and 12 Federal Reserve districts, each with one branch bank.

C??

According to the life−cycle hypothesis, A. the income earned in a lifetime will be evenly divided between consumption and saving. B. the present value of lifetime consumption equals the future value of lifetime income. C. household consumption depends on income that households expect to receive each year, and financial markets are used to smooth consumption in response to changes in transitory income. D. households use financial markets to to transfer funds from periods when income is high to to periods when income is low.

Are the calculations for standard deviation consistent with the permanent-income hypothesis and the life-cycle hypothesis? A. No, because consumption has a higher standard deviation and is thus more volatile than real GDP, a measure of income. B. No, because consumption has a lower standard deviation and is thus more volatile than real GDP, a measure of income. C. Yes, because real GDP, a measure of income, has a lower standard deviation and is thus more volatile than consumption. D. Yes, because real GDP, a measure of income, has a higher standard deviation and is thus more volatile than consumption.

As it relates to uncertainty and irreversible investment, GE's decision to stop production shows. A. the need for government to reduce uncertainty but also to force firms to follow through with projects. B. that uncertainty does hurt investment but proves that investment projects are reversible. C. that uncertainty is omnipresent and that firms can easily reverse projects if they choose to. D. that uncertainty does hurt investment and that it is difficult but not impossible to retool fixed capital

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. A. Agree. Automatic stabilizers are sufficient because they have been designed with consideration for all fluctuations in economic activity. Discretionary fiscal policy is not necessary and will be eliminated in the next few years. B. Agree. Automatic stabilizers are sufficient for all fluctuations in economic activity. Discretionary fiscal policy only makes automatic stabilizers more inefficient. C. Disagree. Automatic stabilizers are hardly sufficient for minor fluctuations in economic activity. Discretionary fiscal policies are always necessary to remedy any fluctuations in economic activity. D. 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: "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. A. Agree. Not only do fiscal and monetary policies both involve the buying and selling of U.S. Treasury securities on the secondary market, they both have the same goals as well (i.e., to keep unemployment levels low and prices stable). B. Disagree. Although fiscal and monetary policies have the same goals, monetary policy focuses more on keeping unemployment levels low and fiscal policy focuses more on keeping prices stable. C. Agree. Although fiscal and monetary policies have different goals, they both involve the buying and selling of U.S. Treasury securities on the secondary market. D. 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.

Credit rationing and the financial accelerator are responsible, in part, for A. the significant volatility of real personal consumption. B. smoothing real personal consumption during expansions. C. smoothing gross private investment during severe recessions. D. the significant volatility of gross private investment.

Cuts in individual income taxes affect potential GDP by A. increasing saving, the funds that make more investment possible. B. raising the return to entrepreneurship and thus encouraging the formation of new businesses. C. increasing the quantity of labor supplied by households. D. All of the above. E. A and B only

Fiscal policy refers to changes in A. state and local taxes and purchases that are intended to achieve state and local policy objectives. B. the money supply and interest rates that are intended to achieve macroeconomic policy objectives. C. federal taxes, purchases, and transfer payments that are intended to achieve environmental and national defense policy objectives. D. federal taxes, purchases, and transfer payments that are intended to achieve macroeconomic policy objectives.

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 A. increase government purchases, thereby decreasing demand and moving real GDP closer to potential GDP. B. decrease taxes, thereby decreasing demand and moving real GDP closer to potential GDP. C. decrease government purchases, thereby increasing demand and moving real GDP closer to potential GDP. D. increase taxes, thereby decreasing demand and moving real GDP closer to potential GDP.

Holding everything else constant, if the nominal interest rate decreases, the interest paid on the debt will ________ the debt−to−GDP ratio, and nominal GDP growth will ________ the debt−to−GDP ratio. A. decreases; increases B. increases; decreases C. increases; increases D. decreases; decreases

How do the uncertainties involved in policymaking limit the use of fiscal policy? It may be difficult to: A. effectively use fiscal policy because its effects may be unknown because of model uncertainty. B. correctly gauge the effects of fiscal policy if the size of the multiplier is uncertain. C. effectively use fiscal policy because its effects may be delayed or incorrect because of lags and errors in forecasts. D. all of the above.

How does the accuracy of economic forecasts present a problem for fiscal policy? A. Since fiscal policy has long implementation lags, the accuracy of economic forecasts is not as critical for fiscal policy as it is for monetary policy. B. Inaccurate economic forecasts affect only the effectiveness of monetary policy. Fiscal policy is not dependent on the accuracy of economic forecasts. C. Since fiscal policy has long impact lags, the accuracy of economic forecasts is not as critical for fiscal policy because it can be revised continuously. D. Inaccurate economic forecasts imply that fiscal policy cannot be implemented optimally.

If the federal government tries to make fiscal policy sustainable by decreasing expenditure on government capital goods, private capital goods will become ________ productive, and this will result in ________ potential GDP. A. more; higher B. more; lower C. less; higher D. less; lower

John Maynard Keynes described investors as having "animal spirits," meaning that investors often make decisions based on emotion as much as on more objective factors. These "animal spirits" may explain the volatility of investment relative to consumption because they: A. are subject to sudden reversals. B. exhibit significant instability. C. generate a sort of herd mentality. D. all of the above.

Maryanne expects to work for another 30 years and expects to live another 10 years after she retires. If Maryanne completely smooths consumption over her lifetime, for every $1,000 increase in disposable income, she will use ________ for consumption each year. A. $100 B. $333 C. $667 D. $750

Of the three three primary tax sources of revenue for the U.S. federal government, which of the following has displayed no long−term trend as a percentage of GDP since 1953? A. social insurance taxes B. sales and excise taxes C. corporate income taxes D. individual income taxes

One of the provisions of the second stimulus bill increased the amount of investment spending that firms were allowed to depreciate for tax purposes from 50% to 100%. If and when the government changes the depreciation allowance back to its original amount, the desired capital stock will ________ and investment spending will ________. A. decrease; increase B. increase; decrease C. increase; increase D. decrease; decrease

One of the provisions of the second stimulus bill increased the amount of investment spending that firms were allowed to depreciate for tax purposes from 50% to 100%. This is just one of over 100 temporary tax provisions affecting firms in the United States. Temporary tax breaks such as the increase in depreciation will tend to A. increase investment expenditures because the tax breaks will entice firms to leave other countries and invest in the United States. B. increase investment expenditures in both the short run and the long run, since investment is irreversible. C. have little impact on current investment expenditures since the tax breaks are temporary. D. increase investment expenditures in the short run but also increase the uncertainty and volatility of investment since the tax breaks are temporary.

Q11 If the federal government tries to make fiscal policy sustainable by increasing taxes on capital income, the after−tax return to capital goods will ________ and will result in ________ potential GDP. A. decrease; higher B. increase; lower C. decrease; higher D. decrease; lower

Q17 If exchange rates are floating, the Fed decreasing its target inflation rate would best be represented by a movement from ________ in panel (a) and a corresponding movement from ________ in panel (b). A. point C to point A; point X to point Y B. point A to point B; point X to point Y C. point B to point D; point Y to point X D. point D to point C; point Y to point X

Q21 Assume the economy is in equilibrium at Y1, where real GDP equals potential GDP. The economy experiences a negative demand shock, and the Fed responds by decreasing real interest rates to bring real GDP and inflation back to their original levels. Other things equal, the Fed's response to the negative demand shock is best represented by a movement from A. point B to point D. B. point B to point A. C. point C to point D. D. point C to point A.

Q5 The Fed conducts open market operations with the primary goal of A. adjusting reserve requirements. B. affecting the discount rate. C. stabilizing the foreign−exchange market. D. affecting the federal funds rate

Ricardian equivalence is the theory that: A. backward-looking households fully anticipate the taxes implied by government spending, so that changes in lump-sum taxes have no effect on the economy. B. forward-looking households fully anticipate the taxes implied by government spending, so that changes in lump-sum taxes have a very large effect on the economy. C. forward-looking households do not anticipate the taxes implied by government spending, so that changes in lump-sum taxes have only a small effect on the economy. D. forward-looking households fully anticipate the taxes implied by government spending, so that changes in lump-sum taxes have no effect on the economy.

Some economists and policymakers criticized the Fed for taking too much time understanding and identifying the problems in financial markets which led to the financial crisis of 2007−2009. This criticism best describes the ________ as a limitation of monetary policy. A. asymmetry lag B. impact lag C. implementation lag D. recognition lag

Some economists are skeptical about the validity of Ricardian equivalence because it assumes that: A. financial markets work so well households can borrow or save as much as they would like at current interest rates. B. households are forward looking in an extreme sense. C. changes in taxes may affect household behavior in a variety of ways. D. A and B only. Your answer is correct. E. all of the above.

Suppose the economy is initially at full employment with real GDP equal to potential GDP, and the expected inflation rate equal to the actual inflation rate. If the economy then experiences a negative demand shock, the shock will cause a A. shift from MP2 to MP1. B. shift from IS1 to IS2. C. shift from MP1 to MP2. D. shift from IS2 to IS1.

The deliberate change in taxes, transfer payments, or government expenditures to achieve macroeconomic policy objectives is known as A. expansionary fiscal policy. B. automatic stabilizers. C. contractionary fiscal policy. D. discretionary fiscal policy.

The goals of monetary policy tend to be interrelated. For example, when the Fed pursues the goal of ________, this helps to achieve the goal of ________ . A. high employment; price stability B. rapid economic growth; low inflation C. interest rate stability; a balanced budget D. interest rate stability; financial market stability

The increase in consumer wealth resulting from the housing bubble is best represented by a movement from A. point B to point D. B. point A to point B. C. point D to point C. D. point C to point A.

The government's budget constraint is best represented by which of the following equations? A. Government purchases of goods and services + Newly issued government bonds + Interest payments on existing debt = Transfer payments + Tax revenue + Seigniorage B. Tax revenue − Transfer payments = Government purchases of goods and services + Interest payments on existing debt + Newly issued government bonds + Seigniorage C. Government purchases of goods and services + Transfer payments + Tax revenue = Interest payments on existing debt + Newly issued government bonds + Seigniorage D. Government purchases of goods and services + Transfer payments + Interest payments on existing debt = Tax revenue + Newly issued government bonds + Seigniorage

The government's budget deficit is financed by some combination of all of the following except A. private saving. B. reduced private investment. C. net exports. D. transfer payments.

Timing is important when conducting monetary policy because A. shocks by their nature are unpredictable. B. policy changes do not have instantaneous effects. C. the factors determining real GDP can change quickly. D. All of the above. E. A and C only.

Uncertainty about U.S. taxes might lead firms to reduce investment since A. investment projects are irreversible and can be delayed. B. uncertainty makes it more difficult to assess the future profitability of projects. C. uncertainty raises the benefit to firms of waiting to acquire additional information. D. All of the above. E. A and C only.

Under a fixed exchange rate system, an expansionary fiscal policy is A. equally effective in an open economy and in a closed economy. B. marginally effective in an open economy and completely ineffective in a closed economy. C. less effective in an open economy than in a closed economy. D. more effective in an open economy than in a closed economy.

Under a fixed exchange rate system, if the real interest rate is at its lower bound and the central bank implements expansionary policy, real GDP will ________ and the output gap will ________. A. increase; increase B. increase; decrease C. decrease; decrease D. not change; not change

q13 Debt-to-GDP ratio 172% 65% Average annual economic growth rate 4.7% 3.2% Average inflation rate 6.3% −0.3% Average nominal interest rate 2.5% 4.6% The above table contains data for the nations of Cordelia and Saldinia for 2012. Assume seigniorage is zero. Based on the data in the table, the primary budget deficit necessary to make fiscal policy sustainable in Cordelia is ________ of GDP. A. −1.5% B. 0% C. 1.5% D. 14.6%

q17 The government's budget deficit is best represented by which of the following equations? A. Budget deficit = Government purchases of goods and services + Transfer payments + Tax revenue+ Newly issued government bonds B. Budget deficit = Government purchases of goods and services + Interest payments on existing debt + Newly issued government bonds + Seigniorage + Transfer payments − Tax revenue C. Budget deficit = Government purchases of goods and services + Transfer payments + Interest payments on existing debt + Seigniorage D. Budget deficit = Government purchases of goods and services + Transfer payments − Tax revenue + Interest payments on existing debt

q18 Assume that seigniorage and the government's primary deficit are both zero. If the real interest rate is greater than the growth rate of real GDP, the debt−to−GDP ratio A. will either decrease or not change. B. will decrease. C. will either increase or not change. D. will increase.

q2 Hector's wealth is zero, he expects to work for another 45 years at a constant salary of $80,000 and live for another 60 years. Yearly taxes are $20,000, and Hector received a one−time tax rebate of $5,000 during his first year of work. If Hector completely smooths consumption over his lifetime, he will save ________ of the tax rebate during his first year of work. A. $1,250.00 B. $2,666.67 C. $3,750.00 D. $4,916.67

q21 Economists who are concerned with the effect of fiscal policy on the ability of households and firms to borrow to finance consumption will focus on ________, and economists who want to know whether the government's fiscal policy is sustainable will focus on ________. A. the federal debt; yearly budget deficits B. the federal debt; both the federal debt and yearly budget deficits C. yearly budget deficits; the federal debt D. yearly budget deficits; both the federal debt and yearly budget deficits

q21 Under a fixed exchange rate system, an expansionary fiscal policy such as an increase in government expenditures will lead to a(n) ________ in real GDP and a ________ inflation rate. A. increase; lower B. decrease; higher C. decrease; lower D. increase; higher

q22 If exchange rates are floating, an expansionary fiscal policy in the United States will cause the dollar to ________ relative to other currencies and cause net capital outflows to ________ . A. appreciate; increase B. depreciate; decrease C. depreciate; increase D. appreciate; decrease

q22 Under a fixed exchange rate system, a currency devaluation ________ the nominal exchange rate and will ________ net exports. A. decreases; decrease B. increases; decrease C. increases; increase D. decreases; increase

q23 One of the provisions of the second stimulus bill increased the amount of investment spending that firms were allowed to depreciate for tax purposes from 50% to 100%. If and when the government changes the depreciation allowance back to its original amount, this should cause the A. uc curve to shift down. B. MPKe curve to shift to the left. C. MPKe curve to shift to the right. D. uc curve to shift up.

q27 Table 13.1 Federal government expenditures on goods and services $455 million Transfer payments $85 million Tax revenue $405 million Interest payment on existing debt $60 million Seigniorage $10 million Newly−issued government bonds $185 million The data in the table represents budget figures for the nation of Arugula for 2011. Refer to Table 13.1. The uses of government funds for Arugula in 2011 total A. $135 million. B. $195 million. C. $380 million. D. $600 million.

q28 Suppose the government cuts taxes by $300 million dollars this year and must pay off its debt next year by increasing taxes by $300 million. According to Ricardian equivalence, consumption spending will ________ this year and ________ next year, all else equal. A. increase by $300 million; decrease by $300 million B. increase by $150 million; decrease by $150 million C. increase by $300 million; not change D. not change; not change

q28 Which of the following is true about the relative volatility of investment and consumption? A. The growth rates of investment and consumption are equally volatile. B. The growth rate of consumption is much more volatile than the growth rate of investment. C. The growth rate of consumption is more volatile during expansions while the growth rate investment is more volatile during recessions. D. The growth rate of investment is much more volatile than the growth rate of consumption.

q6 How is discretionary policy different from an automatic stabilizer? A. Automatic stabilizers are policies that are implemented by decision, such as the American Recovery and Reinvestment Act of 2009. Discretionary policy is implemented in response to the business cycle without explicit implementation, such as unemployment insurance, and usually has a much shorter response lag. B. Automatic stabilizers are policies that are implemented by decision, such as the American Recovery and Reinvestment Act of 2009, and usually have a much shorter response lag. Discretionary policy is implemented in response to the business cycle without explicit implementation, such as unemployment insurance. C. Discretionary policy is implemented by decision, such as the American Recovery and Reinvestment Act of 2009, and usually has a much shorter response lag. Automatic stabilizers are policies that act in response to the business cycle without explicit implementation, such as proportional income taxes. D. 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.

Compared to its effectiveness in a closed economy, fiscal policy in an open economy with a floating exchange rate is A. less effective since the increase in income generated by an expansionary policy will not be exclusively used to purchase domestically produced output. B. more effective since an expansionary policy's impact on the real interest rate results in a currency depreciation and consequent rise in net exports that partially offsets the interest rate driven declines in consumption and investment. C. equally effective; only in an open economy with a fixed exchange rate is fiscal policy's effectiveness diminished. D. 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.

D Compared to its effectiveness in a closed economy, fiscal policy in an open economy with a floating exchange rate is less effective. This happens since the 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. In a closed economy the only offsets to an expansionary fiscal policy come from the interest rate induced declines in consumption and investment.

q27 Suppose you are paid a wage of $50 per hour. if your marginal income tax rate is 20%, then for every additional hour you work, your after−tax wage is: A. $10. B. $20. C. $25. D. $40

D after tax wage rate = (1-20%) x 50

Bernanke's use of the phrase "monetary accommodation" refers to actions by the Fed to A. ensure that deflation did not happen. B. pay for the unprecedented fiscal stimulus enacted during the '07-'09 recession. C. bail out large financial institutions so that their intermediation function was not debilitated. D. promote recovery and growth through the implementation of expansionary monetary policy What does Bernanke mean by "easing financial conditions"? A. expanding the availability of credit. B. lowering borrowing costs. C. improving the functioning of financial markets. D. All of the above 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 ______. A. investment; consumption; net exports. B. consumption; investment; trade. C. consumption; saving; investment.

D D A

Q4 Why is the federal funds rate considered important if no households or firms (other than banks) can borrow or lend at this rate? A. It is a rate that the Fed can establish either as a ceiling or floor for all other interest rates in the economy. B. The Fed administratively sets this rate and it directly impacts household and business expectations. C. The federal funds rate determines the ability of the federal government to finance its budget deficits. D. It is a rate over which the Fed exerts considerable control and which directly influences the rates that affect aggregate expenditures. If the Fed wished to reduce the federal funds rate, it would A. drain reserves from the banking system. B. conduct open market purchases. C. conduct open market sales. D. "jawbone" banks into reducing the rates they charge one another.

D / B

Q7 Quantitative easing is a central bank policy that attempts to: A. stimulate the economy by selling long-term securities. B. stimulate the economy by buying short-term securities. C. contract the economy by selling long-term securities. D. stimulate the economy by buying long-term securities. Under what circumstances would a central bank use quantitative easing to stimulate the economy? A. When the federal funds rate is very high and the Fed wants to remove reserves from the banking system. B. When the federal funds rate is at or nearly at zero and the Fed still wants to remove reserves from the banking system. C. When the federal funds rate is very high, but the Fed still wants to add reserves to the banking system. D. When the federal funds rate is at or nearly at zero and the Fed still wants to add reserves to the banking system.

D / D

What is a "competitiveness gap"? A. A divergence between the inflation rates among trading partners. B. A divergence between production costs among trading partners. C. A divergence between rates of change in productivity among trading partners. D. All of the above are accurate ways to describe a competitiveness gap. E. A and B are correct. Was Greece's competitiveness gap connected to its use of the euro? A. In part, yes, since Greece's participation in the monetary union prevented it from using monetary policy to reduce domestic inflation. B. No. The competitiveness gap experienced by Greece can be wholly attributed to poor choices by the people of Greece.

D. A competitiveness gap is signaled by a divergence between the inflation rates among trading partners, and its underlying cause is a divergence between their production costs which, in turn, is typically set into motion by differing rates of change in productivity. OK A

Q25 The graph to the right shows the goods market in equilibrium at output Y1. Then the aggregate expenditure function shifts to AE2. What could have caused this shift in aggregate expenditure? A. A decrease in consumption. B. An increase in government purchases. C. A decrease in net exports. D. A decrease in investment. Carefully explain the process by which the economy will adjust to the new equilibrium. At the original level of output (Y1), AE2 will be less than GDP. Thus, inventories will unexpectedly fall, which will spur an increase in GDP and employment until a new equilibrium is reached.

D; less than; fall; an increase

As a consequence of a rise in the real interest rate, the substitution effect indicates that individuals will_______ current consumption. with respect to the income effect associated with a rise in the real interest rate, the direction of the income effect depends on whether the individual is a new barrower or lender. if the individual is a net lender, the income effect will cause current consumption to

Decrease An Increase

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

Decrease / Increase / Decrease

The budget deficit projections in this chapter include net interest payments on the debt, the size of which depends on interest rates. What is likely to happen to interest rates and interest payments if the size of the deficit continues to increase? According to the loanable funds model, as the budget deficit increases, the supply of loanable funds ____ due to the _____ in government borrowing. This _____ the real interest rate, investment spending, and ____ debt payments.

Decreases / increases / increases / decrease / increase / increase

The consumption theories of Friedman and Modigliani are similar in that both assume: A. the goal of saving is to provide for future consumption. B. households prefer to smooth consumption over time. C. households use financial markets to transfer funds between time periods. D. A and C only. E. all of the above.

q14 Which of the following is not a policy option for making fiscal policy sustainable? A. Decreasing expenditure on government capital goods. B. Decreasing expenditure on transfer programs. C. Increasing seigniorage by increasing the growth rate of the money supply. D. Increasing taxes on capital income. E. Decreasing taxes on labor income.

Some economists were concerned that the financial crisis of 2007−2009 would lead to problems with deflation. The Federal Reserve Bank of San Francisco's Economic Letter stated: "A popular version of the well-known Phillips curve model of inflation predicts that we are on the cusp of a deflationary spiral in which prices will fall at ever-increasing rates over the next several years." Source: "The Risk of Deflation," FRBSF Economic Letter, March 27, 2009. How might a deflationary spiral occur in the Phillips curve model? Falling prices can cause the expectation that prices will ▼ rise/remain unchanged/fall further. This in turn shifts the Phillips curve toward ▼ lower/higher inflation rates, and as prices ▼ fall/rise, inflation expectations ▼ rise/fall again, and so forth. A deflationary spiral did not happen because inflation expectations______

Fall further, lower, fall, fall Falling prices can cause the expectation that prices will fall further. This in turn shifts the Phillips curve toward lower inflation rates, and as prices fall, inflation expectations fall again, and so forth. OK Were well-anchored

Tobin's q links financial markets to investment by attributing the ability to assign market value and hence determine the profitability of additional capital goods ( I.e. Investments) to _____.

Financial market participants

the government decreases personal income taxes. As a result consumption will____

Increase

For each of the following scenarios, determine the expected effect on consumption. Housing prices rise. As a result, consumption will____

Increase When housing prices rise,household wealth also rises. With higher wealth, households respond by increasing consumption.

a reduction in corporate tax rates will, in the long-run, cause labor productivity to ____ and the real GDP to ____.

Increase / increase

In March 2012, Spain announced budget cuts of €27 billion in an effort to reduce its budget deficit. A CNN article quotes Treasury Minister Cristobal Montoro: "We are in a critical situation. This is the most austere budget in our democracy." The budget proposal included spending cuts for government agencies, infrastructure, defense, and education, as well as reduced aid for immigrants. The proposal also included increases in business taxes and a salary freeze and extended work hours for civil servants. Source: Al Goodman, "Spain Announces 27 Billion Euros in Budget Cuts," CNN, March 30, 2012. The likely effect of these actions will be to ▼ decreasenot affectincrease saving, ▼ increasenot affectdecrease investment, and ▼ raiselowernot affect the real interest rate.

Increase / increase / lower

How might consumption be affected by rising interest rates due to a government deficit? Will all types of consumption be affected equally? Higher interest rates make it ___ to borrow to finance spending and thus ____ consumption. Purchases of ____ will be affected more significantly. Are rising interest rates currently a significant concern in the United States? A. Current debt is not causing much pressure on interest rates and is therefore not a cause for significant concern yet in the United States, because U.S. debt in absolute terms is quite low. B. Current debt is causing too much pressure on interest rates and is therefore a cause for significant concern in the United States, because it is increasing consumption spending and hurting the short-run growth of the economy. C. Current debt is causing too much pressure on interest rates and is therefore a cause for significant concern in the United States, because it is increasing investment spending and impeding the long-run growth of the economy. D. Current debt is not causing much pressure on interest rates and is therefore not a cause for significant concern yet in the United States, because the U.S. debt-to-GDP ratio is fairly reasonable

More expensive / reduce / durable goods D

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 ▼ recognition lags implementation lags are identical for monetary and fiscal policy, ▼ implementation lags impact lags recognition lags 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, what will be the effect on the debt-to-GDP ratio? The monetary base increases, but there is no change in the rate of inflation. The debt-to-GDP ratio will_____

Remain the same

It is easier for a country to undervalue a currency than to overvalue it because overvaluing a currency requires________. 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: A. not affect its imports, but decrease both its exports and purchases of U.S. Treasury securities. B. increase its imports, decrease its exports, but not affect its purchases of U.S. Treasury securities. C. increase its imports and decrease both its exports and purchases of U.S. Treasury securities. D. decrease its imports and increase both its exports and purchases of U.S. Treasury securities.

Selling foreign exchange reserves for the domestic currency US dollar C

The slow pace of economic recovery had Fed officials considering additional stimulus measures in mid-2012, but as a Wall Street Journal article reported, "The Fed is once again finding itself in a difficult spot. Officials aren't yet sure if the recent slowdown in growth is transitory or permanent." Source: Jon Hilsenrath and Kristina Peterson, "Fed Weighs More Stimulus," Wall Street Journal, July 11, 2012. It is important for the Fed to understand whether an economic slowdown is transitory or permanent when considering stimulus measures since the latter situation would likely call for ▼ significantlittle or no change in the stance of monetary policy while the former necessitates the opposite. By misreading the situation the Fed could create additional problems for the economy since ill-advised policies A. cannot be reversed. B. do not generate corrective feedback. C. may exacerbate real problems or create problems where none exists. D. All of the above.

Significant / C

Q26 If firms find it difficult to raise prices, why might the result be a flatter Phillips curve? A. If firms can easily raise prices, then unemployment can fall without a significant rise in inflation, and the Phillips curve is relatively flat. B. If firms cannot easily raise prices, then unemployment can fall without a significant rise in inflation, and the Phillips curve is relatively flat. C. If firms can easily raise prices, then unemployment cannot fall without a significant rise in inflation, and the Phillips curve is relatively flat. D. If firms cannot easily raise prices, then unemployment cannot fall without a significant rise in inflation, and the Phillips curve is relatively flat A given increase in demand would result in a relatively _______ increase in inflation. With a relatively flat Phillips curve, it would require ______ in unemployment to significantly reduce inflation.

b Smaller larger increase

Tobins q links financial markets to investment by attributing the ability to assign market value and hence determine the profitability of addition capital good (I.e investment) to _____.

financial market participants

Q8 Negative supply shocks can have a tendency to ________ costs of production and ________ the inflation rate. A. increase; increase B. decrease; decrease C. decrease; increase D. increase; decrease

Assume the economy is in equilibrium at Y1 = 0. Other things equal, a negative demand shock such as the financial crisis of 2007−2009 would result in a movement from point ________ to point ________. A. A;D B. B;A C. A;B D. A;C

Over which interest rates does the central bank have the most control? A. short-term nominal interest rates B. short-term real interest rates C. long-term nominal interest rates D. long-term real interest rates

Q16: Assume the economy is initially at equilibrium at potential GDP of $250 billion. If the MPC = 0.50 and the difference between AE1 and AE2 represents a $75 billion decrease in planned investment spending, real GDP at Y2 will be equal to A. $100 billion. B. $125 billion. C. $175 billion. D. $212.5 billion.

Q20 Under a fixed exchange rate system, the upward−sloping portion of the MP curve reflects the fact that a central bank ________, and the horizontal portion of the MP curve reflects the fact that a central bank ________. A. can always supply more domestic currency; is limited in meeting the demand for foreign currency B. is limited in meeting the demand for domestic currency; can always meet the demand for foreign currency C. can always supply more domestic currency; can always meet the demand for foreign currency D. is limited in meeting the demand for domestic currency; is limited in meeting the demand for foreign currency

The financial market shock which occurred during the recession of 2007−2009 increased the default−risk premium, and the housing shock which occurred during the recession of 2007−2009 reduced wealth and residential construction. These two events would result in A. a downward shift of the Phillips curve. B. a movement up along the Phillips curve. C. a movement down along the Phillips curve. D. an upward shift of the Phillips curve

q10 The housing shock which occurred during the recession of 2007−2009 reduced wealth and residential construction, causing the A. IS curve to shift to the left. B. MP curve to shift down. C. MP curve to shift up. D. IS curve to shift to the right.

q15 A Phillips curve shows the short−run relationship between A. the unemployment rate and the inflation rate. B. the nominal interest rate and the real interest rate. C. tax rates and tax revenues. D. potential GDP and real GDP.

q30 Assume the long−term nominal interest rate is 7% and the expected inflation rate is 3%. If the Fed increases the money supply and as a result, the expected inflation rate increases to 5%, then based on the Fisher effect, the long−term real interest rate will A. remain at 4%. B. increase to 9%. C. fall to 3%. D. increase to 6%.

q3: Given that an economy is initially in equilibrium, how does a shift to the left of the IS curve change real GDP and the real interest rate? A. Real GDP decreases and the real interest rate does not change. B. Real GDP decreases and the real interest rate increases. C. Real GDP decreases and the real interest rate decreases. D. Real GDP does not change and the real interest rate decreases.

Q4: During the 1960s, a major restructuring of the tax code decreased taxes for most people. Also during these years, the war in Vietnam required increased government purchases. Which components of real GDP were affected by these events? (Check all that apply.) A. government spending B. investment C. consumption D. net exports How did these events affect the goods market? A. Aggregate expenditure fell, causing equilibrium real GDP to fall. B. Aggregate expenditure rose, causing equilibrium real GDP to fall. C. Aggregate expenditure rose, causing equilibrium real GDP to rise. D. Aggregate expenditure fell, causing equilibrium real GDP to rise. Would these events affect the IS curve? Briefly explain. A. The IS curve would shift to the right. B. The IS curve would remain unchanged. C. The IS curve would shift to the left. D. There would be a movement along the IS curve

A / C C A

An increase in the real interest rate outside of the United States will cause net capital outflows to ________ and cause the dollar to ________ relative to other currencies. A. increase; appreciate B. increase; depreciate C. decrease; appreciate D. decrease; depreciate

If the long−term real interest rate is 5.1%, the term structure effect is 2.0%, the default−risk premium is 1.7%, and the expected rate of inflation is 3.3%, the short−term nominal interest rate will be A. −1.9%. B. 4.7%. C. 5.5%. D. 12.1%.

Q8: A decrease in the real interest rate, with no other changes that affect aggregate expenditure, is best represented by ________ in panel (a) and ________ in panel (b). A. a shift from AE3 to AE2; a shift from IS2 to IS1 B. a shift from AE1 to AE2; a movement from point A to point B C. a shift from AE1 to AE3; a movement from point A to point C D. a shift from AE2 to AE3; a shift from IS1 to IS2

This statement is incorrect because although the financial crisis might have been less severe if the risk premium had not increased, there would still have been A. the decrease in real estate values, which affected the MP curve, and the surge in oil prices, which affected both the Phillips curve and the IS curve. B. the decrease in real estate values, which affected the IS curve, and the surge in oil prices, which affected only the Phillips curve. Your answer is correct. C. the decrease in real estate values, which affected the IS curve, and the surge in oil prices, which affected both the Phillips curve and the IS curve. D. the increase in real estate values, which affected the MP curve, and the surge in oil prices, which affected the Phillips curve.

Under a fixed exchange rate system, if the government decides to increase the fixed exchange rate, net exports will ________ and the IS curve will shift to the ________. A. increase; right B. decrease; left C. increase; left D. decrease; right

Which of the following equations best represents the long-term real interest rate? The long-term real interest rate = A. the long-term nominal interest rate + the term structure effect + the default-risk premium − the expected rate of inflation B. the short-term nominal interest rate + the term structure effect + the default-risk premium − the expected rate of inflation C. the short-term nominal interest rate − the term structure effect − the default-risk premium + the expected rate of inflation D. the short-term real interest rate + the term structure effect + the default-risk premium + the expected rate of inflation

With adaptive expectations, the expected inflation rate for the current year ________ the actual inflation rate for the previous year. A. is greater than B. is equal to C. is unrelated to D. is less than

q12 Was the output gap larger or smaller (in absolute value) in 2012 than it would have been if the CBO's 2007 forecast had been correct? A. Larger, since potential output would have exceeded actual output by less had the 2007 forecast been correct. B. Smaller, since output would have been even farther below potential had the 2007 forecast been correct. If the CBO's 2007 forecast had been correct, is it likely that the inflation rate in 2012 would have been higher or lower than it actually was? A. Lower, since a larger negative persistent output gap translates into even more slack in resource markets and hence less pressure on costs and prices. B. Higher, since a greater deviation between actual and potential output corresponds to less slack in resource markets and therefore more pressure on costs and prices.

B A

What causes a movement along the Phillips curve with the output gap on the horizontal axis? A. Supply shocks. B. Demand shocks. C. Changes in expected inflation. D. Both A and B are correct. What causes the Phillips curve to shift? A. Changes in expected inflation. B. Supply shocks. C. Changes in the relationship between the output gap and cyclical unemployment. D. All of the above. E. Both A and B are correct.

B. Demand shocks to the economy produce movements along the Phillips curve. A positive demand shock, such as an increase in spending on nonresidential fixed investment, creates movement up along the Phillips curve. A negative demand shock, such as a decrease in federal spending on the military, creates movement down along the Phillips curve. E. Economists have concluded that the position of the Phillips curve can shift over time in response to supply shocks, such as an increase in the price of oil, and to changes in the expected inflation rate.

A shift from MP1 to MP3 will occur if A. the Fed increases its target for the short−term nominal interest rate. B. investors increase the short−term interest they expect in the future. C. the default−risk premium decreases. Your answer is correct. D. the term structure effect increases

Among the countries that use the euro, the real exchange rate ________ and the nominal exchange rate ________. A. is fixed; can change B. is fixed; is fixed C. can change; is fixed D. can change; can change

An increase in the price level causes a ________ the IS curve and a ________ the aggregate demand curve. A. shift to the right of; movement down along B. shift to the left of; movement up along C. movement down along; movement down along D. movement up along; movement down along

An increase in the real interest rate in the United States will cause net capital outflows to ________ and cause the dollar to ________ relative to other currencies. A. decrease; depreciate B. increase; depreciate C. decrease; appreciate D. increase; appreciate

Assume the economy is in equilibrium at Y1 = 0. Other things equal, an unexpected large increase in the price of oil will result in a movement from point ________ to point ________. A. A;C B. A;B C. B;A D. A;D

Assume the economy is in equilibrium at Y1, where real GDP equals potential GDP. The economy experiences a positive demand shock, and the Fed responds by increasing real interest rates to bring real GDP and inflation back to their original levels. Other things equal, the Fed's response following the positive demand shock is best represented by a(n) A. downward shift of the Phillips curve. B. movement up along the Phillips curve. C. movement down along the Phillips curve. D. upward shift of the Phillips curve.

CH11 Q1 Assume the economy is in equilibrium at Y1, where real GDP equals potential GDP, and then the economy experiences a negative demand shock. Other things equal, the negative demand shock is best represented by a(n) A. movement up along the Phillips curve. B. upward shift of the Phillips curve. C. movement down along the Phillips curve. D. downward shift of the Phillips curve.

Q12: How is equilibrium in the market for money related to equilibrium in the market for non-money assets? At equilibrium in the market for money, the non-money asset market must A. have an excess supply of non-money assets. B. have an excess demand for money. C. also be in equilibrium. D. have an excess demand for non-money assets

Q14 Assume the economy is in a recession and the Federal government decides to cut personal income tax rates. All else equal, the cut in tax rates should A. shift up the MP curve and move the output gap farther away from zero. B. shift up the MP curve and move the output gap closer to zero. C. shift the IS curve to the right and move the output gap closer to zero. D. shift the IS curve to the left and move the output gap farther away from zero.

Q15 Consumption C = $1.0 + 0.80YD Investment = $1.5 Government purchases = $2.2 Net exports = −$0.1 Taxes = $0 Government transfer payments = $0 (all values are in billions of dollars) Refer to Table 10.1. Equilibrium real GDP for this economy is equal to $5.75 billion. B. $12 billion. C. $23 billion. D. $46 billion.

Q23 Assume the economy is initially in equilibrium where potential GDP is less than real GDP. If the expected inflation rate, the term structure effect, and the default−risk premium are constant, ________ in the Fed's target short−term nominal interest rate will shift up the MP curve which will result in real GDP ________. A. an increase; falling B. a decrease; rising C. an increase; rising D. a decrease; falling

The Phillips curve will shift up with ________ or ________. A. a positive supply shock; a decrease in expected inflation B. a negative supply shock; a decrease in expected inflation C. a negative supply shock; an increase in expected inflation D. a positive supply shock; an increase in expected inflation

The oil shock of 2007−2008 saw the price of oil rising from less than $60 a barrel in March 2007 to over $145 a barrel in July 2008, and decreasing again to just over $30 a barrel in December 2008. Assuming the economy was at potential GDP prior to the oil shock, the increase in the price of oil, such as what occurred between March 2007 and July 2008, acts as a negative supply shock, resulting in A. a movement down along the Phillips curve. B. a movement up along the Phillips curve. C. an upward shift of the Phillips curve. D. a downward shift of the Phillips curve

When the Phillips curve was viewed as a structural relationship, it was believed that the Fed could A. permanently reduce the unemployment rate if it were willing to increase the real interest rate. B. permanently reduce the inflation rate if it were willing to decrease the real interest rate. C. permanently reduce the unemployment rate if it were willing to accept an increase in the inflation rate. D. permanently reduce the inflation rate as it permanently reduced the unemployment rate.

q27 The Fed has control over the long−term real interest rate provided that three variables remain unchanged. These three variables include all of the following except A. the default premium. B. term structure effects. C. the short−term real interest rate. D. the expected rate of inflation.

Q10 What is the multiplier effect? A. The magnification of the money supply into total planned expenditure. B. The series of induced changes in autonomous expenditure that results from an initial change in consumption. C. The series of induced changes in consumption that results from an initial change in autonomous expenditure. D. The change in government outlays resulting from a change in government tax receipts. The formulas for the government purchases and tax multipliers are, respectively, A. 11−MPC and −MPC1−MPC B. 1−MPCMPC and 1−MPC−MPC C. −MPC1−MPC and 11−MPC D. ΔG1−MPC and

C A

Why do most economists believe that the value for the government purchases multiplier is greater than the value for the tax multiplier? A. Public spending is more powerful than private spending since the former is devoted to goods of an investment nature. B. The marginal propensity to consume (MPC) applicable to tax changes is smaller than the MPC that applies to changes in government purchases. C. A portion of any tax cut is saved, whereas an equivalent increase in purchases is fully injected into the expenditure stream. This is the correct answer. D. All of the above. If Congress and the president were considering a policy of increasing government purchases or cutting taxes in order to increase real GDP, is it true that the relative sizes of the two multipliers would be the only factor they should take into account? A. Yes. Any other factor would undoubtedly be distorted by "special interests." B. Yes. The only thing that matters is "bang for the buck." C. No. Insightful politicians must consider the political ramifications of their decisions. D. No. Additional effects (e.g. employment effects or the impact on the distribution of income) would also require consideration.

C d

Assume the economy is in equilibrium at Y1, where real GDP equals potential GDP. The economy experiences a negative demand shock, and the Fed responds by decreasing real interest rates to bring real GDP and inflation back to their original levels. Other things equal, the Fed's response following the negative demand shock is best represented by a(n) A. movement down along the Phillips curve. B. downward shift of the Phillips curve. C. upward shift of the Phillips curve. D. movement up along the Phillips curve.

Given that an economy is initially in equilibrium, how does a shift down of the MP curve change real GDP and the real interest rate? A. Real GDP does not change and the real interest rate decreases. B. Real GDP decreases and the real interest rate decreases. C. Real GDP decreases and the real interest rate increases. D. Real GDP increases and the real interest rate decreases

If the real interest rate in the United States decreases, foreign investors will ________ their demand for U.S. dollars because they desire to ________ fewer U.S. financial assets. A. decrease; sell B. increase; sell C. increase; buy D. decrease; buy

Positive demand shocks have a tendency to ________ real GDP relative to potential GDP and ________ the inflation rate. A. decrease; decrease B. increase; decrease C. decrease; increase D. increase; increase

Q3: Under a fixed exchange rate system, at high domestic real interest rates the demand for domestic currency ________, so the central bank ________ foreign−exchange reserves. A. increases; loses B. decreases; loses C. decreases; acquires D. increases; acquires

Q6: If the MPC = 0.75, a decrease in government spending from $875 billion to $840 billion will decrease real GDP by A. $26.25 billion. B. $35 billion. C. $46.67 billion. D. $140 billion

Q7 Once the Phillips curve has shifted down, the economy is ________ because ________. A. better off; every unemployment rate becomes associated with a higher inflation rate B. worse off; every unemployment rate becomes associated with a lower inflation rate C. better off; every inflation rate becomes associated with a lower unemployment rate D. worse off; every inflation rate becomes associated with a higher unemployment rate

Suppose the economy's equilibrium starts out with an output gap of Y1, and real GDP increases so the output gap increases to Y2. If the Fed keeps the money supply constant, money demand will ________ and the nominal interest rate will ________. A. remain constant; remain constant B. increase; remain constant C. increase; decrease D. increase; increase

Under a fixed exchange rate system, central banks ________ meet the demand for their domestic currency and ________ meet the demand for foreign currencies. A. are limited in their ability to; can never B. can always; can always C. are limited in their ability to; are limited in their ability to D. can always; are limited in their ability to

the oil shock of 2007−2008 saw the price of oil rising from less than $60 a barrel in March 2007 to over $145 a barrel in July 2008, and decreasing again to just over $30 a barrel in December 2008. Assuming the economy was at potential GDP prior to the shock, the decrease in the price of oil, such as what occurred between July 2008 and December 2008, acts as a positive supply shock, causing the inflation rate to ________ and the output gap to ________. A. increase; grow B. decrease; grow C. increase; shrink D. decrease; shrink

The large increase in credit from the Federal Reserve can potentially push up prices, even though unemployment remains relatively high. . . . If this seems far-fetched, remember the importance of self-fulfilling expectations as far as inflation is concerned. Source: Simon Johnson, "Inflation Fears," New York Times, May 28, 2009. The Phillips curve equation is given (in the textbook) by A. πet=πt−aUt−UN−st B. πt=πet+aUt−UN−st C. πt=πet−aUN−Ut−st D. πt=πet−aUt−UN−st According to the Phillips curve equation, it is possible to have a high inflation rate even if the unemployment rate is high if A. a negative supply shock occurs. B. expected inflation is high. C. a positive demand shock occurs. D. All of the above. E. A and B are correct.

D E

In April 2012, Federal Reserve Chair Ben Bernanke stated in a press conference that inflation expectations of households and firms were "well anchored." Source: Board of Governors of the Federal Reserve System, "Transcript of Chairman Bernanke's Press Conference April 25, 2012," April 25, 2012. The reference to inflation expectations as "well anchored" means that they A. recognize economic fundamentals such as underlying conditions in resource markets. B. incorporate an analysis of policymaker decisions and intentions. C. take recent history into account. D. all of the above. E. A and C but not B. If expectations are adaptive, are they likely to be well anchored? A. Probably not, since their formulation is essentially backward looking: "we'll (not) have inflation since we've (not) had inflation." B. Most definitely, since past history is the best predictor of future performance.

D A "well anchored" formulation of inflation expectations would recognize economic fundamentals such as underlying conditions in resource markets, incorporate an analysis of policymaker decisions and intentions, and take recent history into account. A Adaptive expectations probably misses the mark when it comes to describing "well anchored" inflation expectations since that method fails to incorporate all available information (such as policymaker pronouncements) and instead merely extrapolates the past into the future. Next Question

In early April 2011, the European Central Bank (ECB) was expected to raise interest rates, while other major central banks held target interest rates constant. A rise in European interest rates would be expected to ▼ increase / not affect / decrease output in Europe and produce ▼ lower / higher / unchanged net capital outflows. The rise in European interest rates will generate _____ of the euro relative to the dollar

Decrease / Lower An appreciation

A newspaper article quotes Gary Painter, a professor at the University of Southern California as arguing: "Increased housing demand definitely has multiplier effects throughout the economy." Source: Catherine Rampell, "As New Graduates Return to Nest, Economy Also Feels the Pain," New York Times, November 16, 2011. By "multiplier effects" the professor means that A. a change in housing demand will generate a series of induced changes in consumption that results in an output change for the economy that is several times larger than the initial change in housing demand. B. a change in the demand for housing has ripple effects in related markets that cumulatively raise aggregate output and income by more than the initial change in housing demand. C. unlike other purchases, housing is unique in the spillover effects it generates upon other segments of the economy. D. All of the above. E. A and B are correct. Why would increased housing demand have multiplier effects? A. One might say that a house becomes a home as it fills with the many accoutrements that give its occupants pleasure. B. Putting a roof over one's head is just the beginning of a train of purchases, many of which are recurrent like utilities or routine maintenance. C. When one acquires shelter, a series of ancillary purchases normally follows. D. All of the above.

E D

a. Holding other factors constant, the effect of this trend would cause the long-term real interest rate to_____. b. If the Fed had wanted to offset the effect you describe in part (a), the action it could have taken was to A. decrease the short-term nominal interest rate. B. lower the term structure effect. C. increase the short-term nominal interest rate. D. decrease the default premium.

Increase; A

CH 10: Q2 Assume the economy is initially in equilibrium where potential GDP is greater than real GDP. If the expected inflation rate, the term structure effect, and the default−risk premium are constant, a decrease in the Fed's target short−term nominal interest rate will ________ the MP curve and the output gap will become ________.

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