Econ Final

Pataasin ang iyong marka sa homework at exams ngayon gamit ang Quizwiz!

Which of the following events would cause the supply curve in the foreign exchange market to​ shift?

Increase in foreign interest rates. B. Changes in expectations of the future value of foreign currencies. C. Increased demand for foreign goods and services. D. All of the above.

In order to attract foreign​ investment, the government of Alzuria had introduced various economic reforms five years back. Although the country is heavily dependent on​ imports, with increased foreign direct investments and foreign portfolio​ investments, the Alzurian economy grew at a faster pace for the last few years. The government is currently considering removing all restrictions on​ cross-border capital flows and allowing its currency to float freely. Dmitri​ Smirnoff, an importer of clothing and​ textiles, is of the opinion that unrestricted​ cross-border capital flows could hurt the economy. His business​ partner, Anna​ Azarov, however feels that the exchange rate is likely to appreciate and therefore benefit all importers. Which of the​ following, if​ true, will strengthen​ Dmitri's claim that unrestricted​ cross-border capital flows could hurt the​ economy?

​Alzuria's currency is artificially overvalued to help importers.

An article published in a leading trade journal in the country Avalon states that​ Avalon's current account balance will improve in the coming year. The author reasons that since the government is expected to run a budget surplus in the next fiscal​ year, this should lead to a current account surplus. Frank​ Nicolai, an​ economist, publishes a rejoinder in the same journal. He says that international transactions are controlled by multiple factors. Hence a budget surplus may not necessarily indicate a trade surplus. Which of the​ following, if​ true, will support​ Frank's claim that current account balance may not improve in spite of a budget​ surplus?

​Avalon's inability to meet global environmental standards is causing many trading partners to impose high import barriers on goods manufactured in Avalon.

A​ "premature tightening" of the​ "pace of​ purchases" would slow down the economic recovery because this action would be

​contractionary, reducing lending and economic activity.

The growth rate of real GDP in the country of West Pruasia was very low last year. The government was unable to fully meet its expenses with the revenue generated during the year. A committee was appointed to suggest appropriate policy measures to boost economic growth. Some of the committee members were of the opinion that an expansionary fiscal policy alone should be able to increase aggregate demand and output sufficiently. Other members of the​ committee, however, disagreed. According to​ them, expansionary fiscal policies may not suffice and the government should consider monetary policy measures​ instead, especially when the government already has a fiscal deficit. The government of West Pruasia decided that they would increase government spending considerably to boost aggregate demand in the economy. The government planned and implemented a series of nationwide programs aimed at increasing output and employment. A review of the impact of the higher government spending showed that the increase in aggregate demand was much larger than anticipated. Which of the​ following, if​ true, would explain this​ outcome?

Interest rates in West Pruasia are still lower than in most other countries.

The Taylor rule for federal funds rate targeting does which of the​ following?

It links the​ Fed's target for the federal funds rate to economic variables.

After September​ 11, 2001, the federal government increased military spending on wars in Iraq and Afghanistan. Is this increase in spending considered fiscal​ policy?

No. The increase in defense spending after that date was designed to achieve homeland security objectives.

The growing economy of Platonia has been consistently running a current account surplus for the past few years. Two industry​ experts, Nicole Watson and Denise​ Kohl, are discussing the implications of a current account surplus on the economy as a whole. Nicole is of the opinion that a persistent current account surplus indicates that the country does not attract a lot of FDI. She also feels that the financial account balance is unlikely to improve in the near​ future, which could pose a bottleneck for economic growth.​ Denise, however, feels that the persistent current account surplus is reflective of​ Platonia's competitive exports. In​ fact, she feels that the focus on exports will continue to drive economic growth. Which of the​ following, if​ true, will weaken​ Nicole's claim that the financial account balance will not improve in the near​ future?

Platonia is increasingly emerging as a likely outsourcing destination due to low labor costs and a skilled workforce.

How does real GDP LOADING... deal with the problem inflation causes with nominal​ GDP?

Real GDP uses the prices of goods and services in the base year to calculate the value of goods in all other years. B. By keeping prices​ constant, we know that changes in real GDP represent changes in the quantity of output produced. C. Real GDP separates price changes from quantity changes. D. All of the above.

In the graph of the money market shown on the​ right, what could cause the money supply curve to shift from MS11 to MS22​?

The Fed decreases the money supply by deciding to sell U.S. Treasury securities.

Why would the Fed intentionally use contractionary monetary policy to reduce real​ GDP?

The Fed intends to reduce​ inflation, which occurs if real GDP is greater than potential GDP.

Monetary policy is defined​ as:

The actions the Federal Reserve takes to manage the money supply and interest rates.

The latest estimates published by the government of​ Rossland, a small open​ economy, shows that the​ government's expenses over the next year are expected to be​ $50 million. The tax revenue on the other​ hand, is likely to be​ $45 million. The data also projects that the real GDP of the country will be approximately​ $130 million and that the household spending on consumption is likely to amount to​ $70 million. The domestic​ investment, however, is expected to be low at​ $40 million. At the end of the following​ year, it was noted that tax revenue was actually​ $46.5 million, while the other estimates​ (real GDP,​ investment, government​ expenditure, and​ consumption) were accurate. Which of the following must also be​ true, given that the other four variables were correctly​ estimated?

The actual level of national savings was equal to what was estimated.

Use the graph to help determine which one of the following statements is​ true:

The average American in the year 2006 could buy nearly eight times as many goods and services as the average American in the year 1900.

A recent report on GDP growth rates showed that the GDP of​ Dorada, a developed​ economy, has declined by 1.5 percent this year. Emily George and her friend Tabitha​ Jude, both students of​ economics, are discussing the possible reasons for the decline in the growth rate. Emily feels that the government deficit has reached an unsustainable​ level, as a result of which interest rates now are extremely high. This has reduced government expenditure in recent​ times, leading to a decline in GDP. Tabitha however disagrees. According to​ her, the fall in GDP must imply a fall in consumer spending as household consumption accounts for the largest share in​ Dorada's GDP. Which of the​ following, if​ true, will weaken the claim that a fall in government expenditure was mainly responsible for the decline in​ GDP?

The domestic currency sharply appreciated against a basket of currencies earlier this year.

Firm​ X, a leading manufacturer of rubber tires in country​ A, caters to almost​ one-third of the domestic tire market. The country was hit by a recession last year that caused the national output growth to be negative. Simon​ Reeds, the CEO of firm​ X, feels that these fluctuations in the business environment are​ short-lived and expects the economy to recover very soon. In spite of the​ recession, Simon feels that the firm can actually invest in expanding its facilities as it has sufficient cash flows to continue its operation during the crisis period. The​ firm's marketing​ head, Sandra​ Jones, counters this by saying that the firm is already losing sales due to the recession and they should not increase costs further by making​ large-scale investments in the present climate. Which of the​ following, if​ true, would support the​ CEO's claim?

The government recently announced a plan to offer incentives to buyers in the car and household appliances market.

The latest estimates published by the government of​ Rossland, a small open​ economy, shows that the​ government's expenses over the next year are expected to be​ $50 million. The tax revenue on the other​ hand, is likely to be​ $45 million. The data also projects that the real GDP of the country will be approximately​ $130 million and that the household spending on consumption is likely to amount to​ $70 million. The domestic​ investment, however, is expected to be low at​ $40 million. Which of the following can be inferred from the information given​ above?

The net capital inflow to Rossland is expected to be​ $30 million next year.

Paul Schumer and Jim​ Miller, two analysts at a research​ institute, discuss the rising costs of higher education in their country. Paul feels that escalating tuition fees in colleges and universities are indicative of a bubble in the higher education market. According to​ Jim, however, the rising costs are the result of better quality education being provided by the institutions in recent years. Which of the​ following, if​ true, will weaken​ Paul's argument?

The number of foreign students enrolling in domestic universities has increased steadily in the last three years.

The production of LCD television sets in Australia increased by​ 20% this year as compared to last year. Those TV sets were no less advanced technologically than the sets sold in previous years.​ However, the value of the contribution LCD television sets made to​ Australia's nominal GDP during this year was the same as the previous year. Which of the​ following, if​ true, would best explain this​ outcome?

The price of LCD television sets declined in the past year.

In order to attract foreign​ investment, the government of Alzuria had introduced various economic reforms five years back. Although the country is heavily dependent on​ imports, with increased foreign direct investments and foreign portfolio​ investments, the Alzurian economy grew at a faster pace for the last few years. The government is currently considering removing all restrictions on​ cross-border capital flows and allowing its currency to float freely. Dmitri​ Smirnoff, an importer of clothing and​ textiles, is of the opinion that unrestricted​ cross-border capital flows could hurt the economy. His business​ partner, Anna​ Azarov, however feels that the exchange rate is likely to appreciate and therefore benefit all importers. Which of the following can most reasonably be concluded from the information given​ above?

The value of the domestic currency in the foreign exchange market is likely to become more volatile if the restrictions are removed.

Fiscal policy refers​ to:

The​ government's use of taxes and expenditures to achieve macroeconomic policy objectives.

Why does a​ $1 increase in government purchases lead to more than a​ $1 increase in income and​ spending?

Through the government purchases​ multiplier, the​ $1 increase in government spending will lead to an increase in aggregate demand and national​ income, which will lead to an increase in induced spending.

Which of the following was the​ Fed's objective in using​ "quantitative easing" and​ "Operation Twist"?

To keep interest rates on mortgages low. B. To increase aggregate demand. C. To keep interest rates on​ 10-year Treasury notes low.

The growth rate of real GDP in the country of West Pruasia was very low last year. The government was unable to fully meet its expenses with the revenue generated during the year. A committee was appointed to suggest appropriate policy measures to boost economic growth. Some of the committee members were of the opinion that an expansionary fiscal policy alone should be able to increase aggregate demand and output sufficiently. Other members of the​ committee, however, disagreed. According to​ them, expansionary fiscal policies may not suffice and the government should consider monetary policy measures​ instead, especially when the government already has a fiscal deficit. Which of the​ following, if​ true, would suggest that monetary policy may work better than fiscal policy in the current​ situation?

West Pruasia is an open economy with a freely floating exchange rate regime.

Why does inflation make nominal GDP LOADING... a poor measure of the increase in total production from one year to the​ next?

When nominal GDP increases from year to​ year, the increase is due partly to changes in prices and partly to changes in quantities.

Expansionary monetary policy on the part of the central bank of the Unoted Kingdom

a decrease in interest rates in the United Kingdom and a decrease in the value of the pound relative to other currencies.

The​ "twin deficits" refers to the idea that

a government budget deficit may lead to a current account deficit.

Increases in real GDP per capita increase life expectancy at birth.

agree

In the graph of the money market shown on the​ right, what could cause the money demand curve to shift from MD11 to MD22​?

an increase in real GDP, an increase in price level

Relative to a market​ economy, a​ centrally-planned economy would be expected to be

better at neither productive efficiency nor allocative efficiency because the absence of​ market-imposed competition negates the need of firms to satisfy consumer wants or produce using the​ lowest-cost methods.

If the government changes its tax policy and taxes only real interest payments and not nominal interest​ payments,

both saving and investment increase.

If the Federal Open Market Committee​ (FOMC) decides to increase the money​ supply, it orders the trading desk at the Federal Reserve Bank of New York to

buy U.S. Treasury securities

How does the dynamic model of aggregate supply and aggregate demand explain​ inflation?

by showing that if total spending in the economy grows faster than total​ production, prices will rise

An increase in the money supply in the U.S. will not

cause the value of investing in U.S. financial assets to become more desirable to foreign investors.

In the figure to the​ right, the exchange rate between the Japanese yen and the U.S. dollar increased because demand increased by more than supply. As a​ result, what happens to U.S. real​ GDP?

decreases

Increases in real GDP per capita do not increase the amount of goods and services available to a​ country's citizens

disagree

Increases in real GDP per capita mean people will have a lower portion of leisure time over the course of their lives.

disagree

Since the United States has negative net foreign​ investment, its

domestic saving must be less than its domestic investment.

Concept Question 29.5.03 Both interest rate and exchange rate will be increased by

expansionary fiscal policy and contractionary monetary policy.

The​ Fed's strategy of increasing the money supply and lowering interest rates in order to increase real GDP is called

expansionary monetary policy.

Most economists agree that the​ above-market wage paid in unionized industries significantly increases the unemployment rate in the United States.

false

The multiplier effect is only a consideration for increases in government purchases.

false

If the Fed would no longer have a specific target for the money​ supply, it would be targeting the

federal funds rate

The interest rate that banks charge each other for overnight loans is called the

federal funds rate

The part of the balance of payments LOADING... that records purchases of assets a country has made abroad and foreign purchases of assets in the country is called

financial account

In​ economics, the term capital refers to

goods used to produce other goods.

Monetary policy has a greater impact on aggregate demand in an open economy than in a closed economy.

greater

The Fed changes the discount rateas a part of its policy to reach all of the following objectives​ except:

high unemployment

When interest rates on Treasury bills and other financial assets are​ low, the opportunity cost of holding money is​ _________, so the quantity of money demanded will be​ _________.

high;low

Scarcity implies that every society and every individual face​ trade-offs because scarcity means that

human wants are greater than what available resources can produce.

The equilibrium quantity of wine will The equilibrium price of wine will

increase only if demand increases more than supply decreases. increase

Higher interest rates strengthen a currency because they

increase the demand for the currency.

When the government runs a budget​ surplus, national saving

increases

If the Fed is too slow to react to a recession and applies an expansionary monetary policy only after the economy begins to​ recover, then

inflation will be higher than if the Fed had not acted.

The federal funds rate

is the rate that banks charge each other for​ short-term loans of excess reserves.

Keynes appears unconcerned if government spending is wasteful because

it will still lead to an increase in production and employment.

A strong Australia dollar would cause problems for Australian manufacturers because Australian manufactured goods will cost

more in terms of foreign​ currencies, and the demand for Australian manufactured goods will fall.

According to an article in the Economist​: ​"countries with persistent​ current-account deficits tend to have higher real interest rates than surplus​ countries." ​Source: "Carry on​ Trading," Economist​, August​ 10, 2013. What do high interest rates have to do with current account​ deficits? Current account deficits

must be funded through a financial account surplus which is facilitated by higher interest rates.

The difference between net exports and the current account balance is

net exports is a subcategory of the current account balance.

The current account records

net​ exports, net investment​ income, and net transfers.

In an economy with rising​ prices, compared to the base​ year,

nominal GDP is larger than real GDP in years after the base year.

Economists use the term fiscal policy to refer to changes in taxing and spending policies

only by the federal government.

The financial account records

only net capital flows.

The purchases Fed Chairman Bernanke is referring to are

open market purchases of government securities.

If a country saves more than it invests​ domestically, then its net foreign investment must be

positive

The Scottish philosopher Adam Smith argued in 1776 that

prices would do a better job of coordinating the activities of buyers and sellers than guilds could.

When the articles refers to a​ "weakening currency," it means that the Indian rupee will

purchase less foreign currency.

The sequester could create a headwind for the economic recovery because government spending cuts resulting from the sequester could

reduce aggregate demand

When the​ People's Bank of China​ "cut the amount of cash that banks must set aside as​ reserves," the monetary policy tool they used was a change in the

required reserve ratio.

From 2015 to​ 2016,

supply decreased more than demand increased.

When the author says a​ "strong Australian​ dollar," he means

the Australian dollar is worth more in terms of foreign currencies.

In​ 2013, Japan's government debt was approaching 250 percent of​ GDP, more than twice as high as in the United States. An article in the Economist noted that​ "the sheer size of the debt weighs ever more​ heavily." ​Source: "Don't Mention the​ Debt," Economist​, May​ 4, 2013. Government debt weighs heavily on

the Japanese economy because of the taxes required to service the debt.

In the balance of​ payments, the difference between the value of the goods a country exports and the value of the goods a country imports is called

the balance of trade.

The balance of payments is equal to

the current account plus the financial account.

The primary reason for this change in the sources of mortgage finance was​ _____; the consequence of this change was also​ _____ in mortgage rates.

the development of a secondary mortgage​ market; a decrease

In the balance of​ payments, the current account records

the difference between transfers made to residents of other countries and transfers U.S. residents receive from other countries. B. imports and exports of goods and services. C. investments in foreign countries made by citizens of the United States and investments in the United States made by citizens of foreign countries

Assets Liabilities Reserves $10 million Discount loan $10 million Assume that before receiving the discount​ loan, FNB had no excess reserves LOADING... . The maximum amount of the​ $10 million that FNB can issue in loans is $10 million . Assume that the required reserve ratio is​ 10%. The maximum total increase in the money supply that can result from the​ Fed's discount loan is

100 million

When the Federal Reserve increases the required reserve ratio as a part of a contractionary monetary​ policy, there​ is:

A decrease in the money supply and an increase in the interest rate.

The growing economy of Platonia has been consistently running a current account surplus for the past few years. Two industry​ experts, Nicole Watson and Denise​ Kohl, are discussing the implications of a current account surplus on the economy as a whole. Nicole is of the opinion that a persistent current account surplus indicates that the country does not attract a lot of FDI. She also feels that the financial account balance is unlikely to improve in the near​ future, which could pose a bottleneck for economic growth.​ Denise, however, feels that the persistent current account surplus is reflective of​ Platonia's competitive exports. In​ fact, she feels that the focus on exports will continue to drive economic growth. Which of the​ following, if​ true, will weaken​ Denise's view that the focus on exports will continue to drive economic growth in​ Platonia?

A group of European​ countries, that together account for a large proportion of​ Platonia's exports, have recently been hit by a severe financial crisis.

The graph to the right illustrates the static​ AD-AS model. Suppose the economy is initially in​ long-run equilibrium at point A. The government decides to decrease government spendingdecrease government spending. In the​ short-run, this contractionary fiscal policy will​ cause:

A shift from AD 2AD2 to AD 1AD1 and a movement to point​ D, with a lower price level and lower output.

As the figure to the right​ indicates, the Fed can affect both the money supply and interest rates.​ However, in recent​ years, the Fed targets interest rates in monetary policy more often than it does the money supply. Which interest rate does the Fed​ target?

the federal funds rate

Which of the following is not a correct comparison between an expansionary monetary policy in the basic aggregate demand and aggregate supply model and in the dynamic aggregate demand and aggregate supply​ model?

A. In the dynamic​ model, expansionary policy would be used when demand does not grow​ sufficiently; in the basic​ model, expansionary policy would be used when demand falls. B. The dynamic model assumes that potential GDP is constantly growing while the basic model assumes that it is static. C. If the economy is below full​ employment, expansionary monetary policy will cause an increase in the price level in both models. D. All of the above are correct statements about the two models.

The part of the balance of payments LOADING... that records purchases of assets a country has made abroad and foreign purchases of assets in the country is called

the financial account.

The federal funds rate is

the interest rate that banks charge each other for overnight loans.

A recent report on GDP growth rates showed that the GDP of​ Dorada, a developed​ economy, has declined by 1.5 percent this year. Emily George and her friend Tabitha​ Jude, both students of​ economics, are discussing the possible reasons for the decline in the growth rate. Emily feels that the government deficit has reached an unsustainable​ level, as a result of which interest rates now are extremely high. This has reduced government expenditure in recent​ times, leading to a decline in GDP. Tabitha however disagrees. According to​ her, the fall in GDP must imply a fall in consumer spending as household consumption accounts for the largest share in​ Dorada's GDP. Which of the​ following, if​ true, will weaken​ Tabitha's argument?

Although sales tax rates remained​ unchanged, the​ government's revenue from sales taxes increased considerably this year.

Which of the following is not a viable monetary policy target for the​ Fed?

the money demand

If the FOMC orders the trading desk to sell Treasury​ securities

the money supply curve will shift to the​ left, and the equilibrium interest rate will rise.

Suppose instead that the demand curve shifts to the right. ​ Then, relative to the initial market​ equilibrium,

the new equilibrium price would be higher and the new equilibrium quantity would be higher.

How would this action​ "pump money into the financial system to support​ lending"?

Banks can make more loans.

The unemployment rate in the United States typically has been lower than the unemployment rates in Canada and countries in Western Europe because

the opportunity cost of job search is lower in Canada and countries of Western Europe and unemployed workers in those countries search longer for jobs.

When the federal government crafts environmental policies that make it less expensive for firms to follow green​ initiatives,

the policies are consistent with economic incentives.

Concept Question 29.2.02 Real exchange rate is

the price of domestic goods in terms of foreign goods.

The two key factors that cause labor productivity to increase over time are

the quantity of capital per hour worked and the level of technology.

One of the goals of the Federal Reserve is price stability. For the Fed to achieve this​ goal,

the rate of inflation should be​ low, such as​ 1% to​ 3%, and should be fairly consistent.

The Fed gave up targeting the money supply because

the relationship between monetary aggregates and other economic variables was becoming unreliable.

The actual change in real GDP resulting from an increase in government purchases or a cut in taxes will be less than the simple multiplier effect indicates.

true

​Additionally, the federal funds rate is

very important for the​ Fed's monetary policy because the Fed uses the federal funds rate as a monetary policy target since it can control the rate through open market operations.

In​ 1914, Henry Ford increased the wage he paid workers in his car factory in​ Dearborn, Michigan to​ $5 per day. This wage was more than twice as much as other car manufacturers were paying. Ford was quoted as​ saying: ​"The payment of five dollars a day for an​ eight-hour day was one of the finest​ cost-cutting moves we ever​ made." Giving workers a raise can result in overall lower costs for a firm if

workers are motivated by higher wages to work harder.

Which of the following is not one of the main sets of factors that cause the supply and demand curves in the foreign exchange market to​ shift?

Changes in the U.S. supply of oil and changes in the foreign supply of oil.

Two​ neighbors, countries A and​ B, produce books and​ blankets, among other goods and services.​ However, Country A produces more of both goods than country B. A student of​ economics, Maya, also notes that in both​ countries, these industries individually employ 30 percent of the population. She concludes that country A has an absolute advantage in the production of books and blankets over country B. Which of the​ following, if​ true, would weaken​ Maya's conclusion?

Country A employs more capital per unit of labor in all industries than country B.

Suppose that currency traders expect that the value of British pound will fall in the future. How will this will affect the demand and supply of British pound in the foreign exchange​ market?

Demand for pounds will decrease and supply of pounds will increase.

Alzuria is a developing economy. With trade and​ liberalization, the country has now seen substantial development in the private sector.​ However, government intervention in certain markets remains strong. The banking sector has a good mix of both private banks and those called​ "government undertakings," or public sector banks. Consumers are becoming increasingly aware of the difference in the quality of service provided by the private and the public sector banks. Competition among private banks has ensured that their employees adhere to high standards of customer service. Their public sector​ counterparts, however, do not appear to be making an effort to improve their customer service. Which of the​ following, if​ true, would explain the rationale behind continued patronage despite the bad service provided by public sector banks in​ Alzuria?

Deposits with public sector banks are insured unlike those with private banks.

Evaluate the following​ statement: Banks use deposits to make consumer loans to households and commercial loans to businesses. Banks will loan out every penny of their deposits in order to make a profit.

False. Banks must hold a fraction of their deposits as vault cash or with the Federal Reserve.

In a speech at the New York University Law​ School, Federal Reserve Chairman Ben Bernanke​ stated: Writing in the eighteenth​ century, Adam Smith conceived of the​ free-market system as an​ "invisible hand" that harnesses the pursuit of private interest to promote the public good.​ Smith's conception remains relevant​ today, notwithstanding the enormous increase in economic complexity since the Industrial Revolution. ​Source: Ben S.​ Bernanke, "Financial Regulation and the Invisible​ Hand," speech made at the New York University Law​ School, New​ York, New​ York, April​ 11, 2007. What is so important about the idea of the invisible​ hand?

Firms will provide consumers what they want without the government.

What is fiscal​ policy?

Fiscal policy can be described as changes in government spending and taxes to achieve macroeconomic policy objectives.

Which one of the following is not a measure of the price​ level?

Government Price​ Index: an average of the prices paid by the government for goods and services used only by different government agencies.

The growth rate of real GDP in the country of West Pruasia was very low last year. The government was unable to fully meet its expenses with the revenue generated during the year. A committee was appointed to suggest appropriate policy measures to boost economic growth. Some of the committee members were of the opinion that an expansionary fiscal policy alone should be able to increase aggregate demand and output sufficiently. Other members of the​ committee, however, disagreed. According to​ them, expansionary fiscal policies may not suffice and the government should consider monetary policy measures​ instead, especially when the government already has a fiscal deficit. Which of the following questions is most important to answer in order to determine the accuracy of the claim that fiscal policy can sufficiently increase aggregate​ demand?

How strong is the impact of government spending on the​ country's net​ exports?

The figure to the right illustrates the economy using the Dynamic Aggregate Demand and Aggregate Supply Model LOADING... What would be the federal​ government's reaction if actual real GDP in 2006 occurs at point B and potential GDP occurs at LRAS 06LRAS06​? That​ is, what step can we expect the federal government to take to control inflation in the second​ period?

A. Increase taxes on businesses B. Decreases government spending on goods and services C. Contractionary policy

The latest estimates published by the government of​ Rossland, a small open​ economy, shows that the​ government's expenses over the next year are expected to be​ $50 million. The tax revenue on the other​ hand, is likely to be​ $45 million. The data also projects that the real GDP of the country will be approximately​ $130 million and that the household spending on consumption is likely to amount to​ $70 million. The domestic​ investment, however, is expected to be low at​ $40 million. At the end of the following​ year, it was noted that real GDP was actually​ $132 million, while the other estimates​ (tax revenue,​ investment, government​ expenditure, and​ consumption) were accurate. Which of the following must also be true given that the other variables were correctly​ estimated?

Actual private saving in the economy must have exceeded the estimate by​ $2 million.

A political commentator​ argues: ​"Congress and the president are more likely to enact an expansionary fiscal policy than a contractionary fiscal policy because expansionary policies are popular and contractionary policies are​ unpopular." Briefly explain whether you agree.

Agree because expansionary fiscal policies create employment and increase GDP whereas contractionary fiscal policies impose an artificial recession on the economy.

A Federal Reserve publication discusses an estimate of the tax multiplier that gives it a value of 1.2 after one year and 2.8 after two years. ​Source: Sylvain​ Leduc, "Fighting Downturns with Fiscal​ Policy," Federal Reserve Bank of San Francisco Economic Letter​, June​ 19, 2009. Why might the tax multiplier have a larger value after two years than after one​ year?

Consumers are more likely to perceive the tax change as permanent and change their spending choices.

Consider the figures below. Determine which combination of fiscal policies shifted AD 1AD1 to AD 2AD2 in each figure and returned the economy to​ long-run macroeconomic equilibrium.

Example​ (A): Expansionary fiscal policy. Example​ (B): Contractionary fiscal policy.

What changes should they make if they decide a contractionary fiscal policy is​ necessary?

In this​ case, Congress and the president should enact policies that decrease government spending and increase taxes.

If Congress and the president decide an expansionary fiscal policy is​ necessary, what changes should they make in government spending or​ taxes?

In this​ case, Congress and the president should enact policies that increase government spending and decrease taxes.

What do economists mean by the demand for​ money?

It is the amount of moneylong dash—currency and checking account depositslong dash—that individuals hold.

Consider the figure to the right. Can the Fed achieve a​ $900 billion money supply​ (MS) AND a​ 5% interest rate​ (point C)?

No. The Fed cannot target both the money supply and the interest rate simultaneously.

Which of the following is not a correct comparison between a contractionary fiscal policy in the basic aggregate demand and aggregate supply model and in the dynamic aggregate demand and aggregate supply​ model?

None of the above are correct statements about the two models.

Suppose the economy is in equilibrium in the first period at point A. In the second​ period, the economy reaches point B. What policy would the Fed likely pursue in order to move AD 2AD2 to AD Subscript 2 comma policyAD2, policy and reach equilibrium​ (point C) in the second​ period? ​ (What policy will increase the price level and increase actual real​ GDP?)

Open market purchase of government securities

Which of the following is not an issue with using active monetary policy to reduce business​ cycles?

Real GDP and employment changes from monetary policy actions can move in a countercyclical manner.

Which of the following equations below represents the saving and investment equation in an open​ economy?

S​ = I​ + NFI

Which of the following statements is true about the​ Fed's monetary policy​ targets?

The Fed is forced to choose between the interest rate and the money supply as its monetary policy target.

For a country such as France which of the following statements is always​ true?

The balance of payments is zero.

Who is responsible for fiscal​ policy?

The federal government controls fiscal policy.

What is the relationship between the federal funds rate falling and the money supply​ increasing?

To decrease the federal funds​ rate, the Fed must increase the money supply.

How does lowering the target for the federal funds rate​ "pour money" into the banking​ system?

To increase the money​ supply, the Fed buys bonds on the open​ market, which increases bank reserves.

Persistent current account deficits pose a problem for the United​ States, because it results in

U.S. net foreign investment to be negative.

In the figure to the​ right, the exchange rate equilibrium occurs at the point where the quantity demanded equals the quantity​ supplied, yen¥120 ​= $1​ (point A). If the equilibrium exchange rate changed from yen¥120 ​= $1 to yen¥150 ​= $1, we would say that the dollar

appreciated against the yen.

Changes in taxes and spending that happen without actions by the government are called

automatic stabilizers.

Some spending and taxes increase or decrease with the business cycle. This event often has an effect on the economy that is similar to fiscal policy and is called

automatic stabilizers.

By​ repercussions, Keynes means that an initial increase in autonomous expenditures will

change production by an amount greater than the initial increase in autonomous expenditures.

when the fed conducts an open market purchase, the interest rate should

decrease

This statement is true because the Chairman of the Fed

has the ability to influence interest rates for the​ world's top reserve currency.

The Fed buys and sells bonds as a part of its policy to reach all of the following objectives​ except:

high unemployment

A countercyclical policy is one that

is used to attempt to stabilize the economy.

What is the advantage of holding​ money?

money can be used to buy goods, services, or financial assets.

Related to the Chapter​ Opener] We saw in the chapter opener that during​ 2013, Congress and President Obama were unable to reach an agreement to avoid the​ sequester, which involved a series of automatic cuts in federal government purchases. In testifying before​ Congress, then Federal Reserve Chairman Ben Bernanke said that the sequester​ "could create a significant headwind for the economic​ recovery." ​Source: Binyamin​ Appelbaum, 'Austerity Kills Government Jobs as Cuts to Budgets​ Loom," New York Times​, February​ 26, 2013. When Bernanke said​ "headwind," he meant that

the sequester could slow down the economic recovery.

All of the following are arguments against an explicit inflation targeting rule for monetary policy except​:

An explicit target is easier to understand by households and firms which makes monetary policy more transparent.

Two years​ back, the Republic of​ Terbia, a developed​ economy, experienced a massive boom in the information technology​ (IT) industry. The rapid expansion of credit to the firms in this industry resulted in a significant increase in employment and prices in the economy.​ However, due to overvaluation and speculation in the​ market, stock prices of these firms fell sharply. IT being one of the most important​ sectors, this downturn affected the economy​ adversely, leading to a recession. Alicia​ White, an industry​ expert, suggests that expansionary monetary policy by the central bank is necessary to induce greater spending in the economy.​ However, Jaime​ Russell, a teacher at a community​ college, disagrees. According to​ him, increasing the supply of money would not help. The only possible impact of a fall in the interest rate would be an increase in aggregate supply.​ This, in​ turn, will reduce prices and profits further.​ Instead, the government should use expansionary fiscal policies to boost aggregate demand. Which of the​ following, if​ true, will support​ Jaime's view that an expansionary fiscal policy would be ideal in the given​ situation?

The current nominal interest rate is close to zero in the country.

An article published in a leading trade journal in the country Avalon states that​ Avalon's current account balance will improve in the coming year. The author reasons that since the government is expected to run a budget surplus in the next fiscal​ year, this should lead to a current account surplus. Frank​ Nicolai, an​ economist, publishes a rejoinder in the same journal. He says that international transactions are controlled by multiple factors. Hence a budget surplus may not necessarily indicate a trade surplus. Which of the​ following, if​ true, will support the claim that a budget surplus will lead to an improvement in​ Avalon's current account​ balance?

The domestic interest rate has declined to a​ ten-year low, causing people in Avalon to invest in assets abroad.

The growth rate of​ Zerbia, a small developing​ country, has fallen close to zero percent in the current year. Harry Miller and Jonathan​ Taylor, who are columnists with a business​ daily, are discussing suitable fiscal measures to revive economic growth in the country. Jonathan feels that the income tax rates in Zerbia are too high. Lower income tax rates would increase consumer spending and so would promote economic growth.​ Harry, on the other​ hand, believes that an increase in government expenditure would have a substantial impact on the​ country's GDP.​ Additionally, he feels that investing in green technology would not only accelerate​ growth, it is also likely to be more sustainable in the long term. Which of the​ following, if​ true, would weaken​ Harry's claim that government investment in green technology will revive the economy in the near​ term?

The green technology industry in this country is highly​ capital-intensive and dependent on imported machinery.

If the​ short-run aggregate supply curve​ (SRAS) were a horizontal​ line, what would be the impact on the size of the government purchases and tax multipliers

The impact of the multiplier would be larger if the SRAS curve is horizontal.

Expansionary monetary policy on the part of the central bank of Canada will​ cause:

a decrease in interest rates in Canada and a decrease in the value of the Canadian dollar relative to other currencies.

If the government cuts taxes in order to increase aggregate​ demand, the action is called

a discretionary fiscal policy.

Which of the following is not one of the monetary policy goals of the Federal Reserve​ ("the Fed")?

a high foreign exchange rate of the U.S. dollar relative to other currencies

According to the Taylor​ Rule, if the Fed reduces its target for the inflation​ rate, the result will be

a higher target federal funds rate.

The government would want the economy to contract when real GDP is

above potential GDP and the price level is rising.

In the figure to the​ right, the exchange rate between the Japanese yen and the U.S. dollar increased because demand increased by more than supply. As a​ result, what happens to U.S. real​ GDP?

it decreases

According to the multiplier effect LOADING... ​, an initial increases in government purchases increases real GDP by more than the initial increase in government purchases.

more than

As interest rates​ decline, stocks become a​ __________ attractive investment relative to​ bonds, which causes the demand for stocks and their prices to​ __________.

more; rise

Which of these variables are the main monetary policy targets of the​ Fed?

the money supply and the interest rate

​"Operation Twist" refers to

the​ Fed's program to purchase​ $400 billion in​ long-term Treasury securities while selling an equal amount of​ shorter-term Treasury securities.

The goal of expansionary fiscal policy is

to increase aggregate demand.

Since World War​ II, the federal​ government's share of total government expenditures has been between

two-thirds and three-quarters

In order to attract foreign​ investment, the government of Alzuria had introduced various economic reforms five years back. Although the country is heavily dependent on​ imports, with increased foreign direct investments and foreign portfolio​ investments, the Alzurian economy grew at a faster pace for the last few years. The government is currently considering removing all restrictions on​ cross-border capital flows and allowing its currency to float freely. Dmitri​ Smirnoff, an importer of clothing and​ textiles, is of the opinion that unrestricted​ cross-border capital flows could hurt the economy. His business​ partner, Anna​ Azarov, however feels that the exchange rate is likely to appreciate and therefore benefit all importers. Which of the​ following, if​ true, will strengthen​ Anna's claim that the currency will​ appreciate?

​Exports, which have traditionally accounted for a substantial portion of​ Alzuria's GDP, are growing at an impressive pace.

An attempt to reduce inflation requires​ _____________ fiscal​ policy, which causes real GDP to​ _________ and the price level to​ __________.

​contractionary; fall; fall

Expansionary fiscal policy has a​ ________ multiplier effect on equilibrium real​ GDP, and contractionary fiscal policy has a​ ________ multiplier effect on equilibrium real GDP.

​positive; negative


Kaugnay na mga set ng pag-aaral

Range, Threshold, Gravity Model and Central Place Theory

View Set

Chapter 11: Divisions of the Nervous System

View Set

Key Concepts, Chapter 7, Legal Dimensions of Nursing Practice

View Set

The Skeletal System- Movements and Articulations

View Set

Chapter 12 Spinal cord and spinal nerves

View Set

Chapter One: Strategic Leadership: Managing the Strategy-Making Process for Competitive Advantage

View Set

Lippincott Practice Q's Antepartal Care

View Set