Economics Final Exam

Consider the diagram above. The economy is in short-run equilibrium. What is the expected level of input prices?

1.0

What could cause the economy to move from point B to point C in the graph above?

A decrease in the expected input price

Which of the following functions does money not fulfill?

A means of barter

A countercyclical fiscal stimulus shifts which curve and in which direction?

Aggregate Demand right

What could cause the economy to move from point A to point B in the graph above?

An increase in taxes

A balance sheet is based on which equation?

Assets = Liabilities + Net Worth

What is the main difference between automatic and discretionary fiscal policy?

Automatic fiscal policy does not include law changes while discretionary fiscal policy includes changing laws

Consider the figure above. The economy is in the short-run equilibrium at point _____.

B

Why is automatic fiscal policy often referred to as automatic stabilizers for the economy?

Because automatic fiscal policy stabilizes the business cycle a bit on its own without changing any laws

What is one reason that input prices change only gradually?

Binding labor contracts

Commercial banks can create new money (i.e. increase the money supply) by doing which of the following?

Both (a) and (c)

The Federal Reserve System has the power to:

Buy government bonds, Act as a lender of last resort, Create money, *All of the above*

Consider the figure above. The economy is in the short-run equilibrium at point _____.

C

From point B (if there is no government intervention) the economy will eventually return to a long run equilibrium. What point will be the economy's new long run equilibrium in the graph above?

C

What is the only factor that can cause the Short Run Aggregate Supply (SRAS) curve to shift?

Changes in expected input prices

______________ CANNOT cause the Aggregate Demand (AD) curve to shift.

Changes in expected input prices

When the federal funds rate increases, which of the following will occur?

Commercial banks will have less money available to lend out or purchase securities with

When the federal funds rate decreases, which of the following will occur?

Commercial banks will have more money available to lend out or purchase securities with

Which of the following is NOT a problem with timing that Congress and the President run into when enacting fiscal policies?

Congress and the President can only enact policies to stabilize the economy

What is the last step of the federal budget process?

Congress passess appropriation bills

Which of the following is NOT true about a countercyclical policy?

Contracts the economy when it is at risk of falling into a recession or trough

Consider the figure above and assume the economy is in the short-run equilibrium. As the economy moves to long-run equilibrium at point ____, input prices will ________.

D; increase

When the Federal Reserve System (the Fed) wants to cause the economy to expand through monetary policy, which of the following will they do?

Decrease interest rates

The Federal Reserve System (the Fed) has direct control over which interest rates?

Discount Rate and Interest Rate Paid on Reserve Deposits

Discretionary spending includes which type of government spending?

Education and National Defense

In the Aggregate Demand Aggregate Supply model, which of the following is NOT true in a long run equilibrium? Chapter 10 practice

Expected input prices have NOT fully adjusted to the price level of final goods and services

Which type of policy do we say is used as a "weapon of last resort"?

Fiscal Policy

Which one of the following statements is correct?

If the economy is not in long-run equilibrium then the short-run aggregate supply curve will shift position

When the Federal Reserve System (the Fed) wants to cause the economy to contract through monetary policy, which of the following will they do?

Increase interest rates (discount rate, interest rate paid on reserve deposits, and federal funds rate)

If a countercyclical fiscal stimulus shifts the Aggregate Demand (AD) curve too far right (past the long run equilibrium), why is it difficult for policymakers to reverse their policies?

Increasing taxes is never a popular option

Which of the following is NOT an interest rate used in monetary policy?

Inflation Rate

The Federal Funds Rate is the:

Interest rate commercial banks charge each other to loan reserve deposits

The Discount Rate is the:

Interest rate the Fed charges commercial banks when it loans them reserves

Which of the following is NOT a characteristic of money being a means of payment?

It is widely available

Why does the government choose to enact fiscal and/or monetary policies when the economy is at or near a trough?

It takes too long for the economy to return itself to a long run equilibrium

When the federal funds rate increases, what is the impact on the economy?

It will cause the economy to contract: decreasing output (actual GDP), increasing unemployment, and decreasing inflation

When the federal funds rate decreases, what is the impact on the economy?

It will cause the economy to expand: increasing output (actual GDP), reducing unemployment, and increasing inflation

The Fed can make all of the following changes. Which would bring about an increase in the money supply?

Make an open market purchase of securities

Commercial banks can create new money (i.e. increase the money supply) by doing which of the following?

Making loans to households and firms, Purchasing securities (such as government bonds)

What will happen on the Fed's balance sheet if you negotiate a business loan with a bank for $500,000?

No change will occur in the Fed's balance sheet

For the federal government, "Fiscal Year 2019" means ______________.

October 1, 2018 through September 30, 2019

___________ CANNOT cause the Long Run Aggregate Supply (LRAS) curve to shift.

Optimistic producer (or firm) expectations

Which of the following makes up currency?

Paper money and coins

In the short run, a rightward shift in the aggregate demand curve, beginning from equilibrium, will tend to cause which of the following to increase?

Real Output, Price Level, Unemployment Rate, *Both A and B, but not C*

The economy can only be in long-run equilibrium at the intersection of which of the following curves?

SRAS, LRAS, and AD

______________ is NOT a component of Aggregate Demand (AD).

Savings

According to the information given in the figure above, as the economy moves from its short-run equilibrium to a new long-run equilibrium, which of the following will occur?

Short-run aggregate supply curve will shift to the left (upward)

Entitlements refer to which type of government spending?

Social Security and Medicare

Other things being equal, if the central bank undertakes expansionary monetary policy, what is expected?

The Aggregate Demand (AD) Curve will shift to the right

Starting at point A in the graph above, assume a decrease in government spending shifts Aggregate Demand (AD) to the left and so the economy moves to point B. Which of the following is true?

The economy has contracted towards a trough in its business cycle

Consider the figure above. Which of the following is NOT true of the short run equilibrium?

The economy is around a trough in the business cycle

What is the first step of the federal budget process?

The executive branch (the president) submits a budget proposal

Why CAN'T the economy stay at point B in the graph above?

The expected input prices are higher than the price level of final goods and services

When a commercial bank makes a car loan to an individual, which of the following does NOT happen on the three main balance sheets of the economy?

The loan liability of the Commercial Bank Balance Sheet increases by the amount of the loan

What is the required reserve ratio?

The minimum level of reserves that the Fed requires commercial banks to hold, stated as a percentage of deposits

When commercial banks are able to lend more money to households & firms and/or purchase more securities, what happens in the economy as a result?

The money stock increases and there is an expansion in the business cycle of the economy

The figure above shows the long-run and short-run aggregate supply curves for an economy. According to this diagram, which of the following is true?

The natural level of real output is $5,000 billion, The expected input price level is 1.5, Input prices are fully flexible in the short run. *Both A and B, but not C*

Short-run equilibrium occurs at an output level that is greater than the natural level of real output. As the economy adjusts to reach long-run equilibrium what would we predict?

The unemployment rate will increase

Tax expenditures have many political advantages over cash government spending. Which of the following is NOT one of the advantages?

Their presence results in no fiscal impact on the economy

Which of the following will be true if unemployment is above its natural rate?

There will be downward pressure on wages

Which of the following will be true if unemployment is below its natural rate?

There will be upward pressure on wages

Which of the following is included in M2 but NOT in M1?

Time Deposits

When consumers make withdrawals of currency from their bank deposits, which of the following tends to decrease?

Total reserves of Commercial Banks

In the short run, a leftward shift in the aggregate demand curve, beginning from equilibrium, will tend to cause which of the following to increase?

Unemployment Rate

Consider the figure above. Which of the following is NOT true of the short run equilibrium?

Unemployment is below the natural rate

What Fed strategy does quantitative easing refer to?

Using open market purchases to provide monetary stimulus when interest rates approach zero

The Long Run Aggregate Supply (LRAS) curve is ___________.

Vertical

What is meant by Open Market Operations?

When the Fed purchases or sells US government securities

Around the trough of the business cycle, the structural budget balance is ______________ the actual budget balance.

above

The ___________ budget balance is influenced by both automatic and discretionary fiscal policy, while the ___________ budget balance is adjusted to remove the effects of automatic fiscal policy.

actual; structural

The economy slips into a recession and, with declining incomes, tax collections decrease. This is ____________ fiscal policy. In response to the recession, the government cuts taxes. This is ____________ fiscal policy.

an automatic; a discretionary

Around the peak of the business cycle, the structural budget balance is ______________ the actual budget balance.

below

Suppose the government raises taxes. If the Fed does not fully accommodate this ___________ fiscal action, then the Fed will ___________interest rates.

contractionary; decrease

Suppose taxes are reduced. Subsequently, in the short run, the unemployment rate will ________ and real output will _________.

decrease; increase

Also because of automatic fiscal policy at or near a trough of the business cycle, the actual government budget balance moves towards ____________.

deficit

Because of automatic fiscal policy during a trough (or a recession), the actual budget moves towards ___________.

deficit

Federal ________ refers to one year where government spending exceeds tax revenue. Federal ________ refers to the total amount owed by the government.

deficit; debt

The president has proposed increasing income tax rates and reducing payments to welfare recipients. We would expect this policy to shift aggregate _______ to the _______.

demand; left

Almost always, the _________________ is higher than the _______________, which is then higher than the ________________.

discount rate; federal funds rate; interest rate paid on reserve deposits

In the graph above, the expected input prices at point A are __________ the expected input prices at point B.

equal to

Typically, it is ________ to reverse a fiscal policy than a monetary policy. To that extent, fiscal policy is ________ likely than monetary policy to be procyclical.

harder; more

If a bank wishes to expand its lending activities, it could approve loans with _______ credit risk or _______ the interest rate on loans

higher; decrease

Government spending is reduced. Subsequently, in the short run, the unemployment rate will ________ and real output will _________.

increase; decrease

The immediate result of an Open Market Purchase by the Fed is an ___________ in reserve deposits and bank deposits and therefore a ___________ in the federal funds rate.

increase; decrease

When a bank makes a loan, the immediate effect is to ______ the money stock by ______ the amount of the loan

increase; exactly

Because of automatic fiscal policy at or near a trough of the business cycle, _____________ tax revenue is collected and ____________ government spending takes place.

less; more

On the Commercial Bank Balance Sheet: bank deposits appear as a _______ and loans appear as a _______.

liability; asset

The intercept of the __________ aggregate supply curve with the real GDP axis coincides with the economy's ___________.

long run; natural level of real output

The federal funds rate is ________, and the discount rate is ________.

market-determined; administered by the Fed

Money fulfills each of the following functions EXCEPT being a:

means for bartering

Because of automatic fiscal policy at or near a peak of the business cycle, _____________ tax revenue is collected and ____________ government spending takes place.

more; less

Which government budget balance is adjusted to remove the effects of both automatic stabilizers and interest payments?

primary structural

When determining how large of a countercyclical fiscal stimulus to apply, policymakers must keep in mind that Aggregate Demand (AD) will ________________ increase in government spending.

shift right by more than

The use of tax expenditures instead of cash government spending makes the government appear _________ since tax expenditures are not subject to the annual appropriations process.

smaller

If we remove the effects of automatic stabilizers from the actual budget balance, we get the __________ budget balance. If we also remove net interest payments we get the __________ budget balance.

structural; primary structural

Also because of automatic fiscal policy at or near a peak of the business cycle, the actual government budget balance moves towards ____________.

surplus

The actual budget balance is calculated by:

tax revenue - government spending