Exam 3 - Macroeconomics

The AE model in Hamsterville is given by AE=$10B + 0.8*Y. If a depreciation of the Hamsterville snark increases net exports by $100M, how much will equilibrium real GDP change?

$500M

The Board of Governors of the Federal Reserve:(i) guides the operations of the Federal Reserve.(ii) ensures that interest rate ceilings are maintained.(iii) ensures that monetary policy follows the guidelines from Congress.(iv) oversees all the Federal Reserve district banks.

(i), (ii), and (iv)

Suppose the rate of inflation increases, and in response the Fed raises interest rates. Which of the following would we expect to see? - Investment increases - Less consumption - More consumption - lower net exports - Less investment

- Less consumption - lower net exports - Less investment

As a result of supply chain disruptions, businesses throughout the economy anticipate higher production costs. At the same time, reduced consumer confidence means that index of consumer sentiment is down. All else equal (i.e., if we ignore business sentiment and just thought about these effects), and if prices are neither fully flexible nor fully fixed, then based on the AD-AS model we can expect real GDP to _______________ and inflation is _______________.

- decrease - not determinable without more information

The IOER serves as a _______ to the FFR and the Discount Rate serves as a _______ to the FFR.

- floor - ceiling

In 2018, an increase of $516 million in real GDP in the United States was associated with an increase in consumption spending of $329 million. From this we can infer that the MPC is

.64 MPC = change in consumption/change in GDP = $329 billion/$516 billion = 0.64

Which taxes are more likely to be regressive? 1 Social Security Taxes 2 Federal Income taxes 3 Sales taxe

1 and 3

Fiscal policy works best when it is: A) timely, targeted, and temporary. B) general, nonspecific, and long-lasting. C) Discretionary. D) not countercyclical.

A

Which of the following leads to lower real GDP based on the AE model? A) Lower unplanned investment spending B) A lower savings rate C) A decreased in planned investment in capital

A decreased in planned investment in capital - This shifts the AE line down, leading to lower real GDP.

Government spending adds directly to GDP through _____ and indirectly through _____. A) government purchases; transfer payments B) Transfer payments; government purchases C) government purchases; military spending D) Higher interest rates; crowding out

A government purchases; transfer payments

Real GDP in Hamsterville increased by 10%. If the central bank of Hamsterville takes no action, we would expect to see what in the short run?

An increase in the demand for money and an increase in nominal interest rates.

Tim Sands invites J Powell (the current chair of the Federal Reserve) to a large gathering that totally violates all the social distancing rules. As a result, J Powell and the entire Board of Governors (who makes monetary policy decisions) is quarantined. You are chosen to take over monetary policy decisions. If there is a negative AD shock causing the unemployment rate to increase substantially, your best option is to A) increase interest rates B) decrease government spending C) decrease interest rates, which increases planned investment. D) increase government spending

C) decrease interest rates, which increases planned investment.

If the Fed announces that it is raising interest rates 50 basis points, which of the following is possible?

It is trying to normalize interest rates It is concerned about inflation

How is monetary policy different from fiscal policy?

Monetary policy adjusts interest rates, whereas fiscal policy adjusts government spending and taxes.

Programs like Social Security and Medicare are funded through: corporate taxes. individual income taxes. payroll taxes. tariffs.

Payroll taxes

Which of the following best describes the purpose and mechanism of a overnight reverse repo (ONP RRP)?

The Fed sells securities to a bank (or other dealer) overnight with an agreement to buy the bond back the next day at a pre-determined price. This decreases the excess reserves a bank has to loan out, which increases the FFR.

You are single and earn $51,875 a year. You plan to take the standard deduction, so your taxable income in 2020 is $39,475 putting you at the marginal tax rate of 12%. Someone offers you a job with a salary of $56,875. If there are no added costs associated with the new job, will your take home pay increase?

Yes

Inflation in Hamsterville is low and predictable. If the citizens of Hamsterville start to worry about the risk of corporate bonds failing, we would expect to see

an increase in money demand and a decrease in the nominal interest rate

Stocks drastically increase, increasing consumer wealth. Consumers are willing to spend more at each level of income. This is illustrated by

an increase in the AE line which increases equilibrium (actual) GDP

If you read an announcement in the news that the Fed has lowered interest on excess reserves, a reasonable conclusion would be the FOMC is concerned about

high unemployment

The Federal Reserve was created

in 1913 in response to a banking crisis in 1907

Suppose that the Federal Reserve has a 2% target on inflation. If actual inflation is 2%, then, the Fed will:

not change the real interest rate.

Suppose business optimism, as measured by an index such as the NFIB (Links to an external site.), goes down, especially in the measure "now is a good time to expand". As a result, planned investment decreases. According to the AD-AS model, what happens to real GDP, inflation, and unemployment, and what phase of the business cycle are you likely in?

real GDP decreases, inflation decreases, unemployment increases, and either peak or contraction

Assume that increased government spending has no effect on real interest rates (it might, but assume that it doesn't for now). According to the AD-AS model, what is the effect of an increase in government spending have on output, inflation, and unemployment?

real GDP increases, the price level increases, and unemployment decreases

You predict that the output gap will decline from 1% to -1%. If the current unemployment rate is 3.5%, using Okun's rule you predict the unemployment rate to

rise to 4.5%

In the United States, the largest components of federal government spending are: military spending and science. Medicare and health. state expenditures and housing. social security, unemployment, and labor.

social security, unemployment, and labor.

What is the Federal Reserve's mandate?

to ensure maximum employment while maintaining stable prices