final exam question

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Ignoring any supply-side effects, to close an inflationary gap of $100 billion with a government expenditure multiplier of 5, the government could

decrease government expenditure on goods and services by $20 billion.

a change in the price level brings a ____ the aggregate supply curve , NOT a _____ the aggregate supply curve

movement along; shift in

when the domestic price level increases, exports decrease and imports increase. other things stay the same, this is

movement upward along the aggregate demand curve

Moving along the aggregate supply curve

only when the prices changes

The output gap is the

percentage deviation of real GDP from potential GDP.

While the Fed has a "dual mandate" of goals to achieve, most economists believe that in the long run the single key role is attaining

price stability

The figure above shows the market for bank reserves in Futureland. If the Bank of Futureland lowers the target federal funds rate by 1 percentage point, the central bank will conduct an open market ________ of government securities of ________ to ________ the supply of reserves.

purchase; $25 billion; increase

In order to reduce inflationary pressure on the economy, what fiscal policy can the government use?

raise taxes

If the AS and the AD curve intersect at a level of real GDP that exceeds potential GDP, then the appropriate monetary policy is one that ________ the federal funds rate and ________ aggregate demand.

raises; decreases

The figure above shows a nation's aggregate demand curve, aggregate supply curve, and potential GDP. In the figure above, the ________ gap is one trillion dollars. To close the gap, the government can ________ government expenditure and/or ________ taxes.

recessionary; increase; decrease

if investment increases by $1 million, then the aggregate (total) demand curve shifts

rightward by more than $1 million

The figure above shows the market for bank reserves in Futureland. If the Bank of Futureland undertakes an open market sale of government securities that changes the quantity of reserves by $25 billion, then the federal funds rate will

rise to 6 percent a year.

if the money wage rate rises, the AS curve shift leftward.

the AS curve shift leftward

The figure above shows aggregate demand curves. Based on the figure above, the aggregate demand curve will shift from AD0 to AD1 when

the Federal Reserve lowers the interest rate.

During a inflationary gap,

the aggregate demand curve and aggregate supply curve intersect at a level of real GDP that exceeds pot

if the AD curve shifts rightward while the AS curve and Potential GDP don't change then

the expansion phase of the business cycle occurs

One problem with the ripple effect from the Fed's monetary policy is

the fact that the monetary policy transmission process is long and drawn out.

what happens when the price level is low?

the lower the price level, the greater the quantity (amount) of real GDP demanded

a change in any of the following factors except____ shifts the aggregate demand curve

the money wage rate

In the short run, when the Fed increases the federal funds rate,

the real interest rate rises and investment decreases.

if people's expectations about future income improve so they think their future income will be higher than previously believed, then the AD curve

will shift rightward because people will increase spending now.

A change in the federal funds rate ________ the supply of loanable funds, ________ the long-term real interest rate, and ________ investment.

affects; affects; affects

if potential GDP increases

aggregate (total) supply increases

The government expenditure multiplier is used to determine the

amount aggregate demand is affected by a change in government expenditure.

The federal budget is defined as

an annual statement of expenditures and tax revenues of the U.S. government.

if taxes are cut there is

an increase in aggregate (total) demand and the AD shifts rightward

Cost-push inflation might initially result from

an increase in the cost of resources

during the late 1960's, U.S. defense spending increased as the United States fought in Vietnam. This increase in government expenditure on goods and services most likely creates

an inflationary gap. (happens when the economy is operating above full capacity) Real GDP> Potential GDP unemployment rate < natural rate of employment

The Fed ________ influence the real interest rate in the short run and ________ influence the real interest rate in the long run.

can; cannot

a rise in the price level

decrease the quantity of real GDP demanded

If the Fed fears inflation, it ________ by ________ government securities

decreases aggregate demand; selling

When the Fed raises the federal funds rate, the consumption expenditure ________ and investment ________.

decreases; decreases

A cut in the income tax rate ________ the tax wedge and ________ employment, saving, and investment.

decreases; increase

An increase in the income tax ________ potential GDP by shifting the labor ________ curve ________.

decreases; supply; leftward

the government collects tax revenues of $100 million and has $105 million in outlays. the budget balance

deficit of $5 million

If the Federal Reserve decreases the Federal funds rate, other short-term interest rates ________ and the exchange rate ________.

demand for money.

The k-percent rule, an example of a money targeting rule, relies on a relatively stable

demand for money.

The figure above shows an economy aggregate demand curve and aggregate supply curves. Suppose the shift from AD0 to AD1 and from AS0 to AS1 is the result of fiscal policy. If the effect on aggregate demand was larger than the figure above shows, as a result the price level would be ________ 110 and real GDP would be ________ $17 trillion.

higher than; larger than

An economy is at a short-run equilibrium as illustrated in the above figure. An appropriate fiscal policy option to move the economy to full employment is to

increase government expenditure and move the economy to a full-employment equilibrium at point b.

which of the following shifts the aggregate supply shift leftward?

increase in money wage rate

If an economy is at the short-run equilibrium illustrated by the figure above, a discretionary fiscal policy to adjust the economy to full employment is to

increase taxes and decrease government spending simultaneously.

The supply-side effects show that a tax cut on labor income ________ employment and ________ potential GDP

increase; decrease

The figure above shows the market for loanable funds. The supply of loanable funds curve shifts rightward. The change illustrated in the figure above is part of the transmission process of the Fed's monetary policy. As a result of the increase in the supply of loanable funds, in the short run aggregate demand ________, aggregate supply ________, and potential GDP ________.

increases; does not change; does not change

When the Fed________ the federal funds rate, the opportunity cost of firms' investment ________ and so the quantity of investment ________.

increases; rises; decreases

Potential GDP increased from 4.7 trillion to 16.6 trillion between 1970 and 2013 resulting in economic growth. Also, during this time ________ occurred because ________.

inflation; aggregate demand increased by more than potential GDP

When the government's outlays equal its tax revenues, then the budget

is balanced

The figure above shows a nation's aggregate demand curve, aggregate supply curve, and potential GDP. In the figure above, to use fiscal policy to move the economy back to potential GDP, the government must increase government expenditure by ________ $1 trillion and/or decrease taxes by ________ $1 trillion.

less than; less than

If the Fed is concerned about a possible recession, it ________ the federal funds rate and, in response, long-term interest rates ________ by a ________ amount than the change in short-term rates

lowers; decrease; smaller

suppose the exchange rate in the year 2010 was 4 yaun per dollar and in 2011 the exchange fell to 3 yaun per dollar. if the Chinese sweater was 120 yuan in both years, the new dollar price in 2011 would be ____ and the Imports of Chinese sweaters would be ________.

$40; Decrease. 4/120= 30 yuan 2010 3/120= 40 yuan 2011

when tax revenues minus outlays is 1. positive, the government has a budget surplus 2. negative, the government has a budget deficit 3. zero, the government has a balanced budget

1,2,3...all correct

The table above gives a nation's government outlays and tax revenues for 2008 through 2012. During which years did the country have a budget deficit?

2010 and 2012

Monetary policy decisions are made by the

Federal Open Market Committee.

Demand-pull inflation starts with a shift of the

AD curve Rightward

If the Fed raises the federal funds rate, eventually the

AD curve shifts leftward, decreasing real GDP and the price level.

If the Fed lowers the federal funds rate, which of the following occurs?

Investment increases.

The ________ view says that fiscal stimulus has a multiplier effect that makes it a ________ tool to fight a deep recession.

Keynesian; powerful

Do automatic fiscal stabilizers eliminate business cycles?

No, but they do moderate business cycles.

a demand-pill inflation consist of____ shifts in the AD curve and _____ shifts in the AS curve

Rightward; Leftward

Which of the following is a problem in pursuing monetary policy?

The lag between a change in the quantity of money and its effect on economic activity may be long.

When tax revenues equal government outlays, the situation is referred to as

a balanced budget

National debt decreases in a given year when a country has

a budget surplus.

the change reflected in the above figure might be a result of. ( the AS curve shifts rightward)

a decrease in money wage rate

During 2010, a country reports that its price level fell and the money wage rate did not change. these changes lead

a higher real wage rate, lower profits, and a decrease in the quantity of real GDP supplied.

Maintaining the growth of the money supply at a constant rate is an example of

a money targeting rule.

The proposal to keep the quantity of money growing at a slow constant rate is an example of

a money targeting rule.

a fall in the price level produces a______ the aggregate supply curve.

a movement downward along

a rise in the price level brings a ________in the buying power of money that____ consumption expenditures and causes the quantity of real GDP demand to______.

fall; decreases; decrease

The monetary policy instrument the Federal Reserve chooses to use is the

federal funds rate

Which of the following is a potential monetary policy instrument for the Fed?

federal funds rate

The government has a budget surplus if

tax revenues are greater than outlays

The structural deficit is the deficit

that would occur at full employment.


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