Last Econ test

Which of the following would be considered a fiscal policy action?

A tax cut is designed to stimulate spending during a recession.

Suppose the economy is in a recession and expansionary fiscal policy is pursued. Using the static AD-AS model in the figure above, this would be depicted as a movement from

A to B

Suppose the economy is in a recession and the Fed pursues an expansionary monetary policy. Using the static AD-AS model in the figure above, this would be depicted as a movement from

A to B

Suppose the economy is in short-run equilibrium below potential GDP and Congress and the president lower taxes to move the economy back to long-run equilibrium. Using the static AD-AS model in the figure above, this would be depicted as a movement from

A to B

Suppose the economy is in a recession and no policy is pursued. Using the static AD-AS model in the figure above, this situation would be depicted as a movement from

A to E

Suppose the economy is in short-term equilibrium below potential GDP and no fiscal or monetary policy is pursued. Using the static AD-AS model in the figure above, this would be depicted as a movement from

A to E

Suppose the Fed increases the money supply. Which of the following is true?

At the original interest rate, the quantity of money demanded is less than the quantity of money supplied.

An increase in taxes would be depicted as a movement from ________, using the AD-AS model in the figure above.

B to A

Suppose the Fed sells Treasury Bills in pursuit of contractionary monetary policy. Using the static AD-AS model in the figure above, this situation would be depicted as a movement from

C to B

Suppose the economy is in short-run equilibrium above potential GDP, the unemployment rate is very low, and wages and prices are rising. Using the static AD-AS model in the figure above, the correct Fed policy for this situation would be depicted as a movement from

C to B

Suppose the economy is in short-term equilibrium above potential GDP and wages and prices are rising. If contractionary policy is used to move the economy back to long run equilibrium, this would be depicted as a movement from _____________________ using the static AD-AS model in the figure above.

C to B

Which of the following would cause the money demand curve to shift to the left?

a decrease in real GDP

Monetary policy refers to the actions the

Federal Reserve takes to manage the money supply and interest rates to pursue its macroeconomic policy objectives.

If the short-run aggregate supply increases by less than the long-run aggregate supply, then, at the short-run equilibrium,

GDP will be below potential GDP.

In the long run,

GDP= potential GDP

Suppose the economy is at a short-run equilibrium GDP that lies above potential GDP. Which of the following will occur because of the automatic mechanism adjusting the economy back to potential GDP?

Short run aggregate supply will shift to the left.

Suppose the economy is at a short-run equilibrium GDP that lies below potential GDP. Which of the following will occur because of the automatic mechanism adjusting the economy back to potential GDP?

Short-run aggregate supply will shift to the right.

Government transfer payments include which of the following?

Social Security and Medicare programs.

Which of the following characterizes the Fed's ability to prevent recessions?

The Fed is able to keep a recession shorter and milder than it would otherwise be.

In the figure above, suppose the economy is initially at point A. The movement of the economy to point B as shown in the graph illustrates the effect of which of the following policy actions by the Federal Reserve?

an open market purchase of Treasury Bills

In the figure above, suppose the economy is initially at point A. The movement of the economy to point B as shown in the graph illustrates the effect of which of the following policy actions by the Federal Reserve?

an open market sale of Treasury Bills

In the figure above, the movement from point A to point B in the money market would be caused by

an open market sale of Treasury securities by the Federal Reserve.

Suppose a recession occurs as a result of a supply shock, and instead of the economy naturally working its way back to equilibrium, the government uses policy to shift the aggregate demand curve to fight the recession. Using policy this way would

bring real GDP back to potential GDP more quickly but would result in a permanently higher price level.

When the Federal Reserve decreases the money supply, at the previous equilibrium interest rate households and firms will now want to

buy Treasury bills

Suppose the Fed decreases the money supply. In response households and firms will ________ short term assets and this will drive ________ interest rates.

buy; up

If money demand is extremely sensitive to changes in the interest rate, the money demand curve becomes almost horizontal. If the Fed expands the money supply under these circumstances, then the interest rate will

change very little and investment and consumer spending will change very little

In the dynamic model of AD-AS in the figure above, if the economy is at point A in year 1 and is expected to go to point B in year 2, Congress and the President would most likely pursue

contractionary fiscal policy

Given that the economy has moved from A to B in the graph above, which of the following would be the appropriate fiscal policy to achieve potential GDP?

increase government spending

In the model of AD-AS in the figure above, if the economy is a point A in year 1 and is expected to go to point B in year 2, Congress and the president would most likely

increase taxes

If the probability of losing your job remains ________, a recession would be a good time to purchase a home because the Fed usually ________ interest rates during this time.

low; lowers

The Federal Reserve System's four monetary policy goals are

price stability, high employment, economic growth, and stability of financial markets and institutions.

Crowding out refers to a decline in ________ as a result of an increase in ________.

private expenditures; government purchases

In the figure above, if the economy is at point A, the appropriate monetary policy by the Federal Reserve would be to

raise interest rates

The use of fiscal policy to stabilize the economy is limited because

the legislative process can be slow, which means that it is difficult to make fiscal policy actions in a timely way.

In the graph above, the shift from AD1 to AD2 represents the total change in aggregate demand. If government purchases increased by $50 billion, then the distance from point A to point B ________ $50 billion.

would be greater than

When the Federal Reserve System was established in 1913, its main policy goal was

preventing bank panics

An increase in aggregate demand in the economy will have what effect on macroeconomic equilibrium in the long run?

The price level will rise, and the level of GDP will be unaffected.

Which of the following correctly describes the automatic mechanism through which the economy adjusts to long run equilibrium?

The rightward shift of the short-run aggregate supply curve that occurs after a recession.

Suppose the economy is at full employment and firms become more pessimistic about the future profitability of new investment. Which of the following will happen in the short run?

Unemployment will rise.

Why does the short-run aggregate supply curve shift to the right in the long run, following a decrease in aggregate demand?

Workers and firms adjust their expectations of wages and prices downward and the accept lower wages and prices.

If the tax multiplier is -1.5 and a $200 billion tax increase is implemented, what is the change in GDP, holding everything else constant? (Assume the price level stays constant.)

a $300 billion decrease in GDP

Active changes in tax and spending by government intended to smooth out the business cycle are called ________, and changes in taxes and spending that occur passively over the business cycle are called ________.

discretionary fiscal policy; automatic stabilizers

If the economy is falling below potential real GDP, which of the following would be an appropriate fiscal policy to bring the economy back to long-run aggregate supply? An increase in:

government purchases

Congress and the president carry out fiscal policy through changes in

government purchases and taxes.

An increase in the interest rate

increases the opportunity cost of holding money

The three categories of federal government expenditures, in addition to government purchase, are

interest on the national debt, grants to state and local governments, and transfer payments.

Social Security

is a system whereby current retirees are paid from taxes collected from current workers.

The tax increases necessary to fund future Social Security and Medicare benefit payments would be

large, and could discourage work effort, entrepreneurship, and investment, thereby slowing economic growth.

An increase in real GDP can shift

money demand to the right and increase the equilibrium interest rate.

If government purchases increase by $100 billion and lead to an ultimate increase in aggregate demand as shown in the graph, the difference in real GDP between point A and point B will be

more than $100 billion

A decrease in aggregate demand causes a decrease in ___________ only in the short-run, but causes a decrease in ______________ in both the short run and the long run.

real GDP; the price level

During the turmoil in the market for subprime mortgages in 2007 and 2008, the Fed increased the volume of discount loans. The goal of the Fed was to

reassure financial markets and promote financial stability.

Stagflation occurs when inflation ________ and GDP ________.

rises; falls

A rapid increase in the price of oil will tend to

shift short-run aggregate supply to the left.

If the economy is growing beyond potential real GDP, which of the following would be an appropriate fiscal policy to bring the economy back to long-run aggregate supply? An increase in

taxes

The Federal Reserve plays a larger role than Congress and president in stabilizing the economy because

the Federal Reserve can more quickly change monetary policy than the president and the Congress can change fiscal policy.

In the model AD-AS in the figure above, if the economy is at point A in year 1 and is expected to go to point B in year 2, and no fiscal policy is pursued, then at point B

the unemployment rate is very low

The largest and fastest-growing category of federal government expenditures is

transfer payments