Macro, Econ 211

The money multiplier equals

1/R, where R represents the reserve ratio for all banks in the economy.

During the Great Recession the budget deficit sharply increased. Which of the following items did NOT contribute to the deficit's increase

Federal Reserve's policy of quantitative easing

Which of the following statements is correct?

In the short run, unemployment and inflation are negatively related. In the long run they are largely unrelated problems.

Again, using the situation in the previous two questions. Which of the following best describes the mechanism that moves the economy from the short-run equilibrium to the long-run equilibrium in response to the tax decline.

In the short-run, the economy's employment level rose above full employment. This tight labor market eventually causes wages and price expectations to increase and, therefore, the SRAS curve shifts up/left.

Which of the following has NOT been advanced as a possible explanation for the Great Moderation

Increased globalization

Figure 33-7. Refer to Figure 33-7. Suppose the economy starts at Y. If there is a fall in aggregate demand, then the economy moves to

Z in the long run.

For the following questions, use the diagram below:Figure 34-7. Refer to Figure 34-7. The aggregate-demand curve could shift from AD1 to AD2 as a result of

a decrease in net exports.

If the economy begins at potential output when there is a decrease in taxes, then in the short-run

all of the above

Some argue that using stabilization policy can introduce more volatility into the economy because

all of the above

The economy's quick recovery from the 1980-82 recession was in part a result of

all of the above

The political independence of the Federal Reserve serves to

allow monetary policy to be formulated based on economic rather than political considerations

Which of the following policies would be advocated by proponents of stabilization policy when the economy is experiencing severe unemployment?

an increase in government purchases

Financial Crisis Suppose that banks are less able to raise funds and so lend less. Consequently, because people and households are less able to borrow, they spend less at any given price level than they would otherwise. The crisis is persistent so lending should remain depressed for some time. Refer to Financial Crisis. What happens to the price level and real GDP in the short run?

both the price level and real GDP fall

The Stock Market Boom of 2015 Imagine that in 2015 the economy is in long-run equilibrium. Then stock prices rise more than expected and stay high for some time. Refer to Stock Market Boom 2015. In the short run what happens to the price level and real GDP?

both the price level and real GDP rise.

When conducting an open-market purchase, the Fed

buys government bonds, and in so doing increases the money supply.

Suppose the economy begins in a short-run recessionary equilibrium. As price expectations and wages adjust and the economy moves from the short-run equilibrium to the new long-run equilibrium,

consumer spending increases as prices fall generating a movement along the AD curve

Social security is a "pay as you go" program. That means

current benefits to the retired are paid with current taxes paid by the non-retired workers

Refer to Figure 33-10. If the economy starts at point C, stagflation would be consistent with point

d. D

If the reserve ratio is 15 percent, and banks do not hold excess reserves, and people hold only deposits and no currency, then when the Fed sells $25.5 million worth of bonds to the public, bank reserves

decrease by $25.5 million and the money supply eventually decreases by $170 million.

Suppose investment spending falls. To offset the change in output the Federal Reserve could

decrease interest rates. This increase would also move the price level closer to its value before the decline in investment spending.

A $75 million open market sale of government securities by the Federal Reserve when the reserve ratio is 10%, will ___________ the money supply by ___________.

decrease, $750 million

When the Federal Reserve conducts an open market sale of government securities, we would expect bank reserves to ____________ and the federal funds interest rate to ____________.

decrease, increase

A basis for the slope of the short-run Phillips curve is that when unemployment is high there are

downward pressures on prices and wages

The U.S. tax code provides incentives for all of the following EXCEPT

drinking red wine

In response to a rise in energy prices, wages will eventually

fall because of the initial increase in unemployment

If the reserve ratio increased from 5 percent to 10 percent, then the money multiplier would

fall from 10 to 5

The decision lag associated with monetary policy is long

false

When the Federal Reserve conducts open market purchases of government securities, it is purchasing them directly from the Treasury.

false

Permanent tax cuts shift the AD curve

farther to the right than do temporary tax cuts.

If one bank lends excess reserves to another bank overnight, the rate that the borrowing bank pays is called

federal funds interest rate

The Federal Reserve uses the ____________ as an intermediate target to affect its final targets of _____________ and ____________ .

federal funds interest rate, employment, inflation

If one bank lends excess reserves to another bank, the rate that the borrowing bank pays is called

federal funds rate

Currently, U.S. currency is

fiat money with no intrinsic value

Suppose the economy begins in a short-run recessionary equilibrium. As price expectations and wages adjust and the economy moves from the short-run equilibrium to the new long-run equilibrium,

firms are willing to produce more because input costs are falling

Suppose, as in the question above, taxes decline. Which of the following best describes the short-run supply reaction?

firms increase production because with rising prices and sticky wages, profit per unit increases. This is shown as a movement along the SRAS curve.

Suppose the economy begins at a long-run equilibrium at potential output when the economy is hit by a negative AD shock. Which of the following best describes the short-run supply reaction to that shock.

firms produce less because the lower price level accompanied by sticky wages decreases profit per unit. This is shown by a movement along the SRAS curve.

The Atlanta Fed's Sticky Price CPI inflation measure, tracks inflation

for goods whose prices change relatively infrequently

If the government deficit this year is $400 billion, then

government debt will increase by $400 billion

If the government deficit this year is $500 billion, then

government debt will increase by $500 billion

A budget deficit occurs when

government expenditures exceed tax revenue in a given year

Most economists believe that a cut in tax rates

has a relatively small effect on the aggregate-supply curve.

The number of retired workers rises as the baby boom generation ages. This will result in

higher mandatory spending

If an open market purchase of government securities increases bank excess reserves by $80 million, then banks will likely

increase loans by $80 million

A positive aggregate demand shock will

increase output and employment in the short run

An increase in investment spending in the long-run can

increase the capital stock and shift the long-run aggregate supply curve to the right

During the Great Recession, U.S. government outlays __________ and U.S. government revenues _________________.

increased, decreased

A negative aggregate demand shock will have which of the following impacts in the long run.

lower prices

To lower inflation during the 1980-82 "double-dip" recession, the Federal Reserve raised the federal funds interest rate which led to

lower spending and higher unemployment

In 2020 the biggest change in government outlays was in which of the following categories

mandatory

Suppose it has become apparent that the economy has entered a recession. If on the same day, the FOMC met to decide on a monetary action and Congress began deliberations on a tax cut, under most circumstances which would you expect to be implemented first?

monetary policy

In the short-run following a positive aggregate demand shock which of the following is true

most wages have not yet adjusted

Consider the exhibit below for the following questions. Figure 33-4 Refer to Figure 33-4. If the economy starts at A and moves to D in the short run, the economy

moves to C in the long run.

Consider the exhibit below for the following questions. Figure 33-4 Refer to Figure 33-4. If the economy is at A and there is a fall in aggregate demand, in the short run the economy

moves to D.

Suppose that the central bank unexpectedly increases the growth rate of the money supply. In the short run the effects of this are shown by

moving to the left along the short-run Phillips curve

The economist A.W. Phillips published a famous article in 1958 in which he showed a

negative correlation between the rate of unemployment and the rate of inflation

The long-run impact of an increase in government purchases is

output is unchanged, investment spending is lower and prices are higher

When the Federal Reserve has high credibility that it will effectively tackle inflation, then if the Fed acts to lower inflation,

price expectations and inflation quickly adjust

The short-run Phillips Curve shifts up when

price expectations and wages increase causing the SRAS to shift up

During the 1950s and 1960s the Phillips Curve appeared stable because

price expectations didn't change much

The Biden infrastructure proposal envisions funding the additional spending by

raising corporate income taxes

If government spending increases by $100 billion and individual income taxes increase by $100 billion so that the government budget deficit is unchanged, then the net impact of both actions is that the AD curve would

shift to the right

The Stock Market Boom of 2015 Imagine that in 2015 the economy is in long-run equilibrium. Then stock prices rise more than expected and stay high for some time. Refer to Stock Market Boom 2015. In the long run, the change in price expectations created by the stock market boom shifts

short-run aggregate supply left.

Which of the following is NOT an example of U.S. government discretionary spending?

social security

When personal income taxes decline by $5 billion and the MPC = .8, in the first round of the spending multiplier process

spending increases by $4 billion

During a more typical recession spending on services __________ while during this pandemic recession spending on services _____________.

stays about the same, decreased

When the economy enters a recession, policy-makers often use stabilization policy because

sticky wages and prices mean the economy's self-adjustment mechanism can be slow acting

One of the major benefits of a Federal Reserve that is credible in its announcements to lower inflation is that

the Federal Reserve will be able to anchor inflation expectations more easily and this can make monetary policy induced recessions shorter

When the economy is moving from a recessionary short-run equilibrium to its long-run equilibrium, if price expectations adjust quickly then we might expect

the SRAS curve to shift down/right more quickly

Recessions in Canada and Mexico would cause

the U.S. price level and real GDP to fall

Economic expansions in Europe and China would lead to which of the following outcomes in the short run

the U.S. price level and real GDP to rise.

Recessions in Canada and Mexico would cause which of the following short-run impacts?

the U.S. price level to rise and real GDP to fall.

If the federal funds interest rate were lowered on the same day that the federal government lowered personal tax rates, which action would you expect to affect spending first?

the fiscal policy action to lower taxes

During the 1990s information technology boom,

the marginal product of capital increased and aggregate demand shifted to the right

In conducting monetary policy, the federal funds interest rate that would yield full employment is called

the neutral interest rate

The short-run is defined as

the period during which prices and wages have not yet fully adjusted to a shock

When wages and price expectations rise

the short-run aggregate supply curve shifts up/left

Refer to Figure 33-4. If the economy starts at A and there is a fall in aggregate demand, the economy moves

to C in the long run

Consider the exhibit below for the following questions. Figure 33-4 Refer to Figure 33-4. If the economy starts at A and there is a fall in aggregate demand, the economy moves

to C in the long run.

During periods of expansion, automatic stabilizers cause government expenditures

to fall and taxes to rise

If government spending decreases by $10 billion and personal income taxes are also cut by $10 billion, then the net effect on total spending (after the multiplier process) is that

total spending decreases

A positive aggregate demand shock will eventually raise firms per unit costs because wages will eventually rise and operating costs may also rise.

true

Treasury securities are issued by the federal government to finance budget deficits.

true

The short-run Phillips curve shows the combinations of

unemployment and inflation that arise in the short run as aggregate demand shifts the economy along the short-run aggregate supply curve

As the aggregate demand curve shifts leftward along a given aggregate supply curve,

unemployment is higher and inflation is lower.

The long-run Phillips curve is

vertical at the natural rate of unemployment

When the Federal Reserve lowers the federal funds interest rate, in the transition from the short run to the long run,

wages rise and production falls

If the reserve requirement is 5 percent, a bank desires to hold no excess reserves, and it receives a new deposit of $10, then this bank

will be able to make new loans up to a maximum of $9.50.

If inflation expectations rise, even without any fundamental economic reasons, it is likely that the expectations themselves

will lead to higher prices and inflation

Figure 33-10. Refer to Figure 33-10. If the economy starts at point A, a short-run fall in output would be consistent with a movement to point

D.

Figure 33-10. Refer to Figure 33-10. If the economy starts at point C, stagflation would be consistent with point

D.

Choose the item below that is not a routine task

Gardening

The current chair of the Federal Reserve is

Jerome Powell

The measure of money than includes checking accounts but not savings account is

M1

In the short run, policy that changes aggregate demand changes

both unemployment and the price level.

Social security retirement funding is "pay as you go" system. This means that

Your current social security payroll taxes are used to pay for current retirees

If the federal funds rate were above the level the Federal Reserve had targeted, the Fed could move the rate back towards its target by

buying bonds. This buying would increase the money supply.

The money supply increases when the Fed

buys bonds. The increase will be larger, the smaller is the reserve ratio.

The Fed's primary tool to change the money supply is

conducting open market operations.

When personal income taxes are cut, in the first round of the multiplier process

consumption increases

In the short-run, when the Federal Reserve increases the federal funds interest rate, aggregate demand __________ because ____________.

decreases, investment spending falls

When taxes increase, the interest rate

decreases, making the change in aggregate demand smaller.

A significant portion of the projected rise in deficits is attributed to projected additional spending on

defense

Which of the following is a bank liability

deposits

Since the late 1960s, the largest federal budget deficit occurred

during the Great Recession

In the short-run, when the Federal Reserve lowers the federal funds interest rate

employment, production and inflation increase

The marginal propensity to consume (MPC) is defined as the fraction of

extra income that a household consumes rather than saves.

The April jobs report showed

a large increase of new jobs in March

In which case can we be sure real GDP rises in the short run?

foreign economies expand and government purchases rise.

The multiplier effect is exemplified by the multiplied impact on

aggregate demand of a given increase in government purchases

Which of the following would cause prices and real GDP to rise in the short run?

aggregate demand shifts right

In the long run, after wages and prices have fully adjusted, monetary policy

all of the above

The reaction of output and prices to an aggregate demand shock is

an endogenous reaction

An aggregate demand shock is

an exogenous event

Which of the following would raise the price level in both the short and long run?

an increase in government expenditures

Which of the following events shifts aggregate demand rightward?

an increase in government expenditures, but not a change in the price level

When people believe that the Federal Reserve is committed to a low inflation environment, this helps to

anchor price expectations

Credit cards

are not considered money.

When the Fed conducts an open market purchase,

bank reserves increase and the federal funds rate decreases.

A bank's assets equal its liabilities under

both 100-percent-reserve banking and fractional-reserve banking

Following a positive aggregate demand shock, the price rise will

both of the above

A policy change that changes the natural rate of unemployment changes

both the long-run Phillips curve and the long-run aggregate supply curve

The Stock Market Boom of 2015 Imagine that in 2015 the economy is in long-run equilibrium. Then stock prices rise more than expected and stay high for some time. Refer to Stock Market Boom 2015. In the short run what happens to the price level and real GDP?

both the price level and real GDP rise.

Given the short-run financial crisis event in the above question, which of the following describes the economy's movement from the short-run to the long-run?

high unemployment eventually causes wages to decline and the short-run aggregate supply curve shifts down/right.

In the short-run, policy can be used to lower the unemployment rate at the cost of

higher inflation

The following picture appears in the Paul Krugman article posted on Canvas. The picture is illustration of which of the following concepts

impact of sticky price adjustment on inflation when inflation expectations are large

The time between the FOMC meeting where a decision has been made to lower the federal funds interest rate and the time when open market operations are conducted is called the

implementation lag

If the multiplier is 6 and if there is no crowding-out effect, then a $60 billion increase in government expenditures causes aggregate demand to

increase by $360 billion.

When the Federal Reserve conducts an open market purchase of $40 million, the first impact is that bank reserves

increase by $40 million

When the Federal Reserve conducts an open market purchase of $50 million, the first impact is that bank reserves

increase by $50 million

Since 1979, overall real wages at the 90th percentile of the wage distribution have _____________ while real wages at the 10th percentile have ____________ .

increased, stayed about the same

In a fractional-reserve banking system, a bank

keeps only a fraction of its deposits in reserve.

A reduction in U.S net exports would shift U.S. aggregate demand

leftward. In an attempt to stabilize the economy, the government could increase expenditures

If you purchase a $5000 Treasury Bill from Treasury Direct (the primary market) you are

lending $5000 to the federal government

An open market purchase of government securities by the Federal Reserve will lead to multiple rounds of

loan and deposit expansion

The "natural" rate of unemployment is the unemployment rate toward which the economy gravitates in the

long run, and the natural rate changes over time.

The recession of 1980-1982 was caused by

monetary policy shock initiated to lower inflation

The 1980-81 recession was caused by

negative AD shock created by monetary policy

The stagflation of the 1970s was at least in part created by

negative shocks to SRAS caused by OPEC's ability to increase the price of oil

A positive aggregate demand shock will __________ production in the long run.

not change

An economic expansion caused by a shift in aggregate demand remedies itself over time as the expected price level

rises, shifting aggregate supply left.

Computerization and automation have led to employment polarization. Which of the following is NOT consistent with employment polarization

rising employment only in the northern and southern parts of the country

Which of the following would cause stagflation?

rising oil prices

Refer to Figure 34-9. Suppose the economy is currently at point A. To restore full employment, the Federal Reserve should

sell government bonds, which will reduce the money supply.

If the federal funds rate were below the level the Federal Reserve had targeted, the Fed could move the rate back towards its target by

sell government securities. This selling would increase interest rates and shift the AD curve to the left.

If the federal funds rate were below the level the Federal Reserve had targeted, the Fed could move the rate back towards its target by

selling bonds. This selling would reduce reserves

Figure 34-8 Refer to Figure 34-8. An increase in government purchases will

shift aggregate demand from AD1 to AD2.

Refer to Figure 34-8. An increase in government purchases will

shift aggregate demand from AD1 to AD2.

Refer to Figure 34-8. An increase in taxes will

shift aggregate demand from AD1 to AD3

A positive aggregate demand shock that increases consumption spending by $50 billion will

shift the AD curve to the right by more than $50 billion

If I deposit my paycheck in the bank today because I want to spend it next week, this is an example of which basic function of money

store of value

A tax cut shifts the aggregate demand curve the farthest if

the MPC is large and if the tax cut is permanent

The picture below shows the value of the S&P 500 stock price index. As you can see, the value of the index has risen steadily throughout the pandemic recession. This is indicative of

the better profit position of large firms relative to small firms during this recession

The Federal Reserve does not depend on Congress for its budget and the terms of the Board of Governors are long and staggered term. These features contribute to

the political independence of the Federal Reserve

The quicker that wages and price expectations adjust

the quicker will be the economy's adjust back to potential output

A change in expected inflation shifts

the short-run Phillips curve, but not the long run Phillips curve

Since about 1980, there has been polarization of job growth. This means that

there has been high employment growth in high and low wage occupations but not in middle wage occupations

Using the CBO budget infographic for 2019 posted on Blackboard, what share of government outlays went toward Social Security and Medicare in 2019? Please round your answer to the nearest tenth and don't include the % sign. For example, if your calculation was 36.789%, then enter 36.8.

32

In 2017 approximately _____ of the federal budget was devoted to mandatory spending

62.5%

On April 16th, the Atlanta Fed's GDPnow estimate of GDP growth was ______%. (Please enter your answer without the percentage sign. For example, if your answer is 3.2%, enter 3.2.)

8.3

As of March 2021, the economy had ___________ jobs relative to February 2020.

8.4 million fewer

In March, retail sales increased by ______%. (Please enter your answer without the percentage sign. For example, if your answer is 3.2%, enter 3.2.)

9.8

Currently, the federal government debt held by the public is about $15 trillion. The projected budget deficit for 2019 is $1 trillion. If this projection holds, we would expect that at the end of the 2019 fiscal year, total debt held by the public would be approximately

$16 trillion

Government outlays increased during the Great Recession because

- a fiscal stimulus packaged (ARRA) that included an increase in spending on government-funded projects was enacted - mandatory spending increased because as incomes fell, more people qualified for Medicaid, unemployment insurance and Supplemental Nutritional Assistance Program.

Which of the following is a function of money?

- a store of value - a unit of account - medium of exchange

Which of the following would increase output in the short run?

- government spending increases - an increase in stock prices makes people feel wealthier - firms chose to purchase more investment goods

Critics of stabilization policy argue that

- the impact of policy may last longer than the problem it was designed to offset. - policy can be a source of, instead of a cure for, economic fluctuations. - there is a lag between the time policy is passed and the time policy has an impact on the economy.

The lag problem associated with monetary policy is due mostly to

- the political system of checks and balances that slows down the process of determining monetary policy. - the fact that business firms make investment plans far in advance. - the time it takes for changes in government spending to affect the interest rate.

M1 includes

- traveler's checks. - demand deposits. - currency.

If the reserve ratio is 10 percent, the money multiplier is

10

In 1980, inflation as measured with the PCE, reached just over

11%

Table 29-7. Bank of Springfield Assets Reserves $19,800 Loans $160,200 Liabilities Deposits $180,000 Refer to Table 29-7. If the Bank of Springfield has lent out all the money it can given its level of deposits, then what is the reserve requirement?

11.0 percent

In which of the following recession periods did both inflation and unemployment rise

1973-74

When the Federal Reserve lowers the federal funds interest rate, the _______ curve shifts to the _________.

AD, right

Which of the following correctly explains the crowding-out effect?

An increase in government expenditures increases the interest rate and so reduces investment spending.

Which of the following is an example of crowding out?

An increase in government spending increases interest rates, causing investment to fall

During a bank run, depositors decide to hold more currency relative to deposits and banks decide to hold more excess reserves relative to deposits.

Both the decision to hold relatively more currency and the decision to hold relatively more excess reserves would make the money supply decrease.

Chapter 9 Digging Deeper

Chapter 9 Digging Deeper

Which of the following is NOT a mandatory spending budget item in the U.S. government budget?

Salary payments to military troops

Government securities are also called

Treasury securities

Currently, U.S. debt is in high demand because

Treasury securities are a very safe asse

Quantitative easing is

a monetary policy action designed to affect longer term interest rates directly

Some economists have compared the initial pandemic induced supply shock to

a natural disaster

Any item that people can use to transfer purchasing power from the present to the future is called

a store of value

The "yardstick" people use to post prices and record debts is called

a unit of account

The Stock Market Boom of 2015 Imagine that in 2015 the economy is in long-run equilibrium. Then stock prices rise more than expected and stay high for some time. Refer to Stock Market Boom 2015. Which curve shifts and in which direction?

aggregate demand shifts right

The price level rises in the short run if

aggregate demand shifts right or aggregate supply shifts left.

A negative aggregate demand shock in the short-run will lower

all of the above

A sharp and long-lasting rise in energy prices will, in the short run,

all of the above

For the following questions, use the diagram below:Figure 34-7. Refer to Figure 34-7. If the economy is at point b, a policy to restore full employment would be

an increase in the money supply.

Keynes used the term "animal spirits" to refer to

arbitrary changes in attitudes of household and firms.

Automatic stabilizers

are changes in taxes or government spending that increase aggregate demand without requiring policy makers to act when the economy goes into recession.

An open market operation INITIALLY changes the composition of the bank's

assets

An increase in the budget deficit can lead to exchange rate changes that will tend to

decrease exports and increase import

Which of the following is NOT an automatic stabilizer

defense spending

The CBO projection for 2031 debt levels

do not include possible additional spending on infrastructure

The Federal Reserves dual final targets are

employment and inflation

In response to a rise in energy prices, eventually wages will

fall because of the initial increase in unemployment

In the long-run expansionary fiscal policy is neutral

false

In the long-run, policy-makers can keep the economy at any unemployment rate as long as they are willing to accept the inflation rate that is consistent with that unemployment rate.

false

Following an aggregate demand shock, the economy's self-adjustment mechanism will

generate wage and price adjustments that eventually return the economy to potential output

For nearly all years since the 1960s, the U.S. federal government

has run a budget deficit

Medicare is primarily what kind of program

health insurance program for retirees

The economic shocks and monetary policy actions during the 1970s caused

high and unanchored inflation expectations

An important macroeconomic consequence of higher government budget deficits is

higher interest rates and lower investment spending

The longest lag associated with monetary policy is

impact lag

Since 1969, the U.S. federal government had a budget surplus

in the late 1990s

Jobs requiring routine tasks are largely concentrated

in the middle of the wage distribution

Open market operations are conducted

in the secondary market for Treasury securities

A positive aggregate demand shock will ________ prices in the long run.

increase

Over the next 10 years, the share of the U.S. population over 65 years of age will

increase

Tax rates are progressive if they

increase as income increases

An open market sale of government securities by the Federal Reserve will INITIALLY

increase banks holding of government securities and decrease its reserves

An increase in the budget deficit will tend to

increase interest rates and appreciate the exchange rate

An increase in government spending, holding taxes constant, will

increase interest rates and decrease investment spending in both the short run and the long run

Suppose stock prices rise. To offset the resulting change in output the Federal Reserve could

increase interest rates. This decrease would also move the price level closer to its value before the rise in stock prices.

Automatic stabilizers tend to

increase spending following a negative aggregate demand shock

An open market sale of government securities by the Federal Reserve will

increase the federal funds interest rate

To reduce the effects of crowding out caused by an increase in government expenditures, the Federal Reserve could

increase the money supply by buying bonds.

Suppose investment spending falls. To offset the change in output the Federal Reserve could

increase the money supply. This increase would also move the price level closer to its value before the decline in investment spending

A shock increases the costs of production. Given the effects of this shock, if the central bank wants to return the unemployment rate towards its previous level it would

increase the rate at which the money supply increases. However, this will make inflation higher than its previous rate

An increase in the MPC

increases the multiplier, so that changes in government expenditures have a larger effect on aggregate demand

An necessary element of Federal Reserve credibility is

independence from political pressure

Which of the following would NOT increase output in the short run?

individual income taxes increase

One reason Federal Reserve credibility is important is because

inflation expectations can be self-fulfilling and a credible Federal Reserve is better able to anchor inflation expectations

If consumption expenditures fall, then in the short run

inflation falls and unemployment rises.

The short-run Phillips Curve shows the relationship between __________ and ____________ when _______________.

inflation, unemployment, the AD curve shifts and SRAS is stable

Which of the following is NOT a basic function of money

interest bearing asset

Suppose the economy begins at potential output and there is a large increase in government spending and the Federal Reserve takes no action to influence interest rates. We could expect that this action would produce which of the following outcomes.

interest rates increase leading to a decline of investment spending in the both the long-run and the short-run.

As a percentage of GDP, the current level of federal debt

is at a post WWII high

The reserve requirement is 4 percent, banks hold no excess reserves and people hold no currency. If the Fed sells $10,000 worth of bonds, what happens to the money supply?

it decreases by $250,000

If the money multiplier is 3 and the Fed buys $50,000 worth of bonds, what happens to the money supply?

it increases by $150,000

In 2020 federal government outlays were

just over $2 trillion higher than 2019 outlays as a result of fiscal relief spending

A reduction in U.S net exports would shift U.S. aggregate demand

leftward. In an attempt to stabilize the economy, the government could increase expenditures.

In the long-run, technological change has generally led to

little to no change in the natural rate of unemployment

The growth and inflation trends of the 1990s are consistent with which of the following

long-run supply increasing faster than aggregate demand

During the 1990s, economic conditions created

low inflation and high real output growth

The deductibility of mortgage interest

makes home-owning less expensive for some households

Monetary policy affects employment

only in the short run.

When the Federal Reserve lowers the federal funds interest rate, in the long run

only prices are higher

In the long run, policy that changes aggregate demand change

only the price level

In the short-run an increase in the costs of production makes

output fall and prices rise.

A negative aggregate demand shock in the long run will lower

prices

In the long-run monetary policy is neutral, meaning that the only long-run impact is on

prices

Following a shock, the economy's self-adjustment mechanism occurs when

prices a wages adjust to return the economy to full employment at potential output

When the Federal Reserve lowers the federal funds interest rate, in the short-run firms will

produce more because per unit profit is rising

Social security is primarily what kind of program

provides retirement income to those who have worked

When Jerome Powell speaks of the economy being at an "inflection point" he is referring to the potential for a robust recovery as long as

public health conditions do not further deteriorate

The most common method employed by the Fed to increase the money supply is the

purchase of U.S. government bonds

Suppose that the economy is in a long-run equilibrium at potential output, but that inflation is over 10%. If the Federal Reserve decides to take action to lower inflation, it would

raise the federal funds interest rate to shift the AD curve to the left

Figure 35-9. The left-hand graph shows a short-run aggregate-supply (SRAS) curve and two aggregate-demand (AD) curves. On the right-hand diagram, "Inf Rate" means "Inflation Rate." ​ Refer to Figure 35-9. The shift of the aggregate-supply curve from AS1 to AS2

represents an adverse shock to aggregate supply

One of the economic dangers of monetary policy's impact lag, is that monetary policy may

result in the economy "overshooting" the full employment goal

Assume the multiplier is 5 and that the crowding-out effect is $30 billion. An increase in government purchases of $20 billion will shift the aggregate-demand curve to the

right by $70 billion.

Stagflation exists when prices

rise and unemployment rises.

An economic expansion caused by a shift in aggregate demand remedies itself over time as wages and the expected price level

rise, shifting short-run aggregate supply up/left.

Suppose the economy is in long-run equilibrium. If the government increases its expenditures, eventually the increase in aggregate demand causes price expectations to

rise. This rise in price expectations shifts the short-run aggregate supply curve to the left.

Figure 34-8 Refer to Figure 34-8. An increase in taxes will

shift aggregate demand from AD1 to AD3.

Tax increases

shift aggregate demand left while increases in government expenditures shift aggregate demand right

Financial Crisis Suppose that banks are less able to raise funds and so lend less. Consequently, because people and households are less able to borrow, they spend less at any given price level than they would otherwise. The crisis is persistent so lending should remain depressed for some time. Refer to Financial Crisis. In the long run, if the Fed does not respond, the change in price expectations created by the crisis shifts

short-run aggregate supply right.

Which of the following would cause prices to fall and output to rise in the short run?

short-run aggregate supply shifts right

In the short-run following a positive aggregate demand shock, some firms will raise prices because

shortages exit at the original prices

During the Great Recession, the Federal Reserve purchased commercial paper

so financial firms (including investment banks) would have a continued source of short-term financing

Payroll taxes are used to pay for

social security and Medicare

In the digging deeper slides, slide #8 shows that the CBO projected debt held by the public to rise to close to 100% of GDP by 2030. This projection was before the large expenditures for economic relief from the pandemic induced downturn. The projected deficits shown on the slide arise from projected expenditures for

social security and medicare expenses for future retirees.

A decrease in the money supply might indicate that the Fed had

sold bonds in an attempt to increase the federal funds rate

When government spending increases by $5 billion and the MPC = .8, in the first round of the spending multiplier process

spending increases by $5 billion

The FOMC statement normally contains which of the following EXCEPT

statistics from the Beige Book

After the FOMC's last meeting (March 12-13), the statement (Links to an external site.) contained the following paragraph: "The path of the economy will depend significantly on the course of the virus, including progress on vaccinations. The ongoing public health crisis continues to weigh on economic activity, employment, and inflation, and poses considerable risks to the economic outlook." The paragraph is an example of

summary of economic conditions

The Federal Reserve's budget does not come from Congress and the members of the Board of Governors serve 14-year, staggered terms. These features are intended to

support monetary policy decisions that are determined by economic conditions and not the political needs of Congress or the President

The federal budget deficit increased during the 1980s because

tax rates were lowered and defense spending increased as the U.S. engaged in a cold war with the Soviet Union

Suppose that the economy begins at potential output when individual income taxes decline by $500 billion. If the MPC = .6, then which of the following occurs in the short run?

the AD curve shifts to the right by $750 billion

If government purchases increase by $250 billion and the MPC = .8, then

the AD curve will shift to the right by $1,250 billion

A problem that the Fed faces when it attempts to control the money supply is that

the Fed does not control the amount of money that households choose to hold as deposits in banks.

When the Fed conducts open-market purchases,

the Federal Reserve buys Treasury securities, which increases the money supply.

In 2009 President Obama and Congress increased government spending. Some economists thought this increase would have little effect on output. Which of the following would make the effect of an increase in government expenditures on aggregate demand smaller?

the MPC is small and changes in the interest rate have a large effect on investment

If an aggregate demand shock initially decreases investment spending by $75 billion and the MPC equals .5, then

the aggregate demand curve shifts to the left by $150 billion

If MPC = .75 and government spending increases by $10 billion

the aggregate demand curve shifts to the right by $40 billion

If MPC = .75 and government spending increases by $10 billion,

the aggregate demand curve shifts to the right by $40 billion

If the reserve requirement is 10 percent, a bank desires to hold no excess reserves, and it receives a new deposit of $500, which of the following is NOT true

the bank will be able to use this deposit to make new loans amounting to $500

The increase in investment during the 1990s information technology boom generated a decline in inflation because

the capital stock rose and increased short-run and long-run aggregate supply

Which of the following tends to make the size of a shift in aggregate demand resulting from an increase in government purchases smaller than it otherwise would be?

the crowding-out effect

Liquidity refers to

the ease with which an asset is converted to the medium of exchange.

The lag problem associated with monetary policy is due mostly to

the fact that business firms make investment plans far in advance.

Today, bank runs are not a major problem for the U.S. banking system because

the federal government now guarantees the safety of deposits at most banks.

Suppose that the Federal Reserve took action to lower inflation as in the question above. Which of the following describes the mechanism that moves the economy from the short-run to the long-run equilibrium.

the increase in unemployment at the short-run equilibrium eventually causes wages and price expectations to decline. This lowers production costs and the SRAS curve shifts down/right.

When the Fed buys government bonds,

the money supply increases and the federal funds rate decreases.

The government buys new weapons systems. The manufacturers of weapons pay their employees. The employees spend this money on goods and services. The firms from which the employees buy the goods and services pay their employees. This sequence of events illustrates

the multiplier effect.

The lag problem associated with fiscal policy is due mostly to

the political system of checks and balances that slows down the process of implementing fiscal policy

The lag problem associated with fiscal policy is due mostly to

the political system of checks and balances that slows down the process of implementing fiscal policy.

Suppose the economy is in long-run equilibrium. Concerns about pollution cause the government to significantly restrict the production of electricity. At the same time, taxes fall. In the short-run

the price level will rise, and real GDP might rise, fall, or stay the same.

Suppose the economy is in long-run equilibrium. If there is an increase in government purchases at the same time there is a large increase in the price of oil, then in the short-run

the price level will rise, and real GDP might rise, fall, or stay the same.

According to the Phillips curve, unemployment and inflation are negatively related in

the short run, but not in the long run

The U.S. federal government currently has a debt level of about $16 trillion. To pay off the debt over the next 50 years would require that

the sum of government deficits and surpluses be at least $16 trillion

If output is above its natural rate, then according to sticky-wage theory

workers will strike bargains for higher wages. In response to the higher wages firms will produce less at any given price level

It will likely take anywhere from 6-24 months for the low federal funds interest rate to fully affect spending, employment and inflation. This is indicative of

monetary policy's long impact lag

If the economy goes into a recession, the Federal Reserve could stabilize the economy by

lowering the federal funds rate which would increase investment spending and shift the aggregate demand curve to the right

The logic of the multiplier effect applies

to any change in spending on any component of GDP.

If the reserve ratio is 8 percent, then an additional $800 of reserves can increase the money supply by as much as

$10,000.

If the reserve ratio is 5 percent, then $600 of additional reserves can create up to

$12,000 of new money.

If the reserve ratio is 6 percent, then $9,000 of additional reserves can create up to

$150,000 of new money

In 2020 the federal government's fiscal deficit was approximately

$3.1 trillion

If the marginal propensity to consume is 0.75, and there is no investment accelerator or crowding out, a $15 billion increase in government expenditures would shift the aggregate demand curve right by

$60 billion, but the effect would be larger if there were an investment accelerator.

A bank's reserve ratio is 8 percent and the bank has $1,000 in deposits. Its reserves amount to

$80.

Suppose the economy is at potential output when consumer confidence suddenly booms and consumer spending increases sharply. Which of the following options describe an appropriate stabilization policy?

(a) the Federal Reserve increases the federal funds interest rate, (d) the federal government increases personal and corporate taxes

Suppose the economy is at potential output when the economy experiences a large decline in housing prices and stock market values. Which of the following options describe an appropriate stabilization policy?

(b) the Federal Reserve decreases the federal funds interest rate, (c) the federal government decreases personal and corporate taxes

A bank has $8,000 in deposits and $6,000 in loans. It has loaned out all it can given the reserve requirement. It follows that the reserve requirement is

25 percent

If the reserve ratio is 4 percent, then the money multiplier is

25.

If the MPC is 5/6 then the multiplier is

6, so a $200 increase in government spending increases aggregate demand by $1200

Refer to Figure 33-4. A decrease in taxes would move the economy from C to

B in the short run and A in the long run

Prior to an FMOC meeting, the Federal Reserve prepares a report that summarizes economic conditions in each Federal Reserve district. This report is called

Beige Book

The fed chairperson most associated with establishing clear communication and transparency in the conduct monetary policy is

Ben Bernanke

Chapter 10 Digging Deeper

Chapter 10 Digging Deeper

Chapter 10 Quiz

Chapter 10 Quiz

The largest share of government outlays is

Mandatory spending

During the Great Recession, interest rates stayed low despite a sharply rising deficit. This is because

Monetary policy was keeping interest rates low

In the long run, a decrease in the money supply growth rate

None of the above is correct

Refer to Figure 35-2. If the economy starts at C and 1, then in the short run, a decrease in taxes moves the economy to

None of the above is correct.

OTHER

OTHER

Figure 33-9. Refer to Figure 33-9. Suppose the economy starts where LRAS = AD1 = SRAS1. A decrease in short-run aggregate supply would be consistent with the movement to

P2, Y1.

The Federal Reserve Chairperson most associated with refocusing monetary policy on anchoring inflation expectations and establishing credibility is

Paul Volcker

During the Great Depression, monetary policy mistakes contributed to the depth of the downturn. What was that monetary policy mistake?

Raised interest rates to protect the gold standard

The Stock Market Boom of 2015 Imagine that in 2015 the economy is in long-run equilibrium. Then stock prices rise more than expected and stay high for some time. Refer to Stock Market Boom 2015. What happens to the expected price level and what impact does this have on wage bargaining?

The expected price level rises. Bargains are struck for higher wages.

The Stock Market Boom of 2015 Imagine that in 2015 the economy is in long-run equilibrium. Then stock prices rise more than expected and stay high for some time. Refer to Stock Market Boom 2015. What happens to the expected price level and what impact does this have on wage bargaining?

The expected price level rises. Bargains are struck for higher wages.

Suppose that the stock market experiences a significant and prolonged decline. In response, the Federal Reserve lowers the federal funds interest rate. Not long afterward the interest rate decline, there is a large positive shock to investment spending. As a result of both the monetary policy action and the investment spending shock, all of the following occur EXCEPT

consumption will fall

Refer to Figure 33-5. The shift of the short-run aggregate-supply curve from SRAS1 to SRAS2

could be caused by a decrease in the expected price level

Following an aggregate demand shock, the economy's self-adjustment mechanism will

create price adjustments that eventually return the economy to potential output

Changes in the price of oil

created both inflation and recession in the United States in the 1970s.

An increase in government purchases is likely to

crowd out investment spending by business firms

The term used to describe the impact of an increase in government spending on investment spending is

crowding out

Financial Crisis Suppose that banks are less able to raise funds and so lend less. Consequently, because people and households are less able to borrow, they spend less at any given price level than they would otherwise. The crisis is persistent so lending should remain depressed for some time. Refer to Financial Crisis. If nominal wages are sticky, which of the following helps explains the change in output?

real wages rise, so firms choose to produce less

The minimum amount of reserves that banks must hold is called

required reserves

The cash that banks keep on hand or on deposit at the Federal Reserve is called

reserves

The Stock Market Boom of 2015 Imagine that in 2015 the economy is in long-run equilibrium. Then stock prices rise more than expected and stay high for some time. Refer to Stock Market Boom 2015. In the long run, the change in price expectations created by the stock market boom shifts

short-run aggregate supply left.

Suppose the economy begins at a long-run equilibrium at potential output when the economy is hit by a negative AD shock. Which of the following items describes the demand response to the shock as the economy moves from the short-run equilibrium to the long-run equilibrium? Please check all responses that apply

there is a movement along the AD curve.

Lately, the FOMC has been referring to a symmetric 2% inflation target in its minutes. By symmetric, the FOMC means

they would view movements above and below the target equally acceptable

Economists use the word "money" to refer to

those assets regularly used to buy goods and services

On a bank's T-account, which are part of the bank's assets?

reserves but not deposits made by its customers

Which of the following is NOT a fiscal policy action

Congress passes a new law legalizing marijuana use in the United States

The Great Recession of 2007-09 was caused by all of the following shocks EXCEPT

Contractionary monetary policy

If R represents the reserve ratio for all banks in the economy, then the money multiplier is

1/R

Chapter 11 Digging Deeper

Chapter 11 Digging Deeper

Chapter 11 Quiz

Chapter 11 Quiz

Chapter 9 Quiz

Chapter 9 Quiz

Which of the following is NOT included in the Biden infrastructure proposal

Child care subsidies

Fluctuations of production away from potential output are

all of the above

Fiat money

has no intrinsic value.

Computerization/automation have led to job growth in

jobs whose tasks are largely non-routine

Which of the following is an example of a decrease in government purchases?​

​The government cancels an order for new military equipment.

​Imagine the U.S. economy is in long-run equilibrium. Then suppose the aggregate demand increases. We would expect that in the long-run the price level would

​increase.

A tax cut targeted at ____ people may have a bigger effect because ​

​poorer; poorer people tend to spend a higher share of their income.

​The 2008 credit crunch occurred when banks reduced lending in response to

​the loss of asset value for mortgage backed securities and mortgage loans.