Macroeconomics Test 4
Suppose the tax rate on the first $20,000 of income is 0%; 10% on the next $20,000 earned; and 20% on any additional income earned. A person earning $35,000 pays an income tax of
$1,500
Suppose the tax rate on the first $20,000 of income is 0%; 10% on the next $20,000 earned; and 20% on any additional income earned. The average tax rate for a person earning $35,000 is
4.3%
The maximum amount of time that a person can receive welfare payments is _____ during a lifetime
5 years
Bill Clinton's administration experienced a federal budget surplus.
The national debt held by the public decreased.
What demographic change in the United States will cause government spending to increase in the next 50 years?
The population older than 65 will grow
a liquid asset is
an asset that can be used for payments, or can quickly and without loss of value be converted to an asset that can be used for payments
To increase the money supply in the economy, the Fed would
carry out open market purchases and/or lower the discount rate
What is an asset that would be classified as liquid
checkable deposits
What monetary policy philosophy is against tying the hands of the central bank?
discretion
Some economists argue that the Fed should commit to keeping stack M +v with minus on top fixed at a particular value, say 5%. How would this rule require the Fed to respond in the event of a negative spending shock? A negative real shock?
increase M; do nothing
Suppose the reserve ratio is 20% for all banks. If the Fed increases bank reserves by $200, then the money supply will
increase by $1,000
To reduce the money supply in the economy, the Fed would
increase the discount rate
To offset the effect of negative growth in money velocity (v with minus on top), the central bank should:
increase the growth rate of the money supply
Many economists worry about the Federal Reserve overstimulating the economy because such overstimulation will lead to rising
inflation
Debt held outside the U.S. government is called the
national debt held by the public
When the text refers to the current U.S. national debt, it means the
national debt held by the public
The annual difference between federal spending and revenues is called the
national deficit
disinflation
prices fall and are negative
When C falls, the aggregate demand curve
shifts left
The Federal Reserve can influence the economy by shifting
the AD curve
The largest source of revenue for the U.S. federal government is
the individual income tax
If a $500 increase in reserves ultimately leads to a $2,000 increase in the money supply, the reserve ratio is
0.25
The main difference between M1 and M2 is that
M2 includes some less liquid assets in addition to the assets in M1
Whereas ______ covers the elderly, ______ covers the poor and the disabled.
Medicare, Medicaid
What is a limitation of monetary policy in stabilizing the economy
Monetary policy is subject to uncertain lags
A nominal GDP rule says ______ should always grow at a constant rate.
Mv
The largest spending program for the U.S. federal government is
Social Security
The purpose of the FICA taxes is to fund
Social Security payments
What is a reason it might be hard for the Fed to restore aggregate demand in the face of a negative demand shock?
The Fed must operate in real time, when a lot of the data about the state of the economy are unknown
Which is an example of quantitative easing by the Federal Reserve?
The Fed purchases $50,000 worth of long-term government bonds
If the Fed overreacts to a negative spending shock by increasing money growth too much
both real GDP growth and inflation will increase more than the Fed prefers
An increase in money growth will cause the inflation rate to increase in
both the short run and the long run
When the government conducts fiscal policy, it can make up for a decrease in C with
an increase in G
When the government conducts fiscal policy, it makes up for a decrease in C with
an increase in G
What is not included in M1 and M2?
bond mutual funds
One of the Fed's greatest powers is its ability to
boost market confidence
The FICA tax burden is
borne more by the employee even though the employer contributes an equal dollar amount
The alternative minimum tax
is a separate income tax code that began in 1969 to prevent the rich from not paying income taxes
The time between which an economic shock is recognized and when the government passes a plan to carry out a policy response is called the
legislative lag
The time necessary for Congress to propose and pass a fiscal policy plan is called the
legislative lag
the time between which an economic shock is recognized and when the government passes a plan to carry out a policy response is called the
legislative lag
In the absence of any policy intervention, when C falls the result will be
lower inflation and real growth
The tax rate paid on an additional dollar of income is the
marginal tax rate
The Federal Reserve's major tools to control the money supply is are
open market operations, discount rate lending, and paying interest on reserves
he money you pay into Social Security goes to
pay current beneficiaries
The best type of negative shock for the Federal Reserve to respond to is a negative shock to
AD
Suppose you are a married person with one child but your whole family earns less than $20,000 a year. Which of the following will supplement income?
Earned Income Tax Credit
Why did the tax rebate of $78 billion in 2008 have few net stimulus benefits?
consumers used much of the rebate to pay off existing debt
Which of the following limits the effectiveness of fiscal policy
crowding out
What are the four major limits to fiscal policy?
crowing out, a drop in the bucket, a matter of timing, and real shocks
What helps a government fight a recession?
cutting taxes
What would help a government fight a recession?
cutting taxes
In the long run, a negative real shock will cause output growth to
decrease
If the Fed sells $200 million in government bonds, the total money supply will
decrease by more than $200 million
Which asset is most liquid: a home, demand deposits, small-time deposits, or a gold bullion?
demand deposits
In a fractional reserve banking system, banks hold only a fraction of their
deposits as reserves
When C falls, the LRAS curve
does not move
The time necessary for a fiscal policy plan to have an impact is called the
effectiveness lag
The Medicare program offers health-care benefits for the
elderly
In the United States, the marginal tax rate for married couples:
exceeds the average tax rate for most income levels.
When the Fed buys short-term Treasury securities, short-term interest rates
fall
The primary tools of fiscal policy are
government expenditure and taxation.
Fiscal policy can best be defined as the use of
government expenditure, borrowing, and taxation to influence the business cycle
What pertains to crowding out?
government raises taxes by $300 million to finance new spending on highway construction, resulting in a decrease in investment spending by $270 million
If the total liabilities of Bank A are less than its total assets but its short-term liabilities are greater than its short-term assets, Bank A is
illiquid, but solvent
The time necessary for government bureaucracies to carry out a fiscal policy plan is called the
implementation lag
In the long run, a negative real shock will cause the inflation rate to
increase
How would the Fed respond to a fixed rate of M+v at 5% during a negative spending shock? A negative real shock?
increase; do nothing
The intended effect of an expansionary monetary policy is that aggregate demand
increases; raising real GDP growth in the short run, but only inflation rises in the long run
Government spending on "interest on the debt" refers to
interest paid to owners of government debt help by the public
The Medicaid program offers health-care benefits for the
poor and disabled
deflation
prices fall below zero
The Term Auction Facility involves the Federal Reserve
providing reserves to banks through an auction
The time necessary to determine that an economic problem exists is called the
recognition lag
The U.S Social Security tax (FICA) is an example of a
regressive tax
The U.S. Social Security tax (FICA) is an example of a
regressive tax
What are the functions of the Federal Reserve?
serving as the lender of last resort, regulating the U.S. financial system, and regulating the money supply
When a bank has short-term liabilities that are greater than its short-term assets, but overall its assets are greater than its liabilities, the bank is considered
solvent and illiquid
The risk that the failure of one financial institution can lead to the failure of other financial institutions is called
systemic risk
Give an example of quantitative easing by the Federal Reserve
the Fed purchases $50,000 worth of long-term government bonds
What is the overnight lending rate from one bank to another?
the Federal Funds rate
Systematic risk is present when
the failure of one financial institution will bring down other institutions as well
When the Fed buys bonds, it increases that demand for bonds which pushes
up the price of bonds, thus lowering the interest rate