Test 3 V2

Monetary policy can deal with a spending shock more effectively than a real shock.

'True'.

If = 5%, = -3%, and = 2%, then must equal:

0

If the reserve ratio is 4%, the money multiplier is:

25

A decrease in money supply growth will cause the:

AD curve to shift to the left.

The reserve ratio is the ratio of bank reserves to:

Bank Deposits

Variations in real GDP growth around its trend growth rate are called:

Business Fluctuations

If spending grows by 3%, real GDP grows by 5%, and velocity is stable, then prices will be _____ at a rate of _____ according to the aggregate demand curve.

Falling, 2%

A recession is a significant, widespread decline in nominal income and employment.

False

Expected shocks are more difficult to deal with than unexpected shocks.

False

Sticky wages minimize the effect of negative supply shocks.

False

A tax with lower tax rates applied to people with higher incomes is called:

Regressive

If a household's income tax increases by 80% when the household's income increases by 100%, then the tax system is:

Regressive

A decrease in consumption growth will cause aggregate demand to:

Shift Inward

The largest spending program for the U.S. federal government is:

Social Security.

In what way are monetary and fiscal policies similar?

They both target aggregate demand to overcome business fluctuations.

Which of the following is NOT an example of intertemporal substitution?

Thomas studies economics 2 hours every night in order to get a good grade in the course.

Individuals receive different Social Security benefits depending on their wealth, life expectancy, marital status, and other factors.

True

Which of the following is a negative real shock that occurred during the Great Depression?

Widespread bank failures led to a reduction in the productivity of financial intermediation.

In the basic model that includes the AD and LRAS curves only, a shock that reduces the velocity of money by 2 percentage points causes:

a decrease of the inflation rate by 2 percentage points.

Because of intertemporal substitution, a negative shock to aggregate demand could result in:

a shift of the LRAS curve to the left.

In the AD-AS diagram, an increase in money supply growth causes:

a shift of the aggregate demand curve to the right.

The long-run aggregate supply curve is:

a vertical line

An increase in the required reserve ratio leaves banks with a need and desire to:

become more liquid

If an increase in government spending of $100 million causes an increase in aggregate spending of less than $100 million, we call this phenomenon:

crowding out.

For a given level of reserves, a decrease in the money multiplier will cause the money supply to:

decrease

Which is NOT an automatic stabilizer?

defense spending

If the Fed wants short-term interest rates to rise, it could:

engage in a monetary contraction.

If the reserve ratio is 20%, the money multiplier is 2.

false

What are the three largest sources of tax revenue for the U.S. federal government?

individual income tax, Social Security/Medicare taxes, and corporate income tax

Many economists worry about the Federal Reserve overstimulating the economy because such overstimulation will lead to rising:

inflation

When the Fed lowers the Federal Funds rate:

interest rates decrease but the money supply increases

Economic activities tend to cluster in time because:

it pays to coordinate economic activities with those of others.

At income levels above the limit for the lowest tax bracket, the average tax rate is:

less than the marginal tax rate.

The discount rate is the interest rate charged on a:

loan from the Federal Reserve to a bank.

Time bunching explains why:

most people work between the hours of 8:00 AM and 5:00 PM.

Government spending in the United States is:

not likely to fall in the future, given the aging population.

The money multiplier equals:

one divided by the reserve ratio.

A temporary positive shock to spending growth will lead to an increase in:

output and prices in the short run, but no change in either in the long run.

The entire U.S. tax system is moderately:

progressive.

An aggregate demand shock is a:

rapid and unexpected shift in spending.

Business fluctuations are variations in:

real income (GDP) growth around its trend growth rate.

In a worst-case scenario, the Federal Reserve is least successful at counteracting a negative:

real shock.

If you pay an average tax rate of 25% on your salary of $20,000 and your neighbor pays an average tax rate of 10% on his salary of $300,000, the tax system is:

regressive

Which of the following is NOT a transmission mechanism?

reversible investments

What is the overnight lending rate from one bank to another?

the Federal Funds rate

The average tax rate is:

the total tax payment divided by total income.

The Federal Reserve must operate in real time even though a lot of the data about the state of the economy are unknown.

true

In response to a real shock, the Fed's monetary policy action will lead to _____ moving in opposite directions.

unemployment and inflation

Fiscal policy is a good option to stimulate an economy when:

unemployment is very high.

Under which scenario would expansionary fiscal policy work BEST?

when AD is low compared with the long-run equilibrium position of the economy