ECON 201 Final: Chapters 14, 15, and 16 (Quizzes and HW)

Suppose the government increases taxes by ​$90 billion and the marginal propensity to consume is 0.50. By how will equilibrium GDP​ change? The change in equilibrium GDP​ is: ​$ ______ billion.

$ - 90 billion

Suppose that real GDP is currently ​$13.2 trillion and potential real GDP is​ $14.0 trillion, or a gap of ​$800 billion. The government purchases multiplier is 5.0​, and the tax multiplier is 4.0. Holding other factors​ constant, by how much will government purchases need to be increased to bring the economy to equilibrium at potential​ GDP? Government spending will need to be increased by ​$ ________ billion. ​(Enter your response rounded to the nearest whole​ number.) Holding other factors​ constant, by how much will taxes have to be cut to bring the economy to equilibrium at potential​ GDP? Taxes will need to be cut by ​$ ______ billion. ​(Enter your response rounded to the nearest whole​ number.)

$160 BILLION $200 BILLION

government spending and taxes that automatically increase or decrease along with the business cycle.

automatic stabilizers

money issued by a central bank that has no value except as​ money, such as paper currency.

fiat currency

The​ government's use of taxes and expenditures to achieve macroeconomic policy objectives.

fiscal policy

changes in government spending and taxes to achieve macroeconomic policy objectives.

fiscal policy

CHAPTER 16 A HW: #14

study

Suppose you deposit ​$1,400 cash into your checking account. By how much will the total money supply increase as a result when the required reserve ratio is 0.2​0? The change in the money supply​ is: ​$ _______

$5600

Assume the tax multiplier is estimated to be 1.3 and the aggregate supply curve has its usual upward slope. Suppose the government lowers taxes by ​$65 million. Aggregate demand will increase by ​$ _______ million.

$84.5 million

When the Federal Reserve increases the required reserve ratio as a part of a contractionary monetary​ policy, there​ is: A. A decrease in the money supply and an increase in the interest rate. B. A decrease in the money supply and a decrease in the interest rate. C. An increase in the money supply and an increase in the interest rate. D. An increase in the money supply and a decrease in the interest rate.

A. A decrease in the money supply and an increase in the interest rate.

Banks use deposits to make consumer loans to households and commercial loans to businesses. Banks will loan out every penny of their deposits in order to make a profit. A. False. Banks must hold a fraction of their deposits as vault cash or with the Federal Reserve. B. True. Deposits that sit in a bank as vault cash earn no interest. C. False. In​ reality, banks are rarely able to find borrowers for all of their deposits. D. True. Any money that is left over after a bank loans money to businesses and households will be loaned to other banks.

A. False. Banks must hold a fraction of their deposits as vault cash or with the Federal Reserve.

Which of the following is a monetary policy target used by the​ Fed? A. Interest rate.. B. Unemployment rate. C. Growth rate of GDP. D. Budget deficit. The Fed uses policy targets of interest rate​ and/or money supply because A. it can affect the interest rate and the money supply directly and these in turn can affect​ unemployment, GDP​ growth, and the price level. B. the target for the GDP growth rate is set by Congress. C. the inflation rate is controlled by Congress and the White House. D. it is difficult to set a target for the unemployment​ rate, which constantly fluctuates.

A. Interest rate A. it can affect the interest rate and the money supply directly and these in turn can affect​ unemployment, GDP​ growth, and the price level.

A 2019 article in the Wall Street Journal discussed the decision by​ India's central bank to cut its policy​ rate, which is the equivalent in India of the federal funds rate in the United​ States, from 6 percent to 5.75 percent. According to the​ article, the cut occurred during a period of​ "low inflation and concerns over​ growth." Why would a cut in the central​ bank's policy rate be an appropriate policy action at a time of low inflation and concerns over​ growth? What response to its rate cut was the central bank hoping to​ see? A. Lowering the policy rate would decrease other interest​ rates, which would increase aggregate demand and stimulate the economy. B. Cutting the policy rate would increase​ short-run aggregate supply due to increased​ investment, thus stimulating the economy. C. By cutting the policy​ rate, long-run aggregate supply would increase due to increased​ investment, thus stimulating the economy. D. A cut in the policy rate is not an appropriate policy action at this​ time; in order to combat these​ issues, India should be engaging in contractionary monetary policy.

A. Lowering the policy rate would decrease other interest​ rates, which would increase aggregate demand and stimulate the economy.

What are the​ Fed's main monetary policy​ targets? A. The money supply and interest rates B. Price stability and economic growth C. High employment and economic growth D. Taxes and government spending

A. The money supply and interest rates

The federal funds rate A. is the rate that banks charge each other for​ short-term loans of excess reserves. B. is set by the Federal Reserve Bank. C. equals the discount rate. D. only matters to banks and has very little impact on individual consumers.

A. is the rate that banks charge each other for​ short-term loans of excess reserves.

A former Federal Reserve official argued that at the​ Fed, "the objectives of price stability and low​ long-term interest rates are essentially the same​ objective." This is true because A. stable prices make it easier to plan for the​ future, so expectations can be​ stable, which makes it less costly to make loans. B. stable prices create an environment in which it is difficult to plan for the future and more difficult to loan funds. C. stable prices reduce the value of money and therefore money is worth less in the future. D. none of the above.

A. stable prices make it easier to plan for the​ future, so expectations can be​ stable, which makes it less costly to make loans.

Which of the following is not a correct statement about​ M2? A. M2 is the best definition of money as a medium of exchange. B. M2 is a broader definition of money compared to M1 and currency. C. M2 includes all of the assets in M1. D. M2 includes savings​ accounts, small-denomination time​ deposits, and money market mutual funds. If you move​ $100 from your savings account to your checking​ account, then M1 will ________ and M2 will ______

A. M2 is the best definition of money as a medium of exchange. increase by $100 remain the same

When Congress established the Federal Reserve in​ 1913, its main responsibility was A. to make discount loans to banks suffering from large withdrawals by depositors. B. to design tax policies. C. to control the money supply. D. to adjust interest rates. Congress broadened the​ Fed's responsibility since A. the 1930s as a result of the Great Depression. B. the end of World War II. C. 1987 when Alan Greenspan was appointed the chair of the Fed. D. World War I.

A. to make discount loans to banks suffering from large withdrawals by depositors. A. the 1930s as a result of the Great Depression

Suppose you decide to withdraw​ $100 in currency from your checking account. What is the effect on M1? Ignore any actions the bank may take as a result of your having withdrawn the​ $100. A. M1 decreases by​ $100 as a result of lower checking deposits. B. M1 remains unchanged. C. M1 increases by​ $100 as a result of additional currency in circulation. D. None of the above occur.

B. M1 remains unchanged.

What are the​ Fed's main monetary policy​ targets? A. Price stability and economic growth B. The money supply and interest rates C. High employment and economic growth D. Taxes and government spending

B. The money supply and interest rates

Suppose the reserve requirement is 15​%. What is the effect on total checkable deposits in the economy if bank reserves increase by ​$50 ​billion? A. $750 billion increase B. $333 billion increase. C. $3 billion increase D. $50 billion increase

B. $333 billion increase

What is a banking​ panic? A. A situation in which banks wish to recall all of their loans. B. A situation in which many banks experience runs at the same time. C. A situation in which there is no demand for​ loans, so banks cannot make a profit. D. A situation in which bank assets exceed liabilities. Which of the following best explains how the Federal Reserve acts to help prevent banking​ panics? A. The Fed insures deposits of banks and thus reduces the chance of a panic. B. The Fed regulates asset markets and prevents damaging speculation. C. The Fed acts as a lender of last​ resort, making loans to banks so that they can pay off depositors. D. The Fed can make it illegal to withdraw deposits from​ banks, preventing bank panics.

B. A situation in which many banks experience runs at the same time. C. The Fed acts as a lender of last​ resort, making loans to banks so that they can pay off depositors.

Which one of the following is not one of the monetary policy goals of the​ Fed? A. Maintain stability of financial markets and institutions. B. Reduce income inequality. C. Maintain high employment. D. Maintain price stability. Why is the Fed sometimes said to have a​ "dual mandate"? The Fed is said to have​ a" dual​ mandate" because A. the two most important goals of the Fed are controlling inflation and the budget deficit. B. the Employment Act of 1946 empowers the Fed to maintain low taxes and high employment. C. the Fed is entrusted by Congress to maintain price stability and low taxes. D. maintaining price stability and high employment are the two most important goals of the Fed.

B. Reduce income inequality. D. maintaining price stability and high employment are the two most important goals of the Fed.

An article in BusinessWeek in 2013 reported that Fed Chairman Ben Bernanke testified to Congress​ that: ​"If we see continued improvement and we have confidence that that is going to be​ sustained, then we could—in the next few meetings—we could take a step down in our pace of​ purchases." According to the​ article, Bernanke also told Congress that​ "'premature tightening' could​ 'carry a substantial risk of slowing or ending the economic​ recovery.' The purchases Fed Chairman Bernanke is referring to are A. purchases of foreclosed homes. B. open market purchases of government securities. C. open market purchases of commercial bonds. D. purchases of foreign currencies. A​ "premature tightening" of the​ "pace of​ purchases" would slow down the economic recovery because this action would be A. expansionary​, increasing lending and economic activity. B. ​expansionary, reducing lending and economic activity. C. ​contractionary, increasing lending and economic activity. D. ​contractionary, reducing lending and economic activity.

B. open market purchases of government securities. D. contractionary, reducing lending and economic activity.

Which of the following is NOT a monetary policyLOADING... goal of the Federal Reserve bank​ (the Fed)? A. Stable financial markets B. Low unemployment C. Low prices D. Higher living standards

C. Low prices

he economy of country Rumblen was hit by a banking crisis which has led to a recession. Jason​ Wallace, a real estate​ agent, says that the economy will recover soon because the government is taking various measures to counter the recession. According to​ him, the flow of credit will soon return to​ pre-crisis levels. His wife Anna Wallace disagrees with him. She says that the situation may not improve​ soon, given the substantial increase in unemployment. Which of the​ following, if​ true, would strengthen​ Anna's view? A. Consumer spending increased moderately during the festive season. B. The recession caused greater unemployment in the services sector than in the manufacturing sector. C. Recent reports indicate that firms in most industries are putting investment plans on hold. D. ​Rumblen's GDP growth slowed down in the last two​ years, prior to the crisis. E. ​Rumblen's currency depreciated by five percent in the last few months.

C. Recent reports indicate that firms in most industries are putting investment plans on hold.

The Federal Reserve has multiple economic goals for monetary policy to​ achieve, ​ However, it can be difficult to manage all of the goals at once. Which of the following is not true regarding the multiple goals of the​ Fed? A. Achieving the goals of price stability and economic growth can be difficult because often the forces that lead to economic growth also can make prices increase at a rate higher than the Fed would desire. B. Having dual goals of high employment and economic growth does not create many issues because most of the time when the economy experiences economic​ growth, the economy also achieves higher rates of employment. C. The goal of financial market stability means that the Fed tries to ensure that asset​ prices, such as stock​ prices, increase at a very high rate so investors can make more money. D. As the Fed tries to ensure economic​ growth, it can also focus on financial market stability because efficient financial markets make it easier for investment to occur and create additional economic growth.

C. The goal of financial market stability means that the Fed tries to ensure that asset​ prices, such as stock​ prices, increase at a very high rate so investors can make more money.

Suppose you decide to withdraw​ $100 in cash from your checking account. Which one of the following choices accurately shows the effect of this transaction on your​ bank's balance sheet. A. Your​ bank's balance sheet shows an increase in reserves by​ $100 and a decrease in deposits by​ $100. B. Your​ bank's balance sheet shows a decrease in reserves by​ $100 and an increase in deposits by​ $100. C. Your​ bank's balance sheet shows a decrease in reserves by​ $100 and a decrease in deposits by​ $100. D. Your​ bank's balance sheet shows an increase in reserves by​ $100 and an increase in deposits by​ $100.

C. Your​ bank's balance sheet shows a decrease in reserves by​ $100 and a decrease in deposits by​ $100.

Which of the following is not one of the monetary policy goals of the Federal Reserve​ ("the Fed")? A. price stability B. stability of financial markets C. a high foreign exchange rate of the U.S. dollar relative to other currencies D. high employment

C. a high foreign exchange rate of the U.S. dollar relative to other currencies

Excess reserves A. are reserves banks keep to meet the reserve requirement. B. are the deposits that banks do not use to make loans. C. are reserves banks keep above the legal requirement. D. are loans made at above market interest rates.

C. are reserves banks keep above the legal requirement.

To affect economic variables such as real GDP or the price​ level, the monetary policy target the Federal Reserve has generally focused on is the A. money supply. B. discount rate. C. federal funds rate. D. prime lending rate.

C. federal funds rate.

Which of these variables are the main monetary policy targets of the​ Fed? A. economic growth and productivity B. real GDP and the price level C. the money supply and the interest rate D. the inflation rate and the unemployment rate

C. the money supply and the interest rate

An article in the Wall Street Journal noted that for a small community bank in upstate New​ York, "only​ 42% of deposits were lent​ out, compared with​ 69% at Bank of​ America." Does the fraction of their deposits that banks lend out have anything to do with the size of the money​ supply? Briefly explain. A. ​Yes, the larger the fraction of deposits that banks lend​ out, the smaller the money supply will​ be, and vice versa. B. ​No, the size of the money supply is generally determined by other economic​ variables, such as the interest rate. C. ​Yes, the larger the fraction of deposits that banks lend​ out, the larger the money supply will​ be, and vice versa. D. ​No, the small size of community banks makes them unable to affect the money​ supply, regardless of the percentage of deposits lent out.

C. ​Yes, the larger the fraction of deposits that banks lend​ out, the larger the money supply will​ be, and vice versa.

What do economists mean by the demand for​ money? A. It is the monetary value of total wealth of individuals. B. It is the amount of money—currency and checking account deposits—that individuals use to pay for one transaction per day. C. It is the amount of money—currency and checking account deposits—that individuals hold. D. It is the amount of​ currency, checking account deposits and stocks and bonds that individuals hold. What is the advantage of holding​ money? A. Currency and checkinng account deposits held by individuals earn substantial interest income. B. Money can be used to buy​ goods, services, or financial assets. C. Money held by an individual can be used to measure​ one's wealth. D. An individual pays little or no taxes on the amount of money he holds. What is the disadvantage of holding​ money? A. Money, in the form of currency or checking account​ deposits, earns either no interest or a very low rate of interest. B. Money cannot be readily used to buy financial assets. C. Money is not very​ "liquid." D. Money can be easily stolen or lost.

C. It is the amount of money—currency and checking account deposits—that individuals hold. B. Money can be used to buy​ goods, services, or financial assets. A. Money, in the form of currency or checking account​ deposits, earns either no interest or a very low rate of interest.

In​ 2015, one article in the Wall Street Journal discussed the possibility of​ "a September​ quarter-point increase in the​ Fed's range for overnight target​ rates," while another article​ noted, "the U.S. central​ bank's discount rate...has been set at​ 0.75% since February​ 2010." What is the name of the​ "target interest​ rate" mentioned in this​ article? A. The mortgage rate. B. The prime rate. C. The federal funds rate. D. The discount rate. Who borrows money and who lends money at this​ "target interest​ rate"? A. Banks borrow and investors lend. B. Banks borrow and the Fed lends. C. Banks borrow and banks lend. D. The Fed borrows and banks lend. What is the discount​ rate? A. The discount rate is the rate at which banks lend to their best customers. B. The discount rate is the rate at which banks lend to each other. C. The discount rate is the rate at which auto loans and mortgages are made. D. The discount rate is the rate at which the Fed lends to banks.

C. The federal funds rate. C. Banks borrow and banks lend. D. The discount rate is the rate at which the Fed lends to banks.

The Federal Reserve cannot affect real GDP ​directly; therefore, the Fed typically uses the following as its policy​ target: A. Government expenditures. B. Inflation. C. Taxes. D. Interest rates.

D. Interest rates.

In the late​ 1940s, the Communists under Mao Zedong were defeating the government of China in a civil war. The paper currency issued by the Chinese government was losing much of its​ value, and most businesses refused to accept it. At the same​ time, there was a paper shortage in Japan. During these​ years, Japan was still under military occupation by the United States. Some U.S. troops in Japan realized that they could use dollars to buy up vast amounts of paper currency in​ China, ship it to Japan to be recycled into​ paper, and make a substantial profit. Under these​ circumstances, was the Chinese paper currency a commodity money or a fiat money? A. It is a commodity money because it has no value except as money. B. It is a fiat money because it has value as recycled paper. C. It is a fiat money because it has no value except as money. D. It is a commodity money because it has value as recycled paper.

D. It is a commodity money because it has value as recycled paper.

Monetary policy is defined​ as: A. The actions the Federal Reserve takes to manage tax policy and interest rates. B. The actions Congress takes to manage the money supply and interest rates. C. The actions Congress takes to manage tax policy and interest rates. D. The actions the Federal Reserve takes to manage the money supply and interest rates.

D. The actions the Federal Reserve takes to manage the money supply and interest rates.

A student says the​ following: ​"I understand why the Fed uses expansionary policy but I​ don't understand why it would ever use contractionary policy. Why would the government ever want the economy to​ contract?" The government would want the economy to contract when real GDP is A. above potential GDP and the price level is falling. B. below potential GDP and the price level is rising. C. below potential GDP and the price level is falling. D. above potential GDP and the price level is rising.

D. above potential GDP and the price level is rising.

An increase in the money supply in the U.S. will not A. cause the amount of net exports from the U.S. to​ increase, as exports rise and imports fall. B. cause the U.S. interest rate to decline relative to interest rates in other countries. C. cause the value of the dollar to decrease relative to other assets. D. cause the value of investing in U.S. financial assets to become more desirable to foreign investors.

D. cause the value of investing in U.S. financial assets to become more desirable to foreign investors.

Since​ 1950, the annual inflation rate in the U.S. A. has always been​ positive, but it has also varied​ substantially, peaking around​ 1980, and falling to its lowest level in 2009 due to the effects of the Great Recession. B. has cycled regularly between being positive and​ negative, peaking around 1980. C. first became positive around​ 1980, but became negative for several months in early 2009 due to the effects of the Great Recession. D. has typically been​ positive, but it has also varied​ substantially, peaking around​ 1980, and becoming negative for several months in early 2009 due to the effects of the Great Recession.

D. has typically been​ positive, but it has also varied​ substantially, peaking around​ 1980, and becoming negative for several months in early 2009 due to the effects of the Great Recession.

One of the goals of the Federal Reserve is price stability. For the Fed to achieve this​ goal, A. prices should not be increasing and the inflation rate should be near zero percent. B. the inflation rate should be consistent but the rate of inflation can be​ zero, low​ (such as​ 1-3%), or high​ (such as​ 8-10%). C. the level of unemployment should be​ low, less than​ 6%, and the inflation rate should be near zero percent. D. the rate of inflation should be​ low, such as​ 1% to​ 3%, and should be fairly consistent.

D. the rate of inflation should be​ low, such as​ 1% to​ 3%, and should be fairly consistent.

The simple deposit multiplier equals A. the formula used to calculate the total increase in checking account deposits from an increase in bank reserves. B. the ratio of the amount of deposits created by banks to the amount of new reserves. C. the​ inverse, or​ reciprocal, of the required reserve ratio. D. All of the above. A higher required reserve ratio​ _________ the value of the simple deposit multiplier. A. decreases B. eliminates C. leaves unchanged D. increases

D. All of the above. A. decreases

In​ 2019, an article in the Wall Street Journal had the headline​ "Fed, Facing Pressure on Rate​ Cut, to Decide on Next​ Move." What rate was the headline likely referring​ to? A. Discount rate. B. Treasury rate. C. Commercial rate. D. Federal funds rate. Who is able to borrow and lend at that​ rate? A. The government borrows at that rate by selling Treasury securities. B. Banks are able to borrow from the Federal Reserve at that rate. C. Households are able to borrow from banks at that rate. D. Banks are able to borrow and lend from each other at that rate. Why does the​ Fed's actions to increase or decrease the rate you identified above attract so much​ attention? A. This rate has a greater effect on​ long-term interest rates than on​ short-term rates. B. This rate ultimately has a substantial effect on many other interest rates. C. This is the rate that directly affects the mortgage rates that households pay. D. The​ Fed's actions attract so much attention because this rate is set precisely by the Fed.

D. Federal funds rate. D. Banks are able to borrow and lend from each other at that rate. B. This rate ultimately has a substantial effect on many other interest rates.

In​ mid-2019, an article in the Wall Street Journal quoted President Donald Trump as stating that the​ Fed's interest rate target was​ "way too​ high" and that​ "the euro and other currencies are devalued against the​ dollar, putting the U.S. at a big​ disadvantage." What did President Trump mean by other currencies being​ "devalued against the​ dollar"? A. This occurs when U.S. prices in dollars are higher than prices in foreign currencies. B. Other currencies being​ "devalued against the​ dollar" means that other currencies can be traded for more dollars. C. This would mean that the value of a dollar in terms of foreign currencies is stable. D. Other currencies being​ "devalued against the​ dollar" means it takes more units of a foreign currency to buy a dollar. Is there an economic connection between the​ president's desire for lower interest rates in the United States and his desire to avoid having other currencies devalued against the​ dollar? Briefly explain. A. No, because the Fed does not have the ability to affect interest rates in a way that would impact the foreign exchange value of the dollar. B. Yes, when the Federal Reserve keeps interest rates​ low, it makes the dollar weaker because firms are less likely to invest in new factories and equipment. C. Yes, when the Federal Reserve keeps interest rates​ low, it makes the dollar weaker because foreigners demand more dollars. D. Yes, when the Federal Reserve keeps interest rates​ low, it makes the dollar weaker because investing in the United States is less attractive. In what sense do other currencies being devalued against the dollar​ "[put] the U.S. at a big​ disadvantage"? A. When the dollar is​ strong, the cost of production in the United States rises. B. A strong dollar causes the U.S. trade deficit with other countries to become larger. C. A strong dollar raises the cost of U.S. goods to buyers in foreign countries. D. A strong dollar increases the quality of foreign goods relative to U.S. goods.

D. Other currencies being​ "devalued against the​ dollar" means it takes more units of a foreign currency to buy a dollar. D. Yes, when the Federal Reserve keeps interest rates​ low, it makes the dollar weaker because investing in the United States is less attractive. C. A strong dollar raises the cost of U.S. goods to buyers in foreign countries.

In response to problems in financial markets and a slowing​ economy, the Federal Open Market Committee​ (FOMC) began lowering its target for the federal funds rate from 5.25 percent in September 2007. Over the next​ year, the FOMC cut its federal funds rate target in a series of steps. Writing in the New York Times​, economist Steven Levitt​ observed, ​ "The Fed has been pouring more money into the banking system by cutting the target federal funds rate to 0 to 0.25 percent in December​ 2008." What is the relationship between the federal funds rate falling and the money supply​ increasing? A. Cutting the federal funds rate increases​ saving, which increases the money supply. B. Cutting the federal funds rate increases the money supply. C. Cutting the federal funds rate increases bank​ reserves, which increases the money supply. D. To decrease the federal funds​ rate, the Fed must increase the money supply. How does lowering the target for the federal funds rate​ "pour money" into the banking​ system? A. To increase the money​ supply, the Fed increases government​ spending, which increases aggregate demand. B. To increase the money​ supply, the Fed decreases​ taxes, which increases consumer spending. C. To increase the money​ supply, the Fed sells bonds on the open​ market, which increases bank reserves. D. To increase the money​ supply, the Fed buys bonds on the open​ market, which increases bank reserves.

D. To decrease the federal funds​ rate, the Fed must increase the money supply. D. To increase the money​ supply, the Fed buys bonds on the open​ market, which increases bank reserves.

The​ Fed's strategy of increasing the money supply and lowering interest rates in order to increase real GDP is called A. expansionary fiscal policy. B. contractionary monetary policy. C. contractionary fiscal policy. D. expansionary monetary policy. Why would the Fed intentionally use contractionary monetary policy to reduce real​ GDP? A. The Fed intends to reduce​ inflation, which occurs if real GDP is greater than potential GDP. B. The Fed intends to raise interest rates to make buying new houses less expensive. C. The Fed intends to reduce real GDP so that real GDP will grow again but at a faster pace. D. The Fed intends to reduce​ unemployment, which occurs if real GDP is greater than potential GDP

D. expansionary monetary policy. A. The Fed intends to reduce​ inflation, which occurs if real GDP is greater than potential GDP.

If the Fed is too slow to react to a recession and applies an expansionary monetary policy only after the economy begins to​ recover, then A. the economy will be more stable than if the Fed had not acted. B. the real GDP will be lower than if the Fed had not acted. C. the unemployment rate will be higher than if the Fed had not acted. D. inflation will be higher than if the Fed had not acted. A countercyclical policy is one that A. occurs automatically during recessions. B. increases the benefits of economic expansions. C. inadvertently increases the severity of the business cycle. D. is used to attempt to stabilize the economy.

D. inflation will be higher than if the Fed had not acted. D. is used to attempt to stabilize the economy.

The federal funds rate is A. the interest rate that the banks charge for loans to its important commercial borrowers. B. the interest rate that the Federal Reserve charges for its loans to banks. C. the required reserve ratio that the Federal Reserve requires banks to maintain. D. the interest rate that banks charge each other for overnight loans. Additionally, the federal funds rate is A. very important for the​ Fed's monetary policy because it is administratively set by the Fed. B. very important for the​ Fed's monetary policy because individual borrowers pay this interest rate for mortgage loans. C. not important for the​ Fed's monetary policy since households and firms are not directly affected by any adjustment of this rate. D. very important for the​ Fed's monetary policy because the Fed uses the federal funds rate as a monetary policy target since it can control the rate through open market operations.

D. the interest rate that banks charge each other for overnight loans. D. very important for the​ Fed's monetary policy because the Fed uses the federal funds rate as a monetary policy target since it can control the rate through open market operations.

what increases when the government runs a budget​ deficit, and rises during recessions and wars?

Government debt

What is the difference between federal government purchases​ (spending) and federal government​ expenditures?

Government purchases are included in government expenditures.

Who is responsible for fiscal​ policy?

The federal government controls fiscal policy.

if the government cuts taxes in order to increase aggregate​ demand, the action is called

a discretionary fiscal policy

Briefly explain whether each of the following is an example of​ (1) a discretionary fiscal​ policy, (2) an automatic​ stabilizer, or​ (3) not a fiscal policy. Congress and the president enact a temporary cut in payroll taxes.

a discretionary fiscal policy.

Some economists argue that because increases in government spending crowd out private​ spending, increased government spending will reduce the​ long-run growth rate of real GDP. a. This is most likely to happen if the private spending being crowded out is _______ b. In terms of its effect on the​ long-run growth rate of real​ GDP, it is likely to matter more if the additional government spending involves A. increased spending on the national parks. B. increased spending on highways and bridges. C. both would have the same impact on​ long-run growth in real GDP. D. neither matters to​ long-run growth in real GDP.

a) investment spending. b) B. increased spending on highways and bridges.

identify each of the following​ as: ​(i) part of an expansionary fiscal​ policy, ​(ii) part of a contractionary fiscal​ policy, or ​(iii) not part of fiscal policy. a. The corporate income tax rate is increased. This is _______ b. Defense spending is increased. This is _______ c. The Federal Reserve lowers the target for the federal funds rate. This is __________

a) part of a contractionary fiscal policy. b) not part of fiscal policy. c) not part of fiscal policy.

Briefly explain whether each of the following is an example of​ (1) a discretionary fiscal​ policy, (2) an automatic​ stabilizer, or​ (3) not a fiscal policy. The revenue the federal government collects from the individual income tax declines during a recession.

an automatic stabilizer

Briefly explain whether each of the following is an example of​ (1) a discretionary fiscal​ policy, (2) an automatic​ stabilizer, or​ (3) not a fiscal policy. The total the federal government pays out for unemployment insurance decreases during an expansion.

an automatic stabilizer.

According to an article in the New York Times​, an official at the Bank of Japan had the following explanation of why monetary policy was not pulling the country out of​ recession: ​ "Despite recent major increases in the money​ supply, he​ said, the money stays in​ banks." In the​ quote, when the official says​ "the money stays in​ banks," he is referring to _______ in the reserves in banks. But the real problem was that banks were not _______ the reserves The reason for this may have been a lack of ________

an increase lending borrowers

occur when government spending exceeds tax​ revenue, and increase during recessions and wars.

budget deficits

When the Federal Open Market Committee​ (FOMC) decides to increase the money​ supply, it ______ U.S. Treasury securities. If the FOMC wishes to decrease the money​ supply, it ____ U.S. Treasury securities

buys sells

William McChesney​ Martin, who was Federal Reserve chairman from 1951 to​ 1970, was once quoted as​ saying, ​"The role of the Federal Reserve is to remove the punchbowl just as the party gets​ going." When he said​ "to remove the​ punchbowl," he meant to engage in _______ policy. In terms of the​ economy, "just as the party gets​ going" refers to a situation in which real GDP ______ potential​ GDP, which will result in _______ the inflation rate.

contractionary is greater than an increase in

a decline in private expenditures as a result of increases in government purchases.

crowding out

includes increasing government spending and decreasing taxes to increase aggregate demand.

expansionary fiscal​ policy

pending by the government on​ goods, services, and factors of production.

government purchases

Briefly explain whether each of the following is an example of​ (1) a discretionary fiscal​ policy, (2) an automatic​ stabilizer, or​ (3) not a fiscal policy. The federal government changes the required gasoline mileage for new cars.

not a fiscal policy

Briefly explain whether each of the following is an example of​ (1) a discretionary fiscal​ policy, (2) an automatic​ stabilizer, or​ (3) not a fiscal policy. The Federal Reserve sells Treasury securities.

not a fiscal policy.

When the economy is experiencing a recession automatic stabilizers will​ cause:

transfer payments to increase and tax revenues to decrease.

what are two examples of automatic stabilizers in the U.S.?

unemployment insurance payments and the progressive income tax system.

The economic definition of money​ is: A. Any asset that people are generally willing to accept in exchange for goods and services. B. A good that has intrinsic value. C. Anything of value owned by a person or a firm. D. Anything authorized by the government to be used in an exchange.

A. Any asset that people are generally willing to accept in exchange for goods and services.

Are federal purchases higher today than they were in​ 1960? A. As a percentage of​ GDP, federal purchases have decreased since 1960. B. As a percentage of​ GDP, federal purchases have remained unchanged since 1960. C. As a percentage of​ GDP, federal purchases have increased since 1960.

A. As a percentage of​ GDP, federal purchases have decreased since 1960. Your answer is correct.

Which of the following statements about the federal debt is​ correct? A. If the debt becomes very large relative to the​ economy, then the government may have to raise taxes to high levels or reduce other types of spending to make the interest payments on the debt. B. The federal government is in danger of defaulting on its debt. C. Interest payments are currently about 60 percent of total federal expenditures. D. Given the current interest payments as a percent of total federal​ expenditures, there is a great need for immediate tax increases or significant cutbacks in other types of federal spending.

A. If the debt becomes very large relative to the​ economy, then the government may have to raise taxes to high levels or reduce other types of spending to make the interest payments on the debt.

Which of the following best describes the difference between crowding out in the short run and in the long​ run? A. In the short​ run, an increase in government purchases may not fully crowd out private expenditures due to the stimulative effect of an increase in government purchases on aggregate demand. In the long​ run, most economists believe that a permanent increase in government purchases will result in complete crowding out of private expenditures. B. In the short run and the long​ run, most economists believe that an increase in government purchases will result in complete crowding out of private expenditures. C. In the short run and the long​ run, an increase in government purchases may not fully crowd out private expenditures due to the stimulative effect of an increase in government purchases on aggregate demand. D. In the long​ run, an increase in government purchases may not fully crowd out private expenditures due to the stimulative effect of an increase in government purchases on aggregate demand. In the short​ run, most economists believe that a permanent increase in government purchases will result in complete crowding out of private expenditures.

A. In the short​ run, an increase in government purchases may not fully crowd out private expenditures due to the stimulative effect of an increase in government purchases on aggregate demand. In the long​ run, most economists believe that a permanent increase in government purchases will result in complete crowding out of private expenditures.

If Congress and the president decide an expansionary fiscal policy is​ necessary, what changes should they make in government spending or​ taxes? A. In this​ case, Congress and the president should enact policies that increase government spending and decrease taxes. B. In this​ case, Congress and the president should enact policies that increase government spending and increase taxes. C. In this​ case, Congress and the president should enact policies that decrease government spending and decrease taxes. D. In this​ case, Congress and the president should enact policies that decrease government spending and increase taxes. What changes should they make if they decide a contractionary fiscal policy is​ necessary? A. In this​ case, Congress and the president should enact policies that increase government spending and decrease taxes. B. In this​ case, Congress and the president should enact policies that increase government spending and increase taxes. C. In this​ case, Congress and the president should enact policies that decrease government spending and decrease taxes. D. In this​ case, Congress and the president should enact policies that decrease government spending and increase taxes.

A. In this​ case, Congress and the president should enact policies that increase government spending and decrease taxes. D. In this​ case, Congress and the president should enact policies that decrease government spending and increase taxes.

What are the largest asset and the largest liability of a typical​ bank? A. Loans are the largest asset and deposits are the largest liability of a typical bank. B. Cash in its vault is the largest asset and bonds are the largest liability of a typical bank. C. Loans are the largest liability and deposits are the largest asset of a typical bank. D. Reserves are the largest asset and deposits are the largest liability of a typical bank.

A. Loans are the largest asset and deposits are the largest liability of a typical bank.

According to a 2019 Congressional Budget Office​ (CBO) report,​ "Among the civilian noninstitutionalized population age 16 or​ older, the share of people over age 65 has increased from 16 percent to 20 percent over the past decade and is projected to rise to 27 percent by​ 2049." The​ over-65 population is increasing so rapidly because A. after​ WWII, there was a​ "baby boom," but after 1965 birthrates fell. B. infant mortality rose significantly after 1965. C. this group is the healthiest. D. modern medicine benefited this group more than others.

A. after​ WWII, there was a​ "baby boom," but after 1965 birthrates fell.

The U.S. dollar can best be described as A. fiat money. B. reserve money. C. commodity money. D. ​commodity-backed money.

A. fiat money.

As a fraction of​ GDP, total expenditures by the U.S. federal​ government, including transfer​ payments, A. have risen since the early 1950s in contrast to U.S. federal purchases of goods and​ services, which have fallen. B. have fallen since the early 1950s in contrast to U.S. federal purchases of goods and​ services, which have risen. C. and U.S. federal purchases of goods and services have both fallen since the early 1950s. D. and U.S. federal purchases of goods and services have both risen since the early 1950s.

A. have risen since the early 1950s in contrast to U.S. federal purchases of goods and​ services, which have fallen.

represent total government spending including​ goods, services, grants to state and local​ governments, and transfer payments.

government expenditures

Each year that the federal government runs a​ deficit, the federal debt ____. Each year that the federal government runs a​ surplus, the federal debt _____.

grows shrinks

Since the​ 1950s, total government expenditures, as a percentage of​ GDP, have ______ and total government​ purchases, as a percentage of​ GDP, have _______ The major cause of these trends is A. there has been a reduction in the nominal amount of government purchases on military as the U.S. does not engage in military conflicts. B. there has been a major increase in the amount of transfer payments the government makes through programs such as Social Security and unemployment insurance. C. there has been a decrease in income tax rates for most households in the U.S. D. All of the above.

increased decreased B. there has been a major increase in the amount of transfer payments the government makes through programs such as Social Security and unemployment insurance.

Suppose the government increases expenditures by ​$30 billion and the marginal propensity to consume is 0.90. By how much will equilibrium GDP​ change? The change in equilibrium GDP​ is: ​$_______billion.

$300 billion

Suppose you deposit ​$1,900 cash into your checking account. By how much will checking deposits in the banking system increase as a result when the required reserve ratio is 0.5​0? The change in checking deposits is equal​ to: $________

$3800

Another infrastructure project in northern California funded in part by ARRA funds involved expanding the Caldecott Tunnel between the cities of Oakland and Orinda. A spokesperson for the California state agency in charge of the project mentioned that the Caldecott tunnel project would have a​ "ripple effect" on employment. The ripple effect meant that A. the job creation would spread to other industries and eventually to the whole economy due to the consumption of the construction workers. B. the income earned by the Caldecott tunnel project workers would trickle down to those who would be still unemployed. C. the job creation would be restricted to the construction industry only as more workers would be hired by other construction companies. D. other​ non-construction industries would also want to share the​ government's stimulus money.

A. the job creation would spread to other industries and eventually to the whole economy due to the consumption of the construction workers.

The national debt is best measured as A. the total value of U.S. Treasury securities outstanding. B. the total value of stocks issued in a country. C. the difference between federal government spending and federal taxes. D. the value of all debts of private citizens and businesses.

A. the total value of U.S. Treasury securities outstanding.

Automatic stabilizers can reduce the severity of a recession​ because, during a​ recession, A. unemployment payments rise and tax collections​ fall, providing more spending ability to push the economy back to full employment. B. social security payments rise and tax collections​ fall, providing more spending ability to push the economy back to full employment. C. student loan subsidies rise and tax collections​ fall, providing more spending ability to push the economy back to full employment. D. social security payments and student loan subsidies​ rise, providing more spending ability to push the economy back to full employment.

A. unemployment payments rise and tax collections​ fall, providing more spending ability to push the economy back to full employment.

In what ways does the federal budget serve as an automatic stabilizer for the​ economy? A. During a​ recession, there is an increase in government expenditures for transfer payments and a decrease in taxes as wages and profits fall. During an​ expansion, there is a decrease in government expenditures for transfer payments and an increase in taxes as wages and profits rise. Both of these occur automatically and both effects help to stabilize aggregate demand. B. During a​ recession, there is a decrease in government expenditures for transfer payments and an increase in taxes as wages and profits rise. During an​ expansion, there is an increase in government expenditures for transfer payments and a decrease in taxes as wages and profits fall. Both of these occur automatically and both effects help to stabilize aggregate demand. C. During a​ recession, there is an increase in government expenditures for transfer payments and a decrease in taxes as wages and profits rise. During an​ expansion, there is a decrease in government expenditures for transfer payments and an increase in taxes as wages and profits fall. Both of these occur automatically and both effects help to stabilize aggregate demand. D. During a​ recession, there is an increase in government expenditures for transfer payments and a decrease in taxes as wages and profits fall. During an​ expansion, there is a decrease in government expenditures for transfer payments and an increase in taxes as wages and profits rise. Both of these require government action to stabilize aggregate demand.

A. During a​ recession, there is an increase in government expenditures for transfer payments and a decrease in taxes as wages and profits fall. During an​ expansion, there is a decrease in government expenditures for transfer payments and an increase in taxes as wages and profits rise. Both of these occur automatically and both effects help to stabilize aggregate demand.

Look carefully at the following list. a. The coins in your pocket. b. The funds in your checking account. c. The funds in your savings account. d. The​ traveler's check that you have leftover from a trip. e. Your Citibank Platinum MasterCard. Which of the things above are NOT included in the M1 definition of the money​ supply? A. c​ & e B. b​ & e C. a​ & b D. d​ & e

A. c​ & e

Savings account​ balances, small-denomination time​ deposits, and noninstitutional money market fund shares are A. included only in M2. B. included only in M1. C. included in both M1 and M2. D. financial assets that are not included in the money supply. Jill makes a deposit into her savings account at the local bank with​ $100 in cash. As a result of this​ transaction, A. M1 will decrease by​ $100 B. both M1 and M2 will increase by​ $100. C. M2 will increase by​ $100. D. Both B and C are correct.

A. included only in M2. A. M1 will decrease by​ $100

Government debt A. increases when the government runs a budget​ deficit, and rises during recessions and wars. B. increases when the government runs a budget​ surplus, and rises during recessions and wars. C. increases when the government runs a budget​ surplus, and falls during recessions and wars. D. increases when the government runs a budget​ deficit, and falls during recessions and wars.

A. increases when the government runs a budget​ deficit, and rises during recessions and wars.

After September​ 11, 2001, the federal government increased military spending on wars in Iraq and Afghanistan. Is this increase in spending considered fiscal​ policy? A. Yes. Fiscal policy refers to changes in government spending and taxes. B. No. The increase in defense spending after that date was designed to achieve homeland security objectives. C. Yes. Increases in defense spending are designed to achieve macroeconomic policy objectives. D. No. Fiscal policy refers to changes in interest rates and the money supply.

B. No. The increase in defense spending after that date was designed to achieve homeland security objectives.

U.S. federal government expenditures are comprised of purchases of goods and services​ (defense spending plus spending on all​ day-to-day activities), transfer​ payments, interest​ payments, and grants to state and local governments. Which of the following statements is​ true? A. Grants to state and local governments are the largest component of the federal budget​ (about 50%) followed by spending on all its​ day-to-day activities​ (about 20%), while transfer payments are the smallest component​ (about ​8%). B. Transfer payments are the largest component of the federal budget​ (about 50%) followed by defense spending​ (about 20%), while spending on all its​ day-to-day activities is the smallest component​ (about ​8%). C. Interest payments are the largest component of the federal budget​ (about 50%) followed by spending on all its​ day-to-day activities​ (about 20%), while defense spending is the smallest component​ (about ​8%). D. Spending on all its​ day-to-day activities is the largest component of the federal budget​ (about 50%) followed by grants to state and local governments​ (about 20%), while interest payments are the smallest component​ (about ​8%

B. Transfer payments are the largest component of the federal budget​ (about 50%) followed by defense spending​ (about 20%), while spending on all its​ day-to-day activities is the smallest component​ (about ​8%).

When is it considered​ "good policy" for the government to run a budget​ deficit? A. When borrowing is used to pay for social insurance programs. B. When borrowing is used for​ long-lived capital goods. C. When borrowing is used for current expenses. D. All of the above.

B. When borrowing is used for​ long-lived capital goods.

When actual GDP is below potential GDP the budget deficit increases because​ of: A. a decrease in transfer payments and a decrease in tax revenues. B. an increase in transfer payments and a decrease in tax revenues. C. an increase in transfer payments and an increase in tax revenues. D. an decrease in transfer payments and an increase in tax revenues.

B. an increase in transfer payments and a decrease in tax revenues.

According to a 2019 Congressional Budget Office​ (CBO) report,​ "Among the civilian noninstitutionalized population age 16 or​ older, the share of people over age 65 has increased from 16 percent to 20 percent over the past decade and is projected to rise to 27 percent by​ 2049." If current projections of federal spending on Social Security and Medicare are​ accurate, policymakers are faced with the choice of A. changing the budget rules so that some of these expenses are moved​ off-budget and/or greatly increasing taxes on households and firms. B. significantly restraining spending on these programs​ and/or greatly increasing taxes on households and firms. C. significantly restraining spending on these programs​ and/or relying more on the Fed to increase the money supply. D. changing the budget rules so that some of these expenses are moved​ off-budget and/or greater reliance on the Fed to increase the money supply.

B. significantly restraining spending on these programs​ and/or greatly increasing taxes on households and firms.

Is it possible for Congress and the president to carry out an expansionary fiscal policy if the money supply does not​ increase? A. ​Yes, because the government can expand the money supply itself. B. ​Yes, because fiscal policy and monetary policy are separate things. C. ​No, because without an expansion of the money​ supply, the government cannot spend more money. D. ​Uncertain, because it depends on the response of investment and consumption to the interest rate.

B. ​Yes, because fiscal policy and monetary policy are separate things.

In​ 2009, Congress and the president enacted​ "cash for​ clunkers" legislation that paid people buying new cars up to​ $4,500 if they traded in an​ older, low​ gas-mileage car. Was this piece of legislation an example of fiscal​ policy? A. ​No, because the program did not have any effect on the national economy. B. ​Yes, because the primary goal of the spending program was to stimulate the national economy. C. ​Yes, because any government spending program​ is, by​ definition, a fiscal policy. D. ​No, because the effect of the spending program was to increase the gas mileage of cars currently on the road.

B. ​Yes, because the primary goal of the spending program was to stimulate the national economy.

Suppose the reserve requirement is 5​%. What is the effect on total checkable deposits in the economy if bank reserves increase by ​$60 ​billion? A. $60 billion increase B. $1,200 billion increase C. $12 billion increase D. $300 billion increase

B. $1,200 billion increase

The term​ "crowding out" refers to a situation​ where: A. Fed policy increases interest rates and decreases private investment. B. Government spending increases interest rates and decreases private investment. C. Fed policy decreases interest rates and increases private investment. D. Government spending decreases interest rates and increases private investment.

B. Government spending increases interest rates and decreases private investment.

In​ 2008, the required reserve ratio for a​ bank's first​ $9.3 million in checking account deposits was zero. It was 3 percent on deposits between​ $9.3 million and​ $43.9 million, and 10 percent on deposits above​ $43.9 million. In most​ cases, and for​ simplicity, we assume that the required reserve ratio is 10 percent on all deposits.​ Therefore, the simple deposit multiplier is 10. Is the​ real-world deposit multiplier greater​ than, less​ than, or equal to the simple deposit​ multiplier? A. Equal. There is no difference between the two. B. Less. The simple deposit multiplier is a model with assumptions that keep it higher than the​ real-world multiplier. C. Greater. Inflation plays a large role in the increase in checkable deposits. D. None of the above. They are very different concepts.

B. Less. The simple deposit multiplier is a model with assumptions that keep it higher than the​ real-world multiplier.

Which of the following is included in M2 but not​ M1? A. Traveler's checks B. Money market deposit accounts in banks C. Currency D. Checking account deposits at banks The Federal Reserve uses two definitions of the money​ supply, M1 and​ M2, because A. M2 is also known as cash and cash​ equivalent, whereas M1 represents the standard of deferred payment function. B. M2 is a narrow definition focusing more on​ liquidity, whereas M1 is a broader definition of the money supply. C. M2 satisfies the medium of exchange function of​ money, whereas M1 satisfies the store of value function. D. M1 is a narrow definition focusing more on​ liquidity, whereas M2 is a broader definition of the money supply

B. Money market deposit accounts in banks D. M1 is a narrow definition focusing more on​ liquidity, whereas M2 is a broader definition of the money supply

What is the difference between the federal budget deficit and federal government​ debt? Part 2 A. The federal budget deficit is the​ year-to-year short fall in tax revenues relative to government spending ​ (T < G​ + TR), financed through corporate bonds. The federal government debt is the accumulation of all past deficits. B. The federal budget deficit is the​ year-to-year short fall in tax revenues relative to government spending ​ (T < G​ + TR), financed through government bonds. The federal government debt is the accumulation of all past deficits. C. The federal budget deficit is the​ year-to-year surplus in tax revenues relative to government spending ​ (T > G​ + TR), financed through government bonds. The federal government debt is the accumulation of all past deficits. D. The federal budget debt is the​ year-to-year short fall in tax revenues relative to government spending ​ (T < G​ + TR), financed through government bonds. The federal government deficit is the accumulation of all past debts.

B. The federal budget deficit is the​ year-to-year short fall in tax revenues relative to government spending ​ (T < G​ + TR), financed through government bonds. The federal government debt is the accumulation of all past deficits.

Which of the following are examples of discretionary fiscal​ policy? ​(Check all that​ apply.) A. A state government borrows money to finance the building of a new bridge. B. The president and Congress reduce tax rates to increase the amount of investment spending. C. Additional taxes are collected as the economy experiences an increase in income resulting from economic growth. D. The government provides stimulus funds to repair roads and bridges to increase spending in the economy. E. Congress provides a tax rebate to encourage additional spending in order to reduce the unemployment rate. F. The government spends more on the military to provide assistance to England after a natural disaster.

B. The president and Congress reduce tax rates to increase the amount of investment spending. D. The government provides stimulus funds to repair roads and bridges to increase spending in the economy. E. Congress provides a tax rebate to encourage additional spending in order to reduce the unemployment rate.

Briefly explain whether an expansionary fiscal policy will cause each of the following variables to increase or​ decrease: ​ (i) Real GDP A. Decrease real GDP by decreasing​ long-run aggregate supply. B. increase real GDP by increasing aggregate demand. C. Increase real GDP by increasing​ short-run aggregate supply. D. Not affect real GDP because potential GDP​ won't change. ​(ii) The unemployment rate A. Increase the unemployment rate by increasing wages. B. Decrease the unemployment rate by increasing production. Your answer is correct. C. increase the unemployment rate by decreasing employment. D. Decrease the unemployment rate by decreasing the labor force. ​(iii) The price level A. Decrease the price level because inflation falls. B. Increase the price level because more is demanded. C. Increase the price level because less is supplied. D. Decrease the price level because more is supplied.

B. increase real GDP by increasing aggregate demand. B. Decrease the unemployment rate by increasing production. B. Increase the price level because more is demanded.

Consider the following​ statement: ​"Real GDP is currently​ $20.7 trillion, and potential real GDP is​ $20.4 trillion. If Congress and the president would decrease government purchases by​ $300 billion or increase taxes by​ $300 billion, the economy could be brought to equilibrium at potential​ GDP." If government purchases were to decrease by​ $300 billion or if taxes were increased by​ $300 billion, the equilibrium level of real GDP would decrease by A. less than​ $300 billion. B. more than​ $300 billion. C. exactly​ $300 billion. D. None of the​ above; equilibrium real GDP would actually increase. ​Therefore, the statement above is _______

B. more than​ $300 billion. incorrect.

A Federal Reserve publication argues that the size of the multiplier​ "depends on the type of fiscal policy changes in question and the environment in which they are​ implemented." In referring to ​"the type of fiscal policy changes in​ question," the author recognizes that A. local government spending changes are different from federal government spending changes. B. the tax multiplier is different from the government purchases multiplier. C. contractionary fiscal policy is different from expansionary fiscal policy. D. discretionary fiscal policy is different from automatic stabilizers. The type of policy matters for the size of the multiplier because A. local government spending changes take longer to work through the economy than federal government spending changes. B. households may not spend all of the saved taxes when there is a tax​ cut, but an increase in government spending will increase aggregate demand by the full amount. C. discretionary fiscal policy requires Congressional action but automatic stabilizers do not. D. the effect of contractionary fiscal policy is slower than the effect of expansionary fiscal policy. The reference to​ "the environment in which they are​ implemented" is a recognition that A. consumers may be more receptive to a fiscal policy that is simple and clear. B. discretionary fiscal policy requires Congressional action but automatic stabilizers do not. C. changes in government spending can be offset or reinforced by monetary​ policy, and the impacts will be different at different phases of the business cycle. D. there are political realities that limit the ability of Congress to design fiscal policies. The size of the multiplier could be affected by how close real GDP is to potential GDP because A. automatic stabilizers do not have multiplier effects. B. multipliers have more effect on the aggregate demand side of the economy than the aggregate supply side. C. the effects are more positive during recessions than during inflations. D. when real GDP equals potential​ GDP, the economy is at zero unemployment.

B. the tax multiplier is different from the government purchases multiplier. B. households may not spend all of the saved taxes when there is a tax​ cut, but an increase in government spending will increase aggregate demand by the full amount. C. changes in government spending can be offset or reinforced by monetary​ policy, and the impacts will be different at different phases of the business cycle. C. the effects are more positive during recessions than during inflations.

Suppose you withdraw​ $1,000 from a money market mutual fund and deposit the funds in your bank checking account. How will this action affect M1 and​ M2? A. M2 will decrease and M1 will increase. B. M2 will​ increase, but M1 will not be affected. C. M2 will not be​ affected, but M1 will increase. D. M2 will increase and M1 will decrease.

C. M2 will not be​ affected, but M1 will increase

When actual GDP is below potential GDP the budget deficit increases because​ of: A. an increase in transfer payments and an increase in tax revenues. B. a decrease in transfer payments and a decrease in tax revenues. C. an increase in transfer payments and a decrease in tax revenues. D. an decrease in transfer payments and an increase in tax revenues.

C. an increase in transfer payments and a decrease in tax revenues.

The large budget deficits of​ $1.4 trillion in fiscal year 2009 and​ $1.3 trillion in fiscal year 2010 were A. caused mostly by huge bailouts given to big investment banks and insurance companies. B. the result of the ailing social security and Medicare programs and the growing number of aging​ baby-boomers receiving benefits. C. caused partly by the increase in government spending including spending to bail out failed financial institutions and by the deep decline in tax revenues as incomes and profits fell. D. caused by the crowding out effect of increased government spending and increased welfare spending.

C. caused partly by the increase in government spending including spending to bail out failed financial institutions and by the deep decline in tax revenues as incomes and profits fell.

The U.S. federal government raises revenue from individual and corporate income​ taxes, social insurance​ taxes, and other sources​ (including excise​ taxes, tariffs, and payments to cut timber on federal​ lands). The largest share of federal revenues comes from A. individual income taxes​ (about 46%), followed by corporate income taxes​ (about 38%) and excise​ taxes, tariffs on​ imports, and other sources​ (about ​11%). B. corporate income taxes​ (about 46%), followed by social insurance taxes​ (about 38%) and individual income taxes​ (about ​11%). C. individual income taxes​ (about 46%), followed by social insurance taxes​ (about 38%) and excise​ taxes, tariffs on​ imports, and other sources​ (about ​11%). D. social insurance taxes​ (about 46%), followed by corporate income taxes​ (about 38%) and individual income taxes​ (about ​11%).

C. individual income taxes​ (about 46%), followed by social insurance taxes​ (about 38%) and excise​ taxes, tariffs on​ imports, and other sources​ (about ​11%).

The federal​ government's day-to-day activities include running federal agencies like the Environmental Protection​ Agency, the​ FBI, the National Park​ Service, and the Immigration and Customs Enforcement. Spending on these types of activities makes up A. about 85 percent of federal government expenditures. B. about 45 percent of federal government expenditures. C. less than 10 percent of federal government expenditures. D. less than 1 percent of federal government expenditures.

C. less than 10 percent of federal government expenditures.

he largest and​ fastest-growing category of federal expenditures is A. grants to state and local governments. B. defense spending. C. transfer payments. D. interest on the national debt.

C. transfer payments.

Are federal expenditures higher today than they were in​ 1960? A. As a percentage of​ GDP, federal expenditures have decreased since 1960. B. As a percentage of​ GDP, federal expenditures have remained unchanged since 1960. C. As a percentage of​ GDP, federal expenditures have increased since 1960.

C. As a percentage of​ GDP, federal expenditures have increased since 1960.

What is the difference between federal purchases and federal​ expenditures? A. Federal purchases and federal expenditures both require that the government receives a good or service in return. B. The difference between federal purchases and federal expenditures is so small that it is generally ignored. C. Federal purchases require that the government receives a good or service in​ return, whereas federal expenditures include transfer payments. D. Federal purchases require that the government receives a good or service in​ return, whereas federal expenditures exclude transfer payments.

C. Federal purchases require that the government receives a good or service in​ return, whereas federal expenditures include transfer payments.

In​ 2015, an article in the Wall Street Journal noted that​ "Prime Minister Shinzo Abe is expected to unveil a plan to balance​ Japan's budget in five years ... as a step toward reducing the​ country's debt​ burden, according to government​ officials." Which of the following statements is​ true? A. The deficit is accumulated​ debt, so if there is a positive​ debt, the deficit will increase. B. The debt will increase no matter what the budget deficit​ is, because the interest on the debt adds to the debt each year. C. The debt is accumulated​ deficits, so if there is a positive budget​ deficit, the debt will increase. D. There will be a budget deficit each year because of the interest on the​ debt, causing the debt to increase. The debt is a​ "burden" on A. everyone in the country and all the trading partners because interest rates will be higher. B. no one in the country because the economy is more stable. C. the current​ generation, which pays the interest on the​ debt, and future​ generations, which will be taxed to pay for present spending. D. the current​ generation, which loses out on public​ spending, and future​ generations, which will have fewer resources.

C. The debt is accumulated​ deficits, so if there is a positive budget​ deficit, the debt will increase. C. the current​ generation, which pays the interest on the​ debt, and future​ generations, which will be taxed to pay for present spending.

The following is from an article on community​ banks: ​"Their commercial-lending​ businesses, funded by their stable deposit​ bases, make them steady​ earners." What is commercial​ lending? A. This is when firms make loans to banks. B. This is when firms make loans to other firms. C. This is when banks make loans to businesses. D. None of the above We can say that loans are funded by deposits because deposits give banks financial​ capital, which can be loaned out so banks can make a profit. A. True B. False

C. This is when banks make loans to businesses. A. True

An opinion column on cnbc.com by the president of a banking association in Florida​ argued, "Local banks are important because our country thrives on small​ businesses, which employ a majority of Americans. . . .​ [For small​ businesses,] lenders of choice tend to be community​ banks." Are small businesses more likely to rely on banks for funding than would large​ corporations? A. ​No, because small businesses usually sell stocks and bonds or other financial securities to meet their credit needs. B. ​Yes, because small businesses often borrow larger amounts of money than do large corporations. C. ​Yes, because small businesses lack the ability to sell stocks and bonds on financial markets. D. ​No, because large corporations are equally as likely as small businesses to rely on banks for funding. Why might a small business have more success obtaining a loan from a local community bank than from a national​ bank? A. Community banks have a better understanding of the circumstances that affect local firms than national banks do. B. Community banks are able to offer a wider variety of services to small business owners than national banks. C. Community banks typically have​ long-term relationships with local businesses and can more easily assess their creditworthiness. D. Only A and C are correct. E. All of the above are correct.

C. Yes, because small businesses lack the ability to sell stocks and bonds on financial markets. D. Only A and C are correct.

An opinion column in the New York Times noted that​ "private borrowers cannot create money from thin​ air" as the Federal Reserve can. Does the government create money by printing​ currency? A. ​Yes, this is the primary way that banks create money. B. ​No, banks create money through the Treasury Department. C. ​Yes, but banks create the majority of the money supply by making loans. D. ​No, banks create money by funding credit card companies. A central bank can​ "create money" by buying bonds because A. by increasing the​ banks' reserves, banks can make loans which increase checking account​ balances, and these are part of the money supply. B. the central bank is the only entity that can print money. C. the bonds are sold to the Federal Reserve which converts the funds to currency. D. they pay for the bonds with paper currency.

C. Yes, but banks create the majority of the money supply by making loans. A. by increasing the​ banks' reserves, banks can make loans which increase checking account​ balances, and these are part of the money supply.

In a column in the Financial Times​, the prime minister and the finance minister of the Netherlands argue that the European​ Union, an organization of 27 countries in​ Europe, should have​ "a commissioner for budgetary​ discipline." They believe​ that: ​"The new commissioner should be given clear powers to set requirements for the budgetary policy of countries that run excessive​ deficits." An​ "excessive" budget deficit in this context is A. a budget deficit that inevitably forces a bond rating agency to lower the rating on the​ country's debt. B. a budget deficit that has bankrupted the government. C. a relatively large budget deficit as a percentage of GDP beyond the European​ Union's deficit and debt rules D. a budget deficit that makes the economy grow by increasing income and employment. Does judging whether a deficit is excessive depend in part on whether the country is in a​ recession? A. A deficit is judged to be excessive only if there is a recession. B. During a​ recession, the deficit is higher as tax revenue falls and spending increases making an existing deficit even bigger. C. During a​ recession, the deficit is lower as tax revenue rises and spending increases making an existing deficit smaller. D. A deficit is excessive because of its size and it should not matter if there is a recession. To reduce a budget​ deficit, A. budgetary policies such as increasing taxes and cutting expenditures can be used. B. trade deficits need to be reduced by increasing imports and decreasing exports. C. budgetary policies such as increasing spending and lowering taxes can be used. D. trade deficits need to be increased by increasing exports and decreasing imports.

C. a relatively large budget deficit as a percentage of GDP beyond the European​ Union's deficit and debt rules B. During a​ recession, the deficit is higher as tax revenue falls and spending increases making an existing deficit even bigger. A. budgetary policies such as increasing taxes and cutting expenditures can be used.

review question #3 on chapter 16 part B quiz

Complete the following table for a static​ AD-AS model:

decreasing government spending and increasing taxes to decrease aggregate demand.

Contractionary fiscal policy

Increased government debt can lead to higher interest rates​ and, as a​ result, crowding out of private investment spending. In terms of borrowing​ (debt-spending), what will offset the effect of crowding out in the long run so that government debt poses less of a problem to the​ economy? A. ​Debt-spending on research and development. B. ​Debt-spending on highways and ports. C. ​Debt-spending on education. D. All of the above.

D. All of the above

How does a budget deficit act as an automatic stabilizer and reduce the severity of a​ recession? A. Transfer payments to households increase. B. During​ recessions, tax obligations fall due to falling wages and profits. C. Consumers spend more than they would in the absence of social insurance​ programs, like unemployment. D. All of the above.

D. All of the above.

Which of the following are categories of federal government​ expenditures? A. grants to state and local governments B. transfer payments C. interest on the national debt D. All of the above.

D. All of the above.

Which of the following best explains the difference between commodity money and fiat​ money? A. Commodity money has no value except as​ money, whereas fiat money has value independent of its use as money. B. All money is commodity​ money, as it has to be exchanged for gold by the central bank. C. Commodity money is usually authorized by the central​ bank, whereas fiat money has to be exchanged for gold by the central bank. D. Fiat money has no value except as​ money, whereas commodity money has value independent of its use as money.

D. Fiat money has no value except as​ money, whereas commodity money has value independent of its use as money.

Why does a​ $1 increase in government purchases lead to more than a​ $1 increase in income and​ spending? A. Through the government purchases​ multiplier, the​ $1 increase in government spending will lead to an increase in aggregate demand and national​ income, which will lead to a decrease in induced spending. B. Through the government purchases​ multiplier, the​ $1 increase in government spending will lead to a decrease in aggregate demand and national​ income, which will lead to an increase in induced spending. C. Through the government purchases​ multiplier, the​ $1 increase in government spending will lead to a decrease in aggregate demand and national​ income, which will lead to a decrease in induced spending. D. Through the government purchases​ multiplier, the​ $1 increase in government spending will lead to an increase in aggregate demand and national​ income, which will lead to an increase in induced spending.

D. Through the government purchases​ multiplier, the​ $1 increase in government spending will lead to an increase in aggregate demand and national​ income, which will lead to an increase in induced spending.

Wall Street Journal writers Josh Zumbrun and Nick Timiraos published answers to several of their​ readers' questions regarding the federal​ government's debt. Two of the questions​ were: "Why is government debt different from​ mine?" and​ "How important is it to pay off this​ debt?" Government debt is different from household debt because A. there are many more households than governments. B. the government only has to make interest​ payments, but households have to make payments on the principal too. C. government debt is much less important than household debt. D. households cannot tax to bring in revenue and so will default if they​ can't make the payments How important is it to pay off this​ debt? A. Very important because the debt is eliminating economic growth. B. Not very important if the debt is at a sustainable​ level, and the interest payments are relatively constant. C. Very important because the next generation is being saddled with huge debt. D. Not very important because as the economy​ grows, the debt​ vanishes and the economy will grow over time.

D. households cannot tax to bring in revenue and so will default if they​ can't make the payments B. Not very important if the debt is at a sustainable​ level, and the interest payments are relatively constant.

The recessions accompanied by a financial crisis are more severe than recessions that do not involve bank crises because A. people use the easy credit to buy assets when their income and credit are not sufficiently high. B. severe financial crises reduce​ savings, increase consumption and reduce exports thereby increasing the trade deficit. C. bank failures reduce the money​ supply, increase the interest rate and cause high inflation. D. severe financial crises collapse asset​ markets, lower real housing prices and cause a significant fall in GDP and employment.

D. severe financial crises collapse asset​ markets, lower real housing prices and cause a significant fall in GDP and employment.

How do the banks​ "create money"? A. Banks sell bonds in the open market and lose​ reserves; the excess cash holding by households increases the money supply. B. When there is a decrease in checking account​ deposits, banks lose reserves and reduce their​ loans, and the money supply expands. C. Banks buy bonds in the open market and gain​ reserves; this excess reserve holding increases the money supply. D. When there is an increase in checking account​ deposits, banks gain reserves and make new​ loans, and the money supply expands.

D. When there is an increase in checking account​ deposits, banks gain reserves and make new​ loans, and the money supply expands.

An attempt to reduce inflation requires​ _____________ fiscal​ policy, which causes real GDP to​ _________ and the price level to​ __________. A. contractionary; rise; fall B. expansionary; rise; rise C. expansionary; rise; fall D. contractionary; fall; fall

D. contractionary; fall; fall

According to a study by Kanishka Misra of the University of Michigan and Paolo Surico of the London Business​ School, "Almost half of American families did not adjust their consumption following receipt of the ... 2008 tax​ rebate." In​ general, we expect that people will increase their consumption A. if their previous​ year's investment income increases. B. if their confidence on the job increases. C. as they age. D. if their disposable income increases. The 2008 tax cut made it more likely that people would not respond by increasing their consumption spending because it was a A. recurring tax cut that affected​ current, not​ permanent, income. B. recurring tax cut that affected​ permanent, not​ current, income. C. one-time tax cut that affected​ current, not​ permanent, income. D. one-time tax cut that affected​ permanent, not​ current, income.

D. if their disposable income increases. C. one-time tax cut that affected​ current, not​ permanent, income.

According to Gunther Schnabl of Leipzig​ University, "In the Yuan dynasty ​(1279-​1369), Kublai Khan amazed Marco Polo with the first fiat currency​ (made of the bark of Mulberry​ trees). To ensure the purchasing​ power, those refusing to accept the currency as a means of payment were​ executed." Why would this currency be considered a fiat​ currency? The currency made from the bark of Mulberry trees would be considered a fiat money because A. the Kublai Khan economy could not function without it because people would be executed. B. people must have had a need for mulberry bark—in other​ words, there was a double coincidence of wants. C. its success as a currency depended on the unpredictable discoveries of more Mulberry trees. D. it had no other use other than as money and required a decree from the government in order to achieve acceptance. Was the drastic measure Kublai Khan used to ensure that the currency circulated​ necessary? Executing those who did not accept the fiat currency ______ necessary to ensure the currency circulated. How do modern governments ensure that their fiat currencies​ circulate? Modern governments get the public to accept their fiat money by A. requiring that it be accepted in payment of debts. B. convincing the public that it will not lose much value during the time they hold it. C. issuing as much of it as possible. D. Only A and B are correct. E. All of the above are correct.

D. it had no other use other than as money and required a decree from the government in order to achieve acceptance. was not D. Only A and B are correct.

M1 includes more than just currency because A. people hold money as other stores of value such as savings accounts and money market mutual funds. B. the federal mint makes a profit from printing currency as dollar bills. C. the government wants to be able to quote that there is a large amount of money in the economy. D. other assets can also be used to make transactions to buy goods and services. The amount of U.S. currency outstanding averages to about​ $2,800 per person in the U.S. This large amount of currency per person can be partially explained because A. rich people hold massive amounts of currency in vaults and​ safes, which makes the average large. B. most people carry large quantities of currency in their wallets and purses. C. many U.S. dollars are held outside of the country by foreigners. D. All of the above.

D. other assets can also be used to make transactions to buy goods and services. C. many U.S. dollars are held outside of the country by foreigners.

If the government increases expenditure without raising​ taxes, this will A. increase the budget deficit and require the government to borrow additional funds. B. cause the interest rate to​ increase, thereby, reducing private investment and crowding out the private sector. C. cause a decrease in the domestic exchange rate which will increase exports and decrease imports. D. All of the above. E. A and B only.

E. A and B only.

If the government increases expenditure without raising​ taxes, this will A. increase the budget deficit and require the government to borrow additional funds. B. cause the interest rate to​ increase, thereby, reducing private investment and crowding out the private sector. C. cause a decrease in the domestic exchange rate which will increase exports and decrease imports. D. All of the above. E. A and B only

E. A and B only.

The increase in the number of people age 65 or older will result in ______ in federal spending on Social Security and Medicare as a percentage of GDP.

an increase

Changes in taxes and spending that happen without actions by the government are called

automatic stabilizers

Government spending and taxes that increase or decrease without any actions taken by the government are referred to as

automatic stabilizers

identify each of the following​ as: ​(i) part of an expansionary fiscal​ policy, ​(ii) part of a contractionary fiscal​ policy, or ​(iii) not part of fiscal policy. d. Families are allowed to deduct all their expenses for daycare from their federal income taxes. This is _________ e. The individual income tax rate is decreased. This is _____________

d) not part of fiscal policy. e) part of an expansionary fiscal​ policy

Briefly explain whether each of the following is an example of​ (1) a discretionary fiscal​ policy, (2) an automatic​ stabilizer, or​ (3) not a fiscal policy. The federal government increases spending on rebuilding the New Jersey shore following a hurricane.

not a fiscal policy.