Econ 211

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

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

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

implementation lag

Open market operations are conducted

in the secondary market for Treasury securities

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

increase

Tax rates are progressive if they

increase as income increases

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

increase banks holding of government securities and decrease its reserves

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

increase by $50 million

An increase in the budget deficit will tend to

increase interest rates and appreciate the exchange rate

An increase in government spending, holding taxes constant, will

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

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

increase loans by $80 million

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

Federal Reserve's policy of quantitative easing

A positive aggregate demand shock will

increase output and employment in the short run

Automatic stabilizers tend to

increase spending following a negative aggregate demand shock

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

increase the federal funds interest rate

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

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

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

moving to the left along the short-run Phillips curve

The 1980-81 recession was caused by

negative AD shock created by monetary policy

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

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

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

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

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

not change

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

only prices are higher

In the long run, policy that changes aggregate demand change

only the price level

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

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

The short-run Phillips Curve shifts up when

price expectations and wages increase causing the SRAS to shift up

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

price expectations didn't change much

A negative aggregate demand shock in the long run will lower

prices

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

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

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

produce more because per unit profit is rising

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

purchase of U.S. government bonds

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

represents an adverse shock to aggregate supply

The minimum amount of reserves that banks must hold is called

required reserves

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

reserves

Stagflation exists when prices

rise and unemployment rises.

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

rises, shifting aggregate supply left.

Which of the following would cause stagflation?

rising oil prices

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

sell government bonds, which will reduce the money supply.

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

selling bonds. This selling would reduce reserves

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

shift aggregate demand from AD1 to AD2.

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

shift aggregate demand from AD1 to AD3

Tax increases

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

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

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

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

short-run aggregate supply left.

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

shortages exit at the original prices

During the Great Recession, the Federal Reserve purchased commercial paper

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

Payroll taxes are used to pay for

social security and Medicare

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

sold bonds in an attempt to increase the federal funds rate

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

spending increases by $4 billion

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

spending increases by $5 billion

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

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

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

store of value

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

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

The quicker that wages and price expectations adjust

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

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

the short run, but not in the long run

A change in expected inflation shifts

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

When wages and price expectations rise

the short-run aggregate supply curve shifts up/left

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

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

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

they would view movements above and below the target equally acceptable

Economists use the word "money" to refer to

those assets regularly used to buy goods and services

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

to C in the long run

During periods of expansion, automatic stabilizers cause government expenditures

to fall and taxes to rise

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

total spending decreases

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

true

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

true

The short-run Phillips curve shows the combinations of

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

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

unemployment is higher and inflation is lower.

The long-run Phillips curve is

vertical at the natural rate of unemployment

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

wages rise and production falls

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

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

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

​The government cancels an order for new military equipment.

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

assets

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

$10,000

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

$150,000 of new money

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

$16 trillion

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

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

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

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

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

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

An increase in government purchases is likely to

crowd out investment spending by business firms

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

crowding out

Government outlays increased during the Great Recession because

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

Which of the following is a function of money?

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

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

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

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

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

Critics of stabilization policy argue that

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

The lag problem associated with monetary policy is due mostly to

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

M1 includes

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

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

1/R

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

10

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

11.0 percent

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

1973-74

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

25 percent

If the MPC is 5/6 then the multiplier is

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

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

62.5%

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

AD, right

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

defense

Which of the following is an example of crowding out?

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

Which of the following is NOT an automatic stabilizer

defense spending

Which of the following is a bank liability

deposits

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

B in the short run and A in the long run

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

Ben Bernanke

Which of the following is NOT a fiscal policy action

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

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

Contractionary monetary policy

Which of the following statements is correct?

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

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

Increased globalization

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

M1

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

Monetary policy was keeping interest rates low

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

None of the above is correct

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

None of the above is correct.

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

Paul Volcker

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

Raised interest rates to protect the gold standard

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

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

Government securities are also called

Treasury securities

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

Treasury securities are a very safe asse

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

downward pressures on prices and wages

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

during the Great Recession

Quantitative easing is

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

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

a store of value

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

a unit of account

Most economists believe that a cut in tax rates

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

The multiplier effect is exemplified by the multiplied impact on

aggregate demand of a given increase in government purchases

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

aggregate demand shifts right

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

aggregate demand shifts right

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

all of the above

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

all of the above

Fluctuations of production away from potential output are

all of the above

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

all of the above

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

all of the above

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

all of the above

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

an endogenous reaction

An aggregate demand shock is

an exogenous event

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

an increase in government expenditures

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

an increase in government purchases

Automatic stabilizers

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

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

has run a budget deficit

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

high and unanchored inflation expectations

A bank's assets equal its liabilities under

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

Following a positive aggregate demand shock, the price rise will

both of the above

A policy change that changes the natural rate of unemployment changes

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

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

both the price level and real GDP rise.

In the short run, policy that changes aggregate demand changes

both unemployment and the price level.

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

consumption increases

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

could be caused by a decrease in the expected price level

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

create price adjustments that eventually return the economy to potential output

Changes in the price of oil

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

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

higher inflation

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

d. D

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

decline, increase

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

decrease exports and increase import

An important macroeconomic consequence of higher government budget deficits is

higher interest rates and lower investment spending

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

decrease, $750 million

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

decreases, investment spending falls,

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

employment, production and inflation increase

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

fall because of the initial increase in unemployment

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

fall from 10 to 5

In the long-run expansionary fiscal policy is neutral

false

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

false

The decision lag associated with monetary policy is long

false

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

false

Permanent tax cuts shift the AD curve

farther to the right than do temporary tax cuts

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

federal funds rate

Currently, U.S. currency is

fiat money with no intrinsic value

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

government debt will increase by $500 billion

A budget deficit occurs when

government expenditures exceed tax revenue in a given year

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

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

An increase in the MPC

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

If consumption expenditures fall, then in the short run

inflation falls and unemployment rises.

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

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

Which of the following is NOT a basic function of money

interest bearing asset

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

is at a post WWII high

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

it decreases by $250,000

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

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

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

lending $5000 to the federal government

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

loan and deposit expansion

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

long run, and the natural rate changes over time.

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

monetary policy

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

most wages have not yet adjusted

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

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

The federal budget deficit increased during the 1980s because

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

A tax cut shifts the aggregate demand curve the farthest if

the MPC is large and if the tax cut is permanent

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

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

Recessions in Canada and Mexico would cause

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

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

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

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

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

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

the crowding-out effect

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

the fiscal policy action to lower taxes

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

the neutral interest rate

The short-run is defined as

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

The lag problem associated with fiscal policy is due mostly to

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


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