Econ Exam 3 (16-19 and 21)
Using the data calculate the balance on current account for this economy. Part 2 The value of the current account is: $
-1050 -600+50+-400+-100 balance of trade + balance of services + net income on investments + net transfers
Why did the Fed help JP Morgan Chase buy Bear Stearns?
A and C only
Suppose that initially, the economy is in long-run macroeconomic equilibrium at point A. If there is increased pessimism about the future of the economy, the AD curve will shift from _______. .
AD1 to AD2
The (FOMC) Federal Open Market Committee
All of the above.
Which of these is an example of an automatic stabilizer?
An unemployment benefit program
Suppose that currency traders expect that the value of U.S. dollar will fall in the future. How will this will affect the demand and supply of U.S. dollar in the foreign exchange market?
Demand for dollars will decrease and supply of dollars will increase.
Which of the following best explains how the economy will adjust from the short-run equilibrium point to the new long-run equilibrium point?
Due to the higher price level, workers will demand higher wages, and firms will raise prices and cause SRAS to shift to the left to point C.
Does judging whether a deficit is excessive depend in part on whether the country is in a recession?
During a recession, the deficit is higher as tax revenue falls and spending increases making an existing deficit even bigger.
Which of these factors were primary cause of the recession of 2007-2009?
Falling housing prices
What is the difference between federal purchases and federal expenditures?
Federal purchases require that the government receives a good or service in return, whereas federal expenditures include transfer payments.
the Fed changes the discount rate as a part of its policy to reach all of the following objectives except:
High unemployment
Which type of fiscal policy would cause the move of the AD curve represented in this graph?
Higher government spending
Which of these is not one of the four main goals of monetary policy?
Home ownership
The graph to the right shows a situation in which the economy was in equilibrium at potential GDP (at point A) when the demand for housing sharply declined. What actions can Congress and the president take to move the economy back to potential GDP?
Increase government spending or decrease taxes.
According to the graph, an increase in government spending, all else equal, will shift the AD curve from the initial AD curve to the curve labeled:
Increased AD
Which of these would be a fiscal policy the government might want to use if the economy is operating at too high a level of output?
Increasing income tax rates
How do investment banks differ from commercial banks? (Mark all that apply.)
Investment banks generally do not lend to households. Investment banks do not take deposits.
A policy of lowering the tax rate on dividends and capital gains to increase investment is intended to result in:
Long run supply side effects
The actions the Federal Reserve takes to manage the money supply and interest rates in order to pursue economic objectives are called __________.
Monetary policy
Which one of the following is not a function of money?
Open market operation.
When we say that money serves as a unit of account, we mean that:
Prices are quoted in terms of money.
Which of the following is a determinant of exchange rates?
Relative price levels
Long-run adjustment will shift the SRAS curve from _______ as workers adjust to lower-than-expected prices.
SRAS1 to SRAS2
Which of the following best explains how the economy will adjust back to long-run equilibrium?
Short-run aggregate supply will decrease (shift leftward) as firms and workers adjust to the new price level.
The formula for the simple deposit multiplier is
Simple Deposit Multiplier = 1/RR
How does the saving and investment equation explain why the United States experienced large current account deficits in the late 1990s?
S = I + NX = I + NFI. The large current account deficits, large negative NX (NFI), must be accounted for by an increase in I or a decrease in S, or both.
Which of these facts is true about the creation of the Federal Reserve System (the Fed)?
The Fed was created in 1913.
Consider the following table: Part 2 Year Potential GDP Real GDP Price Level 2012 $14.7 trillion $14.7 trillion 110 2013 $15.3 trillion $15.4 trillion 114 Part 3 What can we expect from the Federal Reserve Bank if it seeks to move the economy in the direction of long-run macroeconomic equilibrium?
The Fed will pursue a contractionary monetary policy.
Which body of the Federal Reserve System sets the majority of U.S. monetary policy?
The Federal Open Market Committee
When imports are greater than exports, as is usually the case for the United States, which of these must be true?
The United States must be a net foreign borrower from abroad.
What is the cyclically adjusted budget deficit or surplus?
The cyclically adjusted budget deficit or surplus is the deficit or surplus in the federal government's budget if the economy were at potential GDP.
Which of these factors contributed to the recession of 2007-2009?
The end of the housing bubble
If firms reduce investment spending and the economy enters a recession, which of these contributes to the adjustment that causes the economy to return to its long-run equilibrium?
The eventual agreement by workers to accept lower wages
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?
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.
Which of these graphs depicts the impact of a decrease in the aggregate price level?
The graph on the right
How would your open-economy answer change if interest rates in countries that are major trading partners of the United States also rise?
The interest rate increase would not change the value of the dollar, so the decrease in aggregate demand would be less.
Why might cutting government spending as a fiscal policy be a more difficult policy than the use of monetary policy to slow down an economy experiencing inflation?
The legislative process experiences longer delays than monetary policy.
When the Federal Reserve decreases the required reserve ratio,
The money supply will increase.
Which of these is the main reason for the long-run funding problems of Social Security?
The number of workers per retiree continues to decline.
The aggregate demand curve shows the relationship between:
The price level and the quantity of real GDP demanded
Which of these best represents the impact of a decrease in government spending through the multiplier process?
The shift from c to b, and then to a
Suppose an economy experiences technological progress and this causes a shift in the LRAS curve. Which of the following should not occur?
There will be an increase in government purchases as the economy has more income.
Why would the Fed intentionally use contractionary monetary policy to reduce real GDP?
To reduce real GDP in order to reduce inflation, which occurs if real GDP is above potential GDP.
During the German hyperinflation of the 1920s, many households and firms in Germany were hurt economically; however, people with debt actually benefited some from the hyperinflation.
True
Between 2001 and 2011 the Canadian dollar strengthened relative to the U.S. dollar which made:
U.S. goods cheaper to Canadian buyers.
When is the opportunity cost of holding money higher?
When interest rates are high
When many depositors decide simultaneously to withdraw their money from a bank, there is __________.
a bank run
Which of the following would cause a decrease in aggregate demand?
a decrease in government spending
Expansionary monetary policy on the part of the central bank of the United States will cause:
a decrease in interest rates in the United States and a decrease in the value of the U.S. dollar relative to other currencies.
The graph to the right shows the aggregate demand curve for an economy. Use the line drawing tool to show the effect of a monetary policy change that causes a decrease in interest rates. Properly label this line. Carefully follow the instructions above, and only draw the required object. ________ would cause a similar shift in the aggregate demand curve
a decrease in taxes (to the right/above) AD2
If something is to be considered as money, it has to fulfill
all four functions
According to an article in the New York Times, an official at the Bank of Japan had the following explanation of why monetary policyLOADING... was not pulling the country out of recession: "Despite recent major increases in the money supply, he said, the money stays in banks." Source: James Brooke, "Critics Say Koizumi's Economic Medicine Is a Weak Tea," New York Times, February 27, 2002. Part 2 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
When the euro weakens relative to the U.S. dollar there will likely be:
an increase in European imports in the U.S.
The federal funds rate is the rate:
at which banks lend to each other.
The increase in interest rates as a result of the government of Japan running a budget deficit will:
cause an increase in the value of the Yen relative to other currencies and therefore increase imports and decrease exports.
A movement from point A to point C could be the result of a
change in the expectations of households.
Consider the two aggregate demand curves in the graph at right. A movement from point A to point B on AD Subscript 1 could be the result of a
change in the price
A country that has no interactions in trade or finance with other countries is said to have a:
closed economy.
Stagflation is a:
combination of inflation and recession
If the Fed decreases the money supply and increases interest rates in order to reduce inflation, it is engaging in __________.
contractionary monetary policy
When the market value of one country's currency increases relative to the market value of another country's currency it is called:
currency appreciation.
In the short run, a supply shock as a result of an unexpected decrease in oil prices will:
decrease the price level but increase real GDP
If consumers in the United States decrease their demand for Mexican roses, the result will be to __________.
decrease the value of the Mexican peso relative to the dollar
If the Fed's policy is successful, what is the effect on the following indicators? Actual real GDP: Potential real GDP: Price level: Unemployment:
decreases does not change decreases increases
When the tax rate increases, the size of the multiplier effect:
decreases.
A reduction of a fixed exchange rate is a(n) __________, and an increase in a fixed exchange rate is a(n) __________.
devaluation, revaluation
If there are no transfers or net investment, it must be true that net exports are ___ net foreign investment
equal to
The tax multiplier equals the change in:
equilibrium GDP divided by the change in taxes.
The American Recovery and Reinvestment Act of 2009 is a clear example of:
expansionary fiscal policy.
Government policies that increase aggregate demand are called __________.
expansionary policies
When the Federal Reserve increases the money supply and lowers interest rates the value of the U.S. dollar will likely:
fall.
In this graph, as the dollar depreciates __________.
fewer dollars are supplied
The U.S. dollar can best be described as
fiat money
All of these will most likely increase as a result of expansionary monetary policy except:
government purchases.
U.S. currency is fiat money which means it __________.
has no value except as money
A higher domestic price level will result in:
higher imports
U.S.households and U.S. firms supply U.S. dollars in exchange for foreign currency
if the interest rate and other conditions in the foreign countries are lucrative for U.S. firms and households to invest dollars.
Suppose the federal government increases spending without also increasing taxes. Part 2 In a closed economy setting, this policy will ____ real GDP and _____ the price level in the short run. In an open economy setting, the effect of government fiscal policies will _______ For example, in an open economy, expansionary fiscal policies affect interest rates and also exchange rates in the same direction and the changes in the latter create a ____ crowding out effect
increase raise be dampened larger
An increase in income in both the United States and the United Kingdom will __________.
increase the supply and demand for pounds and have an uncertain effect on the exchange rate
Budget deficits automatically __________ during recessions and __________ during expansions.
increase, decrease
When the government runs a budget surplus, national saving _____
increases
If the economy moves into a recession, monetarists argue that the Fed should:
keep the money supply growing at a constant rate.
Under the gold standard, the central bank __________.
lacks the control of the money supply necessary to pursue an active monetary policy
The early and mid-1980s were difficult times for U.S. exporters because _____U.S. government budget deficits led to ____ real interest rates and thus to ____value of the dollar, making U.S. goods _____ in other countries
large high high more expensive
On the balance sheet of a bank:
loans are the most important asset.
A __________ is one where governments intervene in currency markets and buy or sell currency in order to keep an exchange rate trading in a certain range.
managed float exchange rate system
A bank panic occurs when:
many banks experience runs at the same time.
Which of the following would be the least desirable candidate to be a good medium of exchange?
milk
If a country has a deficit in its balance of trade, it means that this country imports __________.
more goods than it exports
The Federal Reserve sells Treasury securities. This is an example of
not a fiscal policy.
Credit cards are:
not part of the money supply.
The Fed conducts monetary policy primarily through:
open market operations.
The U.S. is sometimes called the "world's largest debtor" since foreign investors:
own more U.S. assets than U.S. investors own in foreign countries.
At the new long-run equilibrium
real GDP and the unemployment rate will remain the same, but price level will be higher compared to the initial equilibrium, prior to the increase in exports.
The Board of Governors of the Federal Reserve has _________ members that are appointed for staggered _________ by the __________ and confirmed by the Senate.
seven, 14-year terms, President
A recession in the United States will:
shift the supply curve of dollars to the left.
More capital accumulation will cause the long-run aggregate supply curve to
shift to the right
The wealth effect refers to the fact that:
when the price level falls, the real value of household wealth rises, and so will consumption
As the interest rate increases,
consumption, investment, and net exports decrease; aggregate demand decreases.
Over time, potential GDP ________, which is shown by the ________ curve shifting to the right.
increases; long-run aggregate supply
The Taylor rule for federal funds rate targeting does which of these things?
It links the Fed's target for the federal funds rate to economic variables.
Which of these are the largest sources of federal government revenues?
Which of these are the largest sources of federal government revenues?
If the FOMC orders the trading desk to sell Treasury securities:
the money supply curve will shift to the left and the equilibrium interest rates will rise.
Suppose that the reserve ratio is 25% and that banks loan out all their excess reserves. If a person deposits $100 cash in a bank, checking account balances will increase by a maximum of:
$400
How many Federal Reserve districts are there?
12
Suppose you deposit $1,800 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 0.10? Part 2 The change in checking deposits is equal to: $
18000 .1*100=10*1800=18000
Suppose the economy moves from point A in year 1 to point B in year 2. Part 2 a. The growth rate of potential GDP from year 1 to year 2 is ________
2.3%
If the money supply is growing at a rate of 6 percent per year, real GDP (real output) is growing at a rate of 1 percent per year, and velocityLOADING... is constant, what will the inflation rate be?
6-1=5 6+2-1=7
How can government policies shift the aggregate demand curve to the right?
By increasing government purchases
Which of these factors will cause the long-run aggregate supply curve to shift to the right?
The accumulation of more machinery and equipment
Who is the chairperson of the Federal Open Market Committee (FOMC)?
The chairperson of the Board of Governors
Assuming there are no leakages out of the banking system, a money multiplier equal to 5 means that:
each additional dollar of reserves creates $5 of deposits.
The new long-run macroeconomic equilibrium occurs at _______
point C
The theory concerning the link between the money supply and the price level that assumes the velocity of money is constant is called the:
quantity theory of money.
The name given to the fraction of deposits that a bank is legally required to hold in its vault, or as deposits at the Fed, is __________.
required reserves
The 2007-2009 recession was a clear example of the impact:
that a decrease in aggregate demand can have on the economy
An asset would be usable as a medium of exchange for all of the following reasons except:
the asset should be a commodity that has intrinsic value.
The Federal Reserve System is __________.
the central bank of the United States
The aggregate demand curve shows the relationship between _____ and _______.
the price level output demanded
What relationship is shown by the aggregate demand curve? The aggregate demand curve shows the relationship between
the price level and the quantity of real GDP demanded by households, firms, and the government.
What relationship is shown by the aggregate supply curve? The short run aggregate supply curve shows the relationship in the short run between
the price level and the quantity of real GDP supplied by firms.
Consider the following cases to figure out which one of the following variables causes the short-run aggregate supply curve to shift, and identify whether an increase in that variable will cause the short-run aggregate supply curve to shift to the right or to the left. The SRAS curve will _____ if there is ______ The SRAS curve will _____ if there is ______ The SRAS curve will _____ if there is ______ The SRAS curve will _____ if there is ______ The SRAS curve will _____ if there is ______ The SRAS curve will _____ if there is ______
shift to the right an increase in the labor force or capital accumulation Shift to the right an increase in productivity shift to the right a technological change shift to the left an increase in the expected price of an important natural resource shift to the left an increase in the adjustment of workers' and firms' prior underestimation of the price shift to the left an increase in expected future prices
The 2007-2009 recession was a clear example of
the effect that a decrease in aggregate demand can have on the economy.
In the long-run, the level of output is:
the full-employment level of output
One of the primary goals of the Federal Reserve is __________.
price level stability
A baseball fan with a Mike Trout baseball card wants to trade it for a Manny Machado baseball card, but everyone the fan knows who has a Machado card doesn't want a Trout card. Part 2 Economists characterize this problem as a failure of the
principle of a double coincidence of wants.
When we say that one of the functions of the Fed is to be a lender of last resort, we mean that the Fed:
provides funds to troubled banks that cannot find any other source of funds.
National saving is equal to private saving plus __________.
public saving
When the real exchange rate decreases, a country's net exports will __________.
rise
If real GDP increases:
the money demand curve shifts to the right.
Assume that banks are always fully loaned and people hold no cash. Given a required reserve ratio of 10%, an infusion of $100 billion in reserves will result in a maximum of:
$1,000 billion in deposits.
If the U.S. dollar will currently exchange for 110 Japanese yen, how much is the dollar price of something that costs 124,500 yen?
$1,132
Suppose that velocity is 3 and the money supply is $500 million. According to the quantity theory of money, nominal output equals:
$1.5 billion.
If the dollar price of a euro is $1.25, then the euro price of the dollar is:
0.80 euros
Click the following link to view U.S. / Euro foreign exchange rate data (Series ID: EXUSEU) from FREDopens in a new tab*. Then use that data to answer the following question. LOADING... *Real-time data provided by Federal Reserve Economic Data (FRED), Federal Reserve Bank of Saint Louis. Part 3 On February 01, 2023 (shown as 2023−02−01 in FRED), the euro was trading at $ _______
1.0702
Question content area Part 1 Suppose that the equilibrium real federal funds rate is 2 percent and the target rate of inflationLOADING... is 1 percent. Use the following information and the Taylor ruleLOADING... to calculate the federal funds rate target: Current inflation rate = 5 percent Potential real GDP = $14.15 trillion Real GDP = $14.52 trillion Part 2 The federal funds target rate is ______
10.31%
The United States is divided into 1212 Federal Reserve Districts. The Federal Reserve Bank's Board of Governors consists of 77 members appointed by the president of the U.S. to 14-year, non-renewable terms. One of the board members is appointed to a 44 year, renewable term as the chairman.
12 7 4
If we know the exchange rate between Country A's currency and Country B's currency and we know the exchange rate between Country B's currency and Country C's currency, then we can compute the exchange rate between Country A's currency and Country C's currency. *Real-time data provided by Federal Reserve Economic Data (FRED), Federal Reserve Bank of Saint Louis. In January 2023, the exchange rate between the Japanese yen and the U.S. dollar was ¥130.45 = $1 and the exchange rate between the British pound and the U.S. dollar was £0.82 = $1. The exchange rate between the yen and the pound was _______ The exchange rate between the yen and dollar in February 2023 was ¥133.05 = $1. Compared to the January 2023 exchange rate, the dollar ____ against the yen The exchange rate between the pound and dollar in February 2023 was £0.83 = $1. Compared to the January 2023 exchange rate, the dollar ___ against the pound When the exchange rate between the yen and dollar becomes ¥133.05 = $1 and the exchange rate between the pound and dollar becomes £0.83 = $1 in February 2023, then, compared to January 2023, the yen has ______ against the pound
130.45/.82= 159.09 appreciated appreciated depreciated
If the required reserve ratio is 0.15, the maximum increase in checking account deposits that will result from an increase in bank reserves of $20,000 is $
133333.33 (1/.15)*20000=
Suppose the required reserve ratio is 15% and a bank has the following balance sheet: Assets Liabilities Reserves $2,000 Deposits $10,000 Loans $8,000 This bank keeps required reserves of $______ and excess reserves of $______
1500 500 10000*.15=1500 2000-1500=500
Question content area Part 1 According to the Taylor ruleLOADING..., what is the federal funds target rate under the following conditions? ≻Equilibrium real federal funds rate equals 2% ≻Target rate of inflation equals 2% ≻Current inflation rate equals 1% ≻Real GDP is 1% below potential real GDP Part 2 The federal funds target rate equals
2 percent
Assuming a fixed amount of taxes and a closed economy and that the marginal propensity to consume equals 0.60, calculate the value of the following multipliers. Be sure to use a negative sign (-) to show if a multiplier has a negative value. Part 2 The government purchases multiplier equals _____ The tax multiplier equals _____
2.5
Ron was vacationing in France, when his camera was stolen. As he walked into a camera store, Ron noticed that camera prices were in euros. If Ron was willing to pay $250 for a new digital camera and the exchange rate is $0.85 per euro, how much will Ron be paying in euros? Ron will be paying ____ euros for the camera
250/.85= 294.12
Question content area Part 1 Suppose you buy a house for $150,000. One year later, the market price of the house has risen to $170,000. Part 2 If you made a down payment of 25 percent and took out a mortgage loan for the other 75 percent, the return on your investment in the house is If you made a down payment of 20 percent and borrowed the other 80 percent, the return on your investment in the house is
53 percent 2 percent
Based on the Taylor Rule use the following information to calculate the target federal funds rate. Part 2 Variable Value Target inflation rate 2 percent Current inflation rate 2 percent Real equilibrium federal funds rate 2 percent Output gap 10 percent Part 3 In this case, the Federal funds target rate is:
9 percent
Suppose that Deja owns a McDonald's franchise. She decides to move her restaurant's checking account to Wells Fargo, which causes the changes shown on the following T-account. Wells Fargo Assets Liabilities Reserves +$100,000 Deposits $100,000 If the required reserve ratio is 0.05, or 5 percent, and Wells Fargo currently has no excess reserves, the maximum loan Wells Fargo can make as result of this transaction is $
95000 100000*.05=5000 100000-5000=95000
According to the dynamic AD-AS model, what is the most common cause of inflation?
A and B only
If the government increases expenditure without raising taxes, this will
A and B only
Use the graph on the right to answer the following questions. Part 2 a. Which of points A, B, C, or D can represent a long-run equilibrium?
A and C
Which of these factors will cause the aggregate demand curve to shift?
A change in the expectations of households and firms
When the Federal Reserve increases the required reserve ratio as a part of a contractionary monetary policy, there is:
A decrease in the money supply and an increase in the interest rate.
Which of these factors will shift the short-run aggregate supply to the left?
A decrease in the size of the labor force
Suppose the economy is initially in long-run equilibrium. The Fed enacts a policy to buy bonds. In the short-run, this expansionary monetary policy will cause:
A shift from AD1 to AD2 and a movement to point B, with a higher price level and higher output.
Suppose the economy is initially in long-run equilibrium. The government enacts a policy to decrease taxes. In the short-run, this expansionary fiscal policy will cause:
A shift from AD1 to AD2 and a movement to point B, with a higher price level and higher output.
It is argued that a policy of tax simplification will result in:
A shift from LRAS1 to LRAS2 with higher output at a lower price level.
Suppose the economy is initially in long-run equilibrium. The Fed decides to sell bonds. In the short-run, this contractionary monetary policy will cause:
A shift from AD2 to AD1 and a movement to point D, with a lower price level and lower output.
To have growth without inflation, which of the following must be true?
AD, SRAS, and LRAS must increase by the same amount.
Which of the following is not a correct comparison between an expansionary monetary policy in the basic aggregate demand and aggregate supply model and in the dynamic aggregate demand and aggregate supply model?
All of the above are correct statements about the two models.
which of the following is not a correct comparison between an expansionary fiscal policy in the basic aggregate demand and aggregate supply model and in the dynamic aggregate demand and aggregate supply model?
All of the above are correct statements about the two models.
Which of these fiscal policy actions will increase real GDP in the short run?
An increase in government expenditures
Which of these will shift the money demand curve to the right?
An increase in real GDP
Which of these statements best describes the scenario shown in these graphs?
An open market purchase leads to an increase in the money supply which causes interest rates to fall and investment spending to rise.
Are federal expenditures higher today than they were in 1960?
As a percentage of GDP, federal expenditures have increased since 1960.
Are federal purchases higher today than they were in 1960?
As a percentage of GDP, federal purchases have decreased since 1960
Which of these statements about the federal debt is correct?
At some point, the government may have to raise taxes or cut spending to pay interest on the debt.
According to the graph, if the solid line represents the GDP without policy and the dotted line includes policy, which side shows an ill-timed stabilization policy?
B
Which one of the following does not describe balance of trade?
Balance of trade is equal to the sum of current account balance and financial account balance
Which of these factors is least likely to impact the value of a country's currency?
Changes in the level of gold reserves held by the country
How does an increase in the price level affect the quantity of real GDP supplied in the long run?
Changes in the price level do not affect the level of GDP in the long run.
Suppose that the economy grows from 2023 to 2024 without inflation. Which of the following graphs correctly shows this situation? (Note: 2024 positions are shown with green dashed lines.)
D
b. Suppose that initially the economy is at point A. Then aggregate demand increases from AD Subscript 1 to AD Subscript 2. Part 5 The new short-run equilibrium will be at point _____ Part 6 The long-run equilibrium point will be at point ______
D C
Suppose that the economy is currently at potential GDP, and the federal budget is balanced. If the economy moves into recession, what will happen to the federal budget?
If the budget is balanced at potential GDP and the economy moves into recession, then there will be a budget deficit as government expenditures increase and tax revenues decrease.
Which of these predictions can be made using the growth rates associated with the quantity equation?
If the money supply grows at a faster rate than real GDP, there will be inflation.
Which of these factors could have caused the increase in supply shown in this graph?
Lower U.S. interest rates
Which of these shifts the aggregate demand curve to the right?
Lower interest rates
The sum of all currency in the hands of the public plus demand deposits and other checkable deposits plus traveler's checks is the official definition of:
M1
Which of these policies affects the economy through intended changes in the money supply?
Monetary policy
Which can be changed more quickly: monetary policy or fiscal policy?
Monetary policy can be changed more quickly than fiscal policy. Monetary policy can be changed at any of the FOMC meetings and the smaller number of individuals involved makes it easier to change policy.
Which of these statements is true about using fiscal policy to stabilize the economy?
The delay caused by the legislative process is typically longer for fiscal policy than for monetary policy.
What has been the long-term trend in the exchange value of the dollar and what effect should changes in the exchange rate during this period have had on U.S. net exports?
The exchange rate value of the dollar has been increasing over the years, implying that the purchasing power of the U.S. dollar has been increasing. Higher purchasing power of U.S. dollar should have led to lower levels of U.S. net exports.
If the short-run aggregate supply curve (SRAS) were a horizontal line, what would be the impact on the size of the government purchases and tax multipliersLOADING...?
The impact of the multiplier would be larger if the SRAS curve is horizontal.
Current account deficits during the late 1990s actually increased. Which of the following is a reason why?
The strength of the U.S. stock market and the weakness of other economies made the U.S. an attractive place to invest.
The student explained the graph as follows: "An increase in aggregate supply causes a shift from SRAS Subscript 1 to SRAS Subscript 2. Because this shift in the aggregate supply curve results in a lower price level, consumption, investment, and net exports will increase. This change causes the aggregate demand curve to shift to the right from AD Subscript l to AD Subscript 2. We know that real GDP will increase, but we can't be sure whether the price level will rise or fall because that depends on whether the aggregate supply curve or the aggregate demand curve has shifted farther to the right. I assume that aggregate supply shifts out farther than aggregate demand, so I show the final price level, P Subscript 3, as being lower than the initial price level, P Subscript 1." Which of the following is a correct statement about the student's analysis?
The student is incorrect because the aggregate demand curve does not shift because of the price level change.
Velocity is defined as:
V = (P x Q) / M
This is
a depreciation of the euro and an appreciation of the dollar
Congress and the president enact a temporary cut in payroll taxes. This is an example of
a discretionary fiscal policy.
The "twin deficits" refers to the idea that
a government budget deficit may lead to a current account deficit.
Monetarism is a school of economic thought that favors:
a monetary growth rule.
One of the downsides to global financial markets is that __________.
a problem in one country can be exported to others
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." Source: Mark Rutte and Jan Kees de Jager, "Expulsion from the Eurozone Has to Be the Final Penalty," Financial Times, September 7, 2011. Part 2 An "excessive" budget deficit in this context is
a relatively large budget deficit as a percentage of GDP beyond the European Union's deficit and debt rules .
An unexpected change in the price of oil would be called __________ by economists.
a supply shock
The revenue the federal government collects from the individual income tax declines during a recession. This is an example of
an automatic stabilizer.
The total the federal government pays out for unemployment insurance decreases during an expansion. This is an example of
an automatic stabilizer.
In an open economy, an expansionary fiscal policy on the part of the government of the United Kingdom will cause:
an increase in interest rates in the United Kingdom which may have a larger crowding out effect than in a closed economy.
Suppose the government of Japan runs a budget deficit. This will result in:
an increase in interest rates in Japan and an increase in the value of the Yen relative to other currencies.
The aggregate demand curve is downward sloping because
an increase in the price level reduces real money holdings, which reduces the amount of expenditures.
If the Federal Reserve wishes to decrease the money supply to slow the economy, it will conduct:
an open market sale.
Excess reserves
are reserves banks keep above the legal requirement.
Taxes and transfer payments that stabilize GDP without requiring explicit actions by policymakers are called __________.
automatic stabilizers
The graph shows the economy in long-run equilibrium at point A. Now assume that there is a large increase in demand for U.S. exports. 1.) Use the line drawing tool to show the resulting short-run equilibrium on your diagram. Label any new aggregate demand or aggregate supply curve as AD2, SRAS2 or LRAS2 as appropriate. 2.) Use the point drawing tool to locate the new short- run equilibrium point. Label this point B. Now consider the adjustment of the economy back to long-run equilibrium. 3.) Use the line drawing tool to show the resulting long-run equilibrium on your diagram. Label any new aggregate demand or aggregate supply curve appropriately. 4.) Use the point drawing tool to locate the new long- run equilibrium point. Label this point C. Carefully follow the instructions above, and only draw the required objects. Part 2 At the new short run equilibrium, the unemployment rate will _______ compared to the unemployment rate at the initial equilibrium, prior to the increase in exports.
be lower
Under Bretton Woods, if a country's central bank ran out of U.S. dollar reserves it could __________.
borrow dollars from the IMF
Every time the federal government runs a budget deficit, the Treasury must:
borrow funds from savers by selling U.S. Treasury securities.
Budget deficits may reduce:
both domestic investment and net foreign investment.
According to the graph, in this economy there will be a tendency for:
both wages and prices to rise over time
If the federal government's expenditures are less than its revenue, there is a __________.
budget surplus
In the late 1990s, the United States had large budget surpluses and low interest rates. All other things equal, these factors should have reduced the size of the current account deficit because
budget surpluses mean increased public saving, and low interest rates should reduce foreign investment in the U.S.
To reduce a budget deficit,
budgetary policies such as increasing taxes and cutting expenditures can be used.
To increase the money supply, the FOMC directs the trading desk located at the Federal Reserve Bank of New York to:
buy U.S. Treasury securities from the public.
If the FOMC decides to increase the money supply, it orders the trading desk at the Federal Reserve Bank of New York to:
buy U.S. Treasury securities.
When the Fed conducts an open market purchase, the Fed _______ and the money supply _______
buys securities from banks increases
The decline in private expenditures that results from an increase in government purchases is known as:
crowding out.
Show the effect of the open market purchase on the money market and interest rate on the graph to the right. 1.) Use the line drawing tool to show the change in the money supply or money demand when an open market purchase is conducted. Properly label this line. 2.) Use the point drawing tool to show the new equilibrium interest rate in the money market. Label this point 'B'. Carefully follow the instructions above, and only draw the required objects. Part 3 When the Fed conducts an open market purchase, the interest rate should _______
decrease
Suppose that Federal Reserve policy leads to higher interest rates in the U.S. If the U.S. is a closed economy in the short run, real GDP will ______ If the U.S. is an open economy real GDP will ____ by ____
decrease decrease more than in a closed economy
If the sum of net exports, net income received from abroad, and net transfer payments from abroad yields a negative number, we say that a country's current account is in __________.
deficit
Because of the __________ in forecasting the economy, many economists believe the Fed __________ take a very active role in trying to stabilize the economy.
difficulties, should not
All the programs that Congress authorizes on an annual basis, which are not automatically funded by the prior laws passed by Congress, are called __________.
discretionary spending
When interest rates on Treasury bills and other financial assets are low, the opportunity cost of holding money is __________ , so the quantity of money demanded will be __________.
low, high
If U.S. consumers begin to demand more Japanese goods (i.e. increase their consumption of Japanese goods) then the value of the Japanese yen should __________ relative to the U.S. dollar.
rise
The dynamic aggregate demand and aggregate supply model allows for a more realistic examination of monetary policy over the basic aggregate supply and aggregate demand model by allowing the economy in the dynamic model to
experience continuous inflation and experience long-run economic growth.
Changes in the federal tax rate or changes in government spending designed to achieve some macroeconomic policy objective are known as:
fiscal policy.
A __________ is one where countries agree to keep their exchange rate constant.
fixed exchange rate system
A country that allows demand and supply to determine the value of its currency is said to have a __________.
floating currency
When an individual investor or another firm acquires more than 10 percent ownership in a foreign firm it is known as:
foreign direct investment.
The U.S. typically imports more __________ than it exports and exports more __________ than it imports.
goods; services
Which of the following is a major difference between the AD-AS model and the dynamic AD-AS model? The dynamic AD-AS model assumes
potential GDP increases continually, while the AD-AS model assumes the LRAS does not change.
When the economy is in a recession, the government can:
increase government purchases or decrease taxes in order to increase aggregate demand.
In 2020, France had a current accountLOADING... deficit of €44.3 billion (approximately $50.5 billion). Source: Banque de France, "France's Balance of Payments." This means that France experienced a net capital _____ in 2020. This is because, ignoring the capital account, the sum of the current account balance and the financial account balance must be equal to zero. The current account deficit must be offset by the financial account surplus. The surplus in the financial account means that France is ________
inflow selling more financial assets than it buys
The balance of trade:
is equal to the difference between the value of exports and imports.
The cyclically adjusted budget deficit:
is measured as if the economy were at potential real GDP.
The Federal Reserve Bank of New York is always a voting member of the FOMC because
it carries out the policy directives of the FOMC.
One of the criticisms of the Fed's active intervention to stabilize the economy is that:
it is difficult to time monetary policy because of the impact lags.
On January 1, 2002, Germany officially adopted the euro as its currency, and the deutsche mark stopped being legal tender. According to an article in the Wall Street Journal, even 10 years later many Germans continued using the deutsche mark, and many stores in Germany continued to accept it. Source: Vanessa Fuhrmans, "Who Needs the Euro When You Can Pay with Deutsche Marks?" Wall Street Journal, July 18, 2012. It is possible for people to continue to use a currency when the government that issued it has replaced it with another currency because
it is still accepted as legal tender for transactions.
According to the multiplier effect, an initial increase in government purchases increases real GDP by _____ the initial increase in government purchases
more than
As interest rates decline, stocks become a __________ attractive investment relative to bonds, and this causes the demand for stocks and their prices to __________.
more, rise
A strong dollar reduces the profits of McDonald's because:
most of McDonald's sales are in other currencies.
The theory of purchasing power parity states that, in the long run exchange rates __________.
move to equalize the amount of goods that different currencies can buy
A change in the price level causes a ________ the short-run aggregate supply (SRAS) curve. In the figure, this is shown by moving from point _____ A change in any other factor causes a _____ the SRAS curve. In the figure, this is shown by moving from point ________.
movement along A to B shift in B to C
The value of one currency in terms of another currency is called the __________.
nominal exchange rate
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. This is an example of
not a fiscal policy.
The federal government changes the required gasoline mileage for new cars. This is an example of
not a fiscal policy.
The economy is in long-run equilibrium when the short-run aggregate supply and the aggregate demand curve intersect at a point:
on the long-run aggregate supply curve
When the dollar appreciates against the yen, __________.
one dollar will buy more yen
Monetary policy has a greater impact on aggregate demand in a(n) __________.
open economy
The new short-run macroeconomic equilibrium occurs at
point B
An increase in interest rates affects aggregate demand by
shifting the aggregate demand curve to the left, reducing real GDP and lowering the price level.
The long-run aggregate supply curve:
shifts to the right as technological change occurs
The aggregate demand and aggregate supply model explains:
short-run fluctuations in real GDP and the price level
We would expect the tax multiplier to be __________ in absolute value than the government purchases multiplier.
smaller
According to the graph, the situation of this economy after the supply shock can be called:
stagflation
The fact that wages and prices may not rapidly adjust to changes in demand or supply is called:
sticky wages and prices.
In an open economy an expansionary fiscal policy will lead to a:
stronger currency.
The 1974-1975 recession was a result of a:
supply shock that caused a leftward shift of the short-run aggregate supply curve
How did the FOMC react to the recession of 2007-2009?
the FOMC reduced the target for the fed funds rate steadily in 2008.
For a country such as Russia which of the following statements is always true?
the balance of payments is zero
In an open economy, when an expansionary fiscal policy reduces both domestic investment and net exports it is known as __________.
the crowding out effect
The part of the balance of payments that records a country's exports and imports of goods and services is:
the current account.
An article in a Federal Reserve publication observes that "20 or 30 years ago, local financial institutions were the only option for some borrowers. Today, borrowers have access to national (and even international) sources of mortgage finance." Source: Daniel J.McDonald and Daniel L. Thornton, "A Primer on the Mortgage Market and Mortgage Finance," Federal Reserve Bank of St. Louis Review, January/February 2008. What caused this change in the sources of mortgage finance? What would be the likely consequence of this change for the interest rates borrowers have to pay on mortgages? The primary reason for this change in the sources of mortgage finance was _____; the consequence of this change was also _____ in mortgage rates.
the development of a secondary mortgage market; a decrease
The cyclically adjusted budget surplus is the surplus in the federal government's budget if:
the economy were at potential GDP.
If the price level increases, __________.
the money demand curve shifts to the right
The figure on the right refers to the dynamic AD-AS model. In that model, aggregate demand (AD), short-run aggregate supply (SRAS), and long-run aggregate supply (LRAS) all shift to the right in any given year (i.e., AD Subscript 1 → AD Subscript 2 and LRAS Subscript 1 → LRAS Subscript 2 ). Part 2 Notice that the graph only shows the shifts in aggregate demand (AD) and long-run aggregate supply (LRAS); for purposes of this exercise we ignore short-run aggregate supply. Part 3 Now suppose that there is an increase in marginal tax rates on individual income that affects both aggregate demand and long-run aggregate supply. Part 4 Compared to the dynamic changes shown in the graph, the result of the increase in the marginal tax rate will be that As a result, when compared to Y Subscript 1, real GDP would _______ Compared to P Subscript 1, the price level would Suppose that the tax increase only affected aggregate demand. Compared to the above, the effect on real GDP would be ______ and the effect on the price level would be ________
the rightward shift in aggregate demand will be smaller and the rightward shift in long-run aggregate supply will be smaller. increase increase if aggregate demand increased more than long-run aggregate supply. smaller larger
In the financial account:
there is a capital outflow from the United States when an investor in the United States buys a foreign bond.
When the interest rate decreases, __________.
there is movement down a stationary money demand curve
Increases in the value of the dollar relative to foreign currencies will make the aggregate demand curve shift
to the left
The national debt is best measured as the:
total value of U.S. Treasury securities outstanding.
The largest and fastest growing category of federal expenditures is __________.
transfer payments
When the economy is experiencing a recession automatic stabilizers will cause:
transfer payments to increase and tax revenues to decrease.
When a government budget deficit contributes to a decline in exports it is known as:
twin deficits.
Foreign households and foreign firms demand U.S. dollars in exchange for foreign currency for all of the following, except
when U.S. firms and households want foreign currencies so that they can buy goods and services produced in those foreign countries.
