ECON final
Tax Mulitplier Formula
-MPC/1-MPC
money multiplier formula
1/RR ratio
Which of the following is considered contractionary fiscal policy? A) Congress increases the income tax rate. B) Congress increases defense spending. C) Legislation allows a college tuition deduction from federal income taxes. D) The New Jersey legislature cuts highway spending to balance its budget.
A) Congress increases the income tax rate.
If the tax multiplier is -1.5 and a $200 billion tax increase is implemented, what is the change in GDP, holding everything else constant? (Assume the price level stays constant.) A) a $300 billion decrease in GDP B) a $300 billion increase in GDP C) a $30 billion increase in GDP D) a $133.33 billion decrease in GDP
A) a $300 billion decrease in GDP
Which of the following assets is most liquid? A) dollar bill B) bond C) saving account D) stock
A) dollar bill
What is the crowding out effect?
An increase in government spending results in a decrease in private spending
Which of the following is not counted in M1? A) checking account balances B) credit card balances C) travelers checks D) currency in circulation
B) credit card balances
If the economy is falling below potential real GDP, which of the following would be an appropriate fiscal policy to bring the economy back to long-run equilibrium? An increase in A) the money supply and a decrease in interest rates. B) government purchases. C) oil prices. D) taxes.
B) government purchases.
Which of the following would be considered a fiscal policy action? A) The Fed increases the money supply. B) Tax incentives are offered to encourage the purchase of fuel efficient cars. C) Spending on the war in Afghanistan is increased to promote homeland security. D)A tax cut is designed to stimulate spending during a recession.
D) A tax cut is designed to stimulate spending during a recession.
Suppose you withdraw $1,000 from a money market mutual fund and deposit the funds in your bank and checking account. How will this action affect M1 and M2? A) M2 will increase and M1 will increase B) M2 will decrease and M1 will increase C) M2 will increase, but M1 will not be affected D) M2 will not be affected, but M1 will increase
D) M2 will not be affected, but M1 will increase
Are credit and debit cards M1 and or M2?
Debit and credit cards are neither M1 or M2
Refer to the Figure above. In the graph above, suppose the economy is initially at point A. The movement of the economy to point B as shown in the graph illustrates the effect of which of the following policy actions by Congress and the president? A) a decrease in transfer payments B) an increase in interest rates C) an increase in income taxes D) an open market purchase of Treasury bills
C) an increase in income taxes
What is M2?
Is a broader definition of money supply. It includes: 1. M1 2. Saving account deposits 3. Small denotation time deposits 4. Balances in money market deposit accounts 5. Non-institutional money market fund shares
What is M1?
Is the narrowest definition of money supply. The sum of: 1. Currency in circulation 2. Checking account deposits 3. Holding a travelers check
When GDP increases which curve will shift?
Money demand curve will shift right
When interest rate changes does money demand curve shift?
NO
If we use expansionary policy what will happen to real GDP, potential GDP, the inflation rate, and unemployment rate look like?
Real GDP: Higher Potential GDP: Same The inflation rate: Higher The unemployment rate: lower
If we use contractionary policy what will happen to real GDP, potential GDP, the inflation rate, and unemployment rate look like?
Real GDP: Lower Potential GDP: Same The inflation rate: Higher The unemployment rate: Lower
When do we use contractionary fiscal policy?
We use it when inflation is to high expansion
When do we use expansionary fiscal policy?
We use it when the economy is in recession
What is fiat money?
money that is authorized by a central bank and that does not have to be exchanged for gold or some other commodity money -fiat money has no intrisic value
