Econ Test 3
Individuals decide to increase their saving as a percentage of their income. As a result, a specific monetary policy action will have ______________ effect on total spending.
a smaller
Suppose individuals begin to prefer holding larger amounts of cash as a percentage of their money. As a result, a given monetary policy will have ______________ effect on total spending.
a smaller
Which of the following is an example of discretionary fiscal policy?
a tax cut passed by Congress to fight a recession
A sale of $100 billion of bonds by the Fed will have the largest effect on real GDP if the marginal propensity to consume is ______________.
high
Contractionary or restrictive monetary policy typically results in ______________ in the monetary base and ______________ in interest rates.
a decrease; an increase
Assume that individuals increase their saving as a percentage of their income. As a result, a given monetary policy will have ______________ effect on total spending.
a smaller
Assume that the government purchases multiplier is 1.5. If real GDP is $16 trillion and potential real GDP is $16.3 trillion, then government purchases would need to increase by ______________ to reestablish the economy to potential real GDP.
$200 billion
If the growth rate on money in the long run is 4% and the growth rate of real GDP is 6%, what is likely to be the rate of inflation?
-2%
If the growth rate on money in the long run is 10% and the growth rate of real GDP is 4%, what is likely to be the rate of inflation?
6%
In our Aggregate Supply and Aggregate Demand model, which of the following can the Federal Reserve influence in the short run?
All of the above
What is the result of the federal government's expenditures exceeding tax revenues?
A budget deficit.
What is the result of the federal government's tax revenues exceeding its expenditures?
A budget surplus.
The quantity theory of money predicts that since velocity should be stable, a doubling of the money supply, all else equal should result in
A doubling of the price level
Which is considered active fiscal policy?
A tax cut is passed during a recession with the goal of stimulating spending.
Which of the following is a discretionary fiscal policy that will increase aggregate demand?
A tax cut passed by Congress
If inflation is higher than the Federal Reserve wants, the FOMC is likely to do what at its next meeting:
Announce an increase in the Federal Funds rate target
Who is responsible for fiscal policy?
Congress and the President
Which is an example of expansionary fiscal policy?
Congress decreases the income tax rate.
When bond prices rise, interest rates have ______________.
Decreased
Assuming banks have little or no excess reserves, if the Federal Reserve raises the required reserve ratio, what will likely happen to the M1 money supply?
It will fall
If the Federal Reserve raises the required reserve ratio, what will happen to the monetary base?
It will not change
When interest rates rise bond prices ______________.
Fall
The Federal Reserve System consists of I. 12 Regional Banks II. The Board of Governors III. The US National Bank
I and II only
Members of the Federal Reserve Board of Governors I. Serve 14 year terms II. Are elected by bankers III. Are appointed by the president of the US
I and III only
Which of the following accurately describes the result of an automatic stabilizer?
Income taxes paid decrease during recessions.
If the economy expands past potential real GDP, what would be an appropriate fiscal policy to bring the economy back to equilibrium at long-run aggregate supply?
Increasing taxes
What will likely happen if the Federal Reserve tries to maintain very low employment in the long run?
Inflation will rise and become unpredictable
Which monetary policy tool did the US Federal Reserve introduce most recently?
Interest on excess reserves
What is an argument AGAINST forcing the government to operate a balanced budget?
It would require the government to increase tax rates or decrease spending during a recession resulting in policy which would make the recession worse
When the Federal Reserve conducts expansionary monetary policy, it hopes that banks will
Make more loans
Each of the twelve regional banks of the Federal Reserve system is responsible for
Managing electronic transfers and distributing currency
Which monetary policy tool involves the Federal Reserve buying and selling bonds?
Open market operations
Which of the following would be considered expansionary or simulative monetary policy?
Open market purchases and Reducing the interest on excess reserves
Which activities is the US Federal Reserve involved in?
Regulating banks and other financial institutions
Which monetary policy tool has not been used in over 20 years?
Required reserve ratio
Which entity is responsible for setting US monetary policy?
The Federal Open Market Committee
Which monetary policy tool involves loans from the Federal Reserve to banks?
The discount rate
What is likely to happen to the interest rate on mortgage loans if the Federal Reserve does large amounts of open market purchases?
They likely fall
What happens to the Federal Funds rate and US treasury interest rates when the Federal Reserve decides to sell bonds?
They rise
Why would the Federal Reserve do contractionary monetary policy?
To slow the growth rate of prices
Under what circumstances might the Federal Reserve wish to lower interest rates?
Unemployment is higher than usual and There is deflation
The Federal Reserve Board of Governors is located in
Washington, DC
An increase in government purchases of $300 billion will shift the ______________ curve to the right by ______________.
aggregate demand; more than $300 billion
Which is a suitable discretionary fiscal policy if real GDP falls below potential real GDP?
an increase in government purchases
The purchase of bonds in the open market will cause which of the following?
an increase in the price of bonds and a decrease in interest rates
Expansionary monetary policy typically results in ______________ in the monetary base and ______________ in interest rates.
an increase; a decrease
Real GDP is $17 trillion and potential real GDP is $17.3 trillion. A decrease in taxes of $300 billion would cause real GDP to ______________ potential real GDP.
be more than
How should the Federal Reserve react to a recession created by a slowdown in the growth of spending?
buy bonds and lower the discount rate
The Federal Reserve should do which of the following if it wishes to increase employment in the economy?
buy bonds and lower the required reserve ratio
Suppose inflation is higher than desired. To reduce inflation, Congress and the President should
decrease government spending.
To reduce the length and depth of a recession with discretionary fiscal policy, the President and Congress could
decrease taxes.
An increase in the required reserve ratio will do what to the present value of a future payment?
decrease the present value
Contractionary fiscal policy would ______________ real GDP and ______________ inflation.
decrease; decrease
The purchasing of bonds by the Federal Reserve will have a greater effect on spending in the economy if there is a(n) ______________ in the personal saving as a percentage of income and a(n) ______________ in the required reserve ratio.
decrease; decrease
Suppose the FOMC increases the target for the federal funds rate. What will happen to bond prices and interest rates?
decrease; increase
A sale of $100 billion of bonds by the Fed will have the largest effect on real GDP if current unemployment is ______________.
high
Active changes in government spending and taxes in order to smooth the business cycle are called ______________, and changes in government spending and taxes that happen passively over the parts of the business cycle are called ______________.
discretionary fiscal policy; automatic stabilizers
It is ______________ to time fiscal policy compared to monetary policy because ______________.
harder; fiscal policy takes longer to implement
In one economy, the amount of currency held as a percentage of money is small, but banks tend to make as many loans as they can. In a second, the amount of currency held as a percentage of money is large, but banks tend to make fewer loans than they can. In which economy will a sale of bonds have the largest effect on spending?
in the first economy
A forecast of impending inflation caused by rapid growth in spending might logically cause the Federal Reserve to:
increase its target for the federal funds rate and sell bonds.
A restrictive monetary policy might include a(n) ______________ in the discount rate and a(n) ______________ in Federal Reserve interest rates paid on reserves.
increase; increase
Cutting taxes will ______________ disposable income and shift the aggregate demand curve to the ______________.
increase; right
If there are significant increases in spending causing significant increases in inflation, which of the following would be the best policies for the Federal Reserve?
increased reserve requirements and a Fed sale of bonds.
A Federal Reserve purchase of bonds will have the smallest effect on real GDP if the amount of currency normally held as a percentage of money ______________ and the tax rate ______________.
increases; increases
A purchase of $100 billion of bonds by the Fed will have the largest effect on real GDP if the spending multiplier is relatively ______________ and the money multiplier is relatively ______________.
large; large
Real GDP is $16 trillion and potential real GDP is $16.7 trillion. Congress and the President plan to use fiscal policy to return real GDP to potential real GDP. Congress and the President would need to decrease taxes by
less than $700 billion.
A Federal Reserve sale of bonds will have the greatest effect on real GDP if income tax rates are ______________ (high/low) and the amount of currency normally held as a percentage of an individual's money is ______________ (high/low)
low; low
The Federal Reserve purchases $50 billion of bonds. Real GDP will change by the greatest amount if employment is relatively ______________ and if income tax rates are ______________.
low; low
The Federal Reserve purchases $50 billion of bonds. Real GDP will change by the greatest amount if employment is relatively ______________ and if income tax rates are ______________.
low; low.
A ______________ saving rate and a ______________ required reserve ratio will mean that a Federal Reserve purchase of bonds will have a greater effect on spending.
lower; lower
Government budget deficits are more likely to increase during times of
recession or war
Given a concern with rising inflation, which of the following monetary policies should the Federal Reserve undertake?
sell bonds and increase the required reserve ratio
Expansionary fiscal policy will
shift the aggregate demand curve right.
A Federal Reserve purchase of bonds will have the greatest effect on real GDP if the amount of currency normally held as a percentage of money is ______________ and the tax rate is ______________.
small; small
A given change in monetary policy will cause the greatest decrease in inflation if the economy is experiencing ______________ (large/small) amounts of unemployment and if banks normally keep ______________ (large/small) amounts of excess reserves.
small; small
A given change in monetary policy will cause the greatest increase in employment if the economy is experiencing relatively ______________ (large/small) real GDP and if banks normally keep ______________ (large/small) amounts of excess reserves.
small; small
Fiscal policy is when changes are made to ______________ and ______________ to accomplish macroeconomic goals.
taxes; government expenditures
