Econ test 4

The Fed uses monetary policy to offset the effects of a recession (high unemployment and falling prices when actual real GDP falls short of potential GDP) and the effects of a rapid expansion (high prices and wages). Can the Fed, therefore, eliminate recessions? a) The Fed can, but choses not to, eliminate recessions b) The Fed is only concerned with the money supply and interest rates c) The Fed can eliminate recessions by properly anticipating the economic events that cause them d) The Fed can only only soften the magnitude of recessions, not eliminate them

d) The Fed can only soften the magnitude of recessions, not eliminate them

One-time tax rebates, such as those in 2001 and 2008, increase consumption spending by less than a permanent tax cut because one-time tax rebates increase a) the multiplier effect b) taxable income c) permanent income d) current income

d) current income

An increase in interest rates is likely to cause a) the money demand curve to shift to the left b) the money demand curve to shift to the left c) firms and households to increase the quantity of money demanded d) firms and households to decrease the quantity of money demanded

d) firms and households to decrease the quantity of money demanded

The Fed buys and sells bonds as a part of its policy to reach all of the following objectives except: a) stability of financial markets and institutions b) economic growth c) price stability d) high unemployment

d) high unemployment

When the Fed purchases government bonds it ____ banks' reserves and ____ the money supply. a) decreases; decreases b) decreases; increases c) increases; increases d) increases; decreases

increases; increases

A decrease in individual income taxes ___ disposable income, which ___ consumption spending. a) increases; increases b) decreases; increases c) decreases; decreases d) increases; decreases

a) increases; increases

The higher the tax rate, the _____ the multiplier effect. a) larger b) smaller

b) smaller

An increase in interest rates is likely to cause a) firms and households to decrease the quantity of money demanded b) the money demand curve to shift to the right c) firms and households to increase the quantity of money demanded d) the money demand curve to shift to the left

a) firms and households to decrease the quantity of money demanded

What is the difference between federal government purchases (spending) and federal government expenditures? a) Government expenditures are included in government purchases. b) Government purchases are included in government expenditures. c) Government purchases refer to spending for which no good or service is received. d) They are the same.

b) Government purchases are included in government expenditures.

Which of the following would not be considered an automatic stabilizer? a) declining food stamp payments due to more persons finding jobs during an expansion b) legislation increasing funding for job retraining passed during a recession c) rising income tax collections due to rising incomes during an expansion d) decreasing unemployment insurance payments due to decreased jobless during an expansion

b) legislation increasing funding for job retraining passed during a recession

Active changes in tax and spending by government intended to smooth out the business cycle are called ____ changes in taxes and spending that occur passively over the business cycle are called ___. a) discretionary fiscal policy; conscious fiscal policy b) automatic stabilizers; monetary policy c) discretionary fiscal policy; automatic stabilizers d) automatic stabilizers; discretionary fiscal policy

c) discretionary fiscal policy; automatic stabilizers

During recessions, government expenditures automatically a) falls because of programs such as unemployment insurance and Medicaid b) rises because of the progressive income tax system c) rises because of programs such as unemployment insurance and Medicaid d) falls because of the progressive income tax system

c) rises because of programs such as unemployment insurance and Medicaid

If the federal government's expenditures are less than its tax revenues, then a) a budget surplus results b) the budget is balanced c) a budget deficit results d) no conclusion can be drawn here regarding the budget surplus or deficit without information regarding government purchases versus other outlays

a) a budget surplus results

Contractionary monetary policy causes a) aggregate demand to fall and the price level to fall b) aggregate demand to fall and the price level to rise c) aggregate demand to rise and the price level to rise d) aggregate demand to rise and the price level to fall

a) aggregate demand to fall and the price level to fall

When the Federal Reserve conducts open market transactions, it a) buys or sells previously issued government bonds b) buys or sells corporate bonds in the bond market c) issues government bonds to raise funds for the government d) makes credit available to financial institutions in crises

a) buys or sells previously issued government bonds

Changes in interest rates affect aggregate demand. Which of the following is affected by changes in interest rates and, as a result, impacts aggregate demand? a) consumption of durable goods b) government spending c) the value of the dollar d) business investment projects

a) consumption of durable goods c) the value of the dollar d) business investment projects

Buy a house during a recession may be a good idea if your job is secure because the Federal Reserve often a) lowers income taxes during recessions b) lowers interest rates during recessions c) raises interest rates during recessions d) sells Treasury bills to help the housing market

b) lowers interest rates during recessions

The Fed can affect both the money supply and interest rates. However, in recent years, the Fed targets interest rates in monetary policy more often than it does the money supply. Which interest rate does the Fed target? a) the discount rate b) the federal funds rate c) the long-term nominal interest rate d) the short-term real interest rate

b) the federal funds rate

Which of the following is an example of discretionary fiscal policy? a) an increase in unemployment insurance payments during a recession b) the tax cuts passed by Congress in 2001 to combat the recession c) an increase in income tax receipts with rising income during an expansion d) a decrease in food stamps issued during an expansion or boom

b) the tax cuts passed by Congress in 2001 to combat the recession

When is it considered "good policy" for the government to run a budget deficit? a) when borrowing is used for current expenses b) when borrowing is used for long-lived capital goods c) when borrowing is used to pay for social insurance programs d) all of the above

b) when borrowing is used for long-lived capital goods

In the cause-effect chain, a contractionary monetary policy decreases the money supply, increases the interest rate, decreases investment spending, and decreases aggregate demand. a) true b) false

a) true

Maintaining a strong dollar in international currency markets is not one of the four monetary policy goals of the Fed listed in the textbook. a) true b) false

a) true

Problem: Recession Policy: Expansionary Actions: Increase government spending or ________ (increase/ decrease taxes) Result: Real GDP and price level _____ (fall/rise)

Actions: decrease taxes Result: rise

Which of the following is NOT a monetary policy goal of the Federal Reserve bank (the Fed)? a) low prices b) low unemployment c) stable financial markets d) higher living standards

a) low prices

An increase in government spending increases the supply of money in our economy. a) true b) false

b) false

When the Fed conducts an open market sale, it a) lowers interest rates and reduces the money supply b) lowers interest rates and increases the money supply c) raises interest rates and reduces the money supply d) raises interest rates and increases the money supply

b) lowers interest rates and increases the money supply

If the Fed raises the interest rate, this will ___ inflation and ____ real GDP in the short run. a) increase; raise b) reduce; lower c) increase; lower d) reduce; raise

b) reduce; lower

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

c) No. The increase in defense spending after that date was designed to achieve homeland security deposits.

The simple multiplier effect shows the resulting change in real GDP due to an increase in government purchases or a decrease in taxes assuming that the price level is _____. (increasing, decreasing, constant) In reality, the SRAS is _____. (vertical, horizontal, upward sloping, downward sloping) As a result, when AD shifts to the right, in reality the change in real GDP will be ______ it would be if the price level were constant. (less than, more than)

constant upward sloping less than

Fiscal policy is defined as changes in federal ____ and ____ to achieve macroeconomic objectives such as price stability, high rates of economic growth, and high employment. a) interest rates; money supply b) taxes; the money supply c) taxes; interest rates d) taxes; expenditures

d) taxes; expenditures

If the Fed pursues expansionary monetary policy then a) the money supply will decrease, interest rates will rise and GDP will fall b) the money supply will increase, interest rates will rise and GDP will rise c) the money supply will decrease, interest rates will fall and GDP will fall d) the money supply will increase, interest rates will fall and GDP will rise

d) the money supply will increase, interest rates will fall and GDP will rise

Each year that the federal government runs a deficit, the federal debt ____. Each year that the federal government runs a surplus, the federal debt _____. (grows or shrinks)

grows, shrinks

If the Federal Reserve Bank's Contractionary monetary policy is successful, what is the effect on the following macroeconomic indicators? 1. Actual Real GDP 2. Potential Real GDP 3. Price Level 4. Unemployment (increase, decrease, does not change)

1. Actual Real GDP: decreases 2. Potential Real GDP: does not change 3. Price Level: decreases 4. Unemployment: increases

If the Federal Reserve Bank's Expansionary monetary policy is successful, what is the effect on the following macroeconomic indicators? 1. Actual Real GDP 2. Potential real GDP 3. Price Level 4. Unemployment (increase, decrease, does not change)

1. Actual Real GDP: increases 2. Potential Real GDP: does not change 3. Price Level: increases 4. Unemployment: decreases

If the marginal propensity to consume equals 0.75, the tax rate equals 0.20, what is the value of the government purchases multiplier? The government purchases multiplier is equal to ____.

2.50

What is inflation targeting? a) Committing the central bank to achieve an announced level of inflation b) Another name for contractionary monetary policy c) A target that links the Fed's target for the federal funds rate to inflation d) A policy that attempts to reduce inflation to zero

a) Committing the central bank to achieve an announced level of inflation

An increase in interest rates is likely to cause the money demand curve to shift to the left. a) true b) false

b) false

Keeping an extra $200 in your checking account to pay for possible car repairs illustrates the a) transfer demand for money b) transactions demand for money c) speculate demand for money d) precautionary demand for money

d) precautionary demand for money

What two institutions did Congress create in order to increase the availability of mortgages in a secondary market? a) The Federal Open Market Committee (FOMC) and the Federal Deposit Insurance Corporation (FDIC) b) "Fannie Mae" and "Freddie Mac" c) The National Bureau of Economic Research (NBER) and the Bureau of Labor Statistics (BLS) d) The Bank Oversight Committee and the Department of the Interior

b) "Fannie Mae" and "Freddie Mac"

In the long run, increases in government purchases result in a) partial crowding out b) complete crowding out c) an absence of crowding out d) none of the above

b) complete crowding out

Does government spending ever reduce private spending? a) No, due to crowding out. b) No, they are unrelated. c) Yes, due to crowding out. d) Yes, due to reduced interest rates.

c) Yes, due to crowding out.

An increase in the money supply will a) have no effect on the interest rate b) increase the interest rate c) decrease the interest rate d) decrease the equilibrium quantity of money in the economy

c) decrease the interest rate

What are the gains to be had from simplifying the tax code? a) Resources from the tax preparation industry freed up for other endeavors. b) Increased efficiency of households and firms. c) Greater clarity of the decisions made by households and firms. d) All of the above.

d) All of the above

When the money supply is increased, the equilibrium interest rate fell from 4% to 3%. Why? a) Increased demand for Treasury securities drives up their prices b) Initially, firms hold more money than they want relative to other financial assets c) Increased demand for Treasury securities drives down their interest rate d) All of the above

d) All of the above

Problem: Rising inflation Policy: Contractionary Actions: _______ or increase taxes (increase/decrease government spending) Result: Real GDP and price level ____ (fall/rise)

Actions: decrease government spending Result: fall

How do investment banks differ from commercial banks? a) investment banks generally do not lend to households b) investment banks do not take deposits c) commercial banks are financial advisors to firms issuing stocks d) commercial banks do not lend to households e) investment banks take deposits

a) investment banks generally do not lend to households b) investment banks do not take deposits

According to the multiplier effect, an initial increase in government purchases increases real GDP by _____ the initial increase in government purchases. a) more than b) less than c) the same as

a) more than

Policy that is specifically designed to affect aggregate supply and increase incentives to work, save, and start a business, by reducing the tax wedge is called a) supply-side economics b) demand-side economics c) labor economics d) tax-and-spend economics

a) supply-side economics

Which of the following is a government expenditure, but is not a government purchase? a) the federal government pays out an unemployment insurance claim b) the federal government pays the salary of an FBI agent c) the federal government buys a Humvee d) the federal government pays to support research on Aids

a) the federal government pays out an unemployment insurance claim

What are the Fed's main monetary policy targets? a) the money supply and interest rates b) high employment and economic growth c) taxes and government spending d) price stability and economic growth

a) the money supply and interest rates

The implementation lag for monetary policy tends to be shorter than for fiscal policy because the Federal Reserve is not motivated by politics. a) true b) false

a) true

The money supply curve is vertical because an economy's money supply is independent of the interest rate. a) true b) false

a) true

Which of the following is an appropriate discretionary fiscal policy if equilibrium real GDP falls below potential real GDP? a) an increase in the supply of money b) an increase in government purchases c) a decrease in transfer payments d) an increase in individual income taxes

b) an increase in government purchases

In the cause-effect chain, a contractionary monetary policy decreases the money supply, increases the interest rate, decreases investment spending, and increases aggregate demand. a) true b) false

b) false

The multiplier effect is only a consideration for increases in government purchases. a) true b) false

b) false

The opportunity cost of holding money is zero. a) true b) false

b) false

To correct an inflationary gap, the Federal Reserve could increase taxes and/or increase the reserve requirement. a) true b) false

b) false

The federal government debt ___ when the federal government runs a deficit and ___ when the federal government runs a surplus. a) decreases; increases b) increases; decreases c) increases; increases d) decreases; decreases

b) increases; decreases

If the economy is growing beyond potential real GDP, which of the following would be an appropriate fiscal policy to bring the economy back to long-run aggregate supply? An increase in a) the money supply and a decrease in interest rates b) government purchases c) taxes d) oil prices

c) taxes

By the height of the housing bubble in 2005 and early 2006, lenders had greatly loosened the standards for obtaining a mortgage loan, with many mortgages being granted to sub-prime borrowers ___ and "Alt-A" borrowers ____. a) who borrowed money at rates below the prime interest rate; who had AAA credit ratings b) who purchased homes in depressed housing markets; who purchased homes which were repossessed by government agencies c) with flawed credit histories; who did not document their income d) who borrowed more than 120 percent of the value of the house, with no proof of U.S. citizenship

c) with flawed credit histories; who did not document their incomes