Economics exam2

What are two specific policies—one from the Bush Administration and one from the Obama Administration--that have increased the national debt since 2000?

(Tax cuts, increased government spending) BUSH-3 Trillion Tax cuts, Increased Government Spending Iraq & Afganastan, $700 Billion Bank Bailout, OBAMA '09-'10 Stimulus Package 787 billion, 500 billion spending, 287 billion tax cuts

In a recession, what is the appropriate monetary policy tool below? tax cut Buy bonds Sell bonds

Buy bonds A tax cut is fiscal policy. Selling bonds and increasing interest rates are the opposite directions that we would want to go in a recession.

Which of the following is NOT a cost of running a budget deficit. Increases the inflation rate. Crowding Out: Budget deficit can lead to less private investment spending. Can cause a recession. Can lead to a trade deficit.

Can cause a recession.

What policies can the government enact to try to slow down the rate of inflation? The main cause of inflation is too much spending, so the main way to deal with inflation is to slow down the rate of spending—the exact opposite of what we try to do when unemployment is the problem. What are the policies to slow down spending and reduce inflation?

Contractionary Policy: The primary cause of inflation is too much spending. Thus, the main way to reduce inflation is to reduce spending. Fiscal Policy: 1. Increase Taxes 2. Decrease Government Spending Monetary Policy: The Federal Reserve's Control over Interest rates and money to influence the overall economy. Increase interest rates and decrease the money supply: Recession: Decrease interest rates and increase money

What are 4 tools the Fed Reserve can use to try to get the economy out of recession?

Decrease Reserve requirement, Decrease the Discount Rate, Open Market Operation, Decrease Federal Funds rate

What are the two basic fiscal policy tools that can be used to try to help get an economy out of a recession?

Increase government spending- This could be through military, education, or construction spending (This would increase production, increasing pay for workers and in turn increasing consumption...helps industries where workers spend money. Decrease Taxes- decreasing taxes to increase consumer spending.

Which of the fiscal policy tools from above were used by Presidents Reagan, Bush, and Obama to help get the economy out of the 1981-82, 2001-02, and 2008-09 recessions?

Increased government spending

What are the two general policies that increase the budget deficit?

Increased government spending, reduction in tax income

When banks make loans, what happens to the money supply? Increases Decreases No change--only the Fed can change the money supply.

Increases

Who is the current chair of the Federal Reserve, nominated by President Obama? Ben Bernanke Alan Greenspan Janet Yellen

Janet Yellen

Who is the Chair of the Federal Reserve?

Janet Yellen.

Classical economists invoked the notion of

Moral Hazard, which says that the government should not do anything. (If the government bails out a company then it sends the wrong message to the market.)

What is monetary policy and who controls it?

The Federal Reserve's control over interest rates and the money supply in order to influence the overall economy (affect GDP, unemployment, and inflation).

Which of the following has contributed the most to the total U.S. national debt? Obamacare Clinton tax increases Bush tax cuts Reagan tax increases

The policy that has contributed to the largest percentage of today's national debt is the "Bush tax cuts". In the future, social security costs and health care costs will become an increasing percentage. As for tax increases, that would lower the debt (although Reagan did not increase taxes).

Contractionary Policy

The primary cause of inflation is too much spending. Thus, the main way to reduce inflation is to reduce spending.

Who controls fiscal policy? Federal Reserve The Government President and Congress Supreme Court

While it is true that "The Government" controls fiscal policy, the "President and Congress" is a more specific and better answer that helps to distinguish it from monetary policy.

What is a budget deficit?

when government spending is greater than tax revenue...so the government spends all of its tax revenue and then spends even more on top of that.

Which of the following Presidents used tax cuts and government spending increases to help get the economy out of a recession? Reagan Bush Jr. Obama All of them

All of them

follow—Moral Hazard or System Risk—when it came to Fannie Mae? Lehman Brothers? AIG?

Fannie Mae? Systemic Risk Lehman Brothers? Morale Hazard AIG? Systemic Risk

What is fiscal policy and who controls it?

Fiscal policy is the government's control over taxes and government spending in order to influence the overall economy (variables such as GDP, unemployment, and inflation). It is controlled by the President and Congress jointly

Fiscal Policy

Fiscal policy is the government's control over taxes and government spending in order to influence the overall economy (variables such as GDP, unemployment, and inflation). controlled by the President and Congress jointly. Fiscal policy generally looks at total taxes rather than individual taxes, such as a gas tax. Similarly with government spending, we focus more on total government spending rather than specific types of spending, such as military spending or education spending. There are times when the budget is more of the President's and times when it is more of a joint action between Congress and President. For example, the first four years of the Bush Presidency (2001-2004) the budget and tax cuts were President Bush's. On the other hand, the 2011 budget was a compromise between the Republican House of Representatives and the Democratic Senate and Presidency.

What is the definition of M1, the most common definition of money?

M1 = Currency (in the hands of the public) + Checking Accounts

What are the three functions of money?

Medium of Exchange, Store of Value & Unit of Account

When the government decided to allow Lehman Brothers to fail, which economic concept were they following? Systemic Risk Moral Hazard

Moral Hazard Moral hazard is the argument to let banks fail...that it sends a message to other banks to not do bad things. Systemic risk is the argument to bail out banks...that allowing banks to fail would cause a cascading effect and could potentially bring down the entire financial system.

Keynesian economists made the argument of

Systemic Risk, which says that the government should bail out a bank with many ties to other banks and financial institutions. (If the bank is allowed to fail, it can create a domino effect, pulling down other banks and potentially bringing down the entire banking system.)

Which two variables does fiscal policy deal with? Money supply and interest rates taxes and money government spending and interest rates Taxes and government spending

Taxes and government spending

Decrease Reserve requirement

The Fed can increase the money supply and decrease interest rates by decreasing the reserve requirement. This is because banks would not have to keep as much in reserves and they could loan more money out to the public. This money that goes out into circulation increases the money supply. Thus, the Fed can increase the money supply without actually printing more money. When the money supply increases, interest rates generally come down because money is now easier to get.

Decrease the Discount

is the interest rate the Fed charges on loans to banks. Banks can borrow from the Federal Reserve. The interest they pay is the discount rate. If the Federal Reserve wants to lower interest rates and increase the money supply they can lower the discount rate.

What happens to the money supply when a bank makes a loan?

This increases the money supply.

Open Market Operation

This refers to the Fed's buying and selling government securities. If the Federal Reserve wants to increase the money supply and decrease interest rates it would buy government securities. This is the main way in which the Fed gets more money into the financial system. (The media has taken to calling this Quantitative Easing.) The Fed basically prints up new money and gets it into the hands of the public by buying government securities from the public. The Federal Reserve bought a lot of bonds during the 2008-14 period, often at the rate of $85 billion per month. They were specifically targeting longer term bonds in order to reduce interest rates on long-term borrowing (particularly mortgage interest rates). They have recently ended these purchases. They are debating when to start selling bonds, which will begin to push interest rates back up. The timing of this transition will be important.

What are two costs of running a budget deficit in the long run?

inflation, crowding out- (govt deficits can cause private investment spending to decrease), trade deficit, opportunety cost, less future social security, education, infrastructure

Which of the following would be an appropriate fiscal policy tool in a recession? taxes decrease interest rates increase taxes decrease taxes

decrease taxes

Decrease Federal Funds rate

f the Federal Reserve wants to increase the money supply and decrease interest rates it would buy government securities. This is the main way in which the Fed gets more money into the financial system. (The media has taken to calling this Quantitative Easing.) The Fed basically prints up new money and gets it into the hands of the public by buying government securities from the public. The Federal Reserve bought a lot of bonds during the 2008-14 period, often at the rate of $85 billion per month. They were specifically targeting longer term bonds in order to reduce interest rates on long-term borrowing (particularly mortgage interest rates). They have recently ended these purchases. They are debating when to start selling bonds, which will begin to push interest rates back up. The timing of this transition will be important.

Monetary Policy:

he Federal Reserve's Control over Interest rates and money to influence the overall economy. Increase interest rates and decrease the money supply:

What are the two main ways to reduce the budget deficit (and national debt)?

increase taxes and cut government spending