economics final catch all

Which of the following are arguments in favor of active stabilization policy by the government? Check all that apply.

Businesses make investment plans many months in advance. The Fed can effectively respond to excessive pessimism by expanding the money supply and lowering interest rates. Shifts in aggregate demand are often the result of waves of pessimism or optimism among consumers and businesses. The current tax system acts as an automatic stabilizer.

Quantity of Output Supplied =

Natural Level of Output+α×( Price Level Actual − Price Level Expected

Which of the following are examples of automatic stabilizers? Check all that apply.

The discount rate Corporate income taxes Personal income taxes

Change Needed to Increase AD

Wealth Increase Taxes Decrease Interest ratesDecrease The value of the domestic currency relative to the foreign currency Depreciate

The higher interest rate increases the .

cost of borrowing and reduces investment. In this case, each one-percentage-point increase in the interest rate reduces investment spending by $0.5 billion

The central bank in this economy is called the Fed. Assume that the Fed fixes the quantity of money supplied. Suppose the price level decreases from 150 to 125. People will try to

decrease their money holdings. In order to do so, people will buy bonds and other interest-bearing assets, and bond issuers will find that they can offer lower interest rates until the money market reaches its new equilibrium at an interest rate of4%

Should the government use monetary and fiscal policy in an effort to stabilize the economy? The following questions address the issue of how monetary and fiscal policies affect the economy, and the pros and cons of using these tools to combat economic fluctuations. Suppose the government decides to intervene to bring the economy back to the natural level of output by using

an expansionary policy.

monetary neutrality .

an increase in the quantity of money will impact the price level but not the output level

Suppose the Fed announces that it is raising its target interest rate by 75 basis points, or 0.75 percentage point. To do this, the Fed will use open-market operations to

decrease thesupply of money by selling bonds to the public.

This phenomenon is known as the

exchange rate effect.

As the price level falls, the cost of borrowing money will

fall , causing the quantity of output demanded to rise . This phenomenon is known as theinterest rate effect.

Suppose that for each one-percentage-point increase in the interest rate, the level of investment spending declines by $0.5 billion. The change in the interest rate (according to the change you made to the money market in the previous scenario) therefore causes the level of investment spending to

fall by$0.5 billion .

At a higher level of income, households will undertake a .

greater number of transactions. Their demand for money with which to complete those transactions will increase accordingly, shifting the money demand curve to the right

The rightward shift of the money demand curve causes the interest rate to

increase by 1% percentage points, from 3% to 4%.

Suppose the following graph shows the aggregate demand curve for this economy. The Fed's policy of targeting a higher interest rate will

increase the cost of borrowing, causing residential and business investment spending to decrease and the quantity of output demanded to decrease at each price level.

Suppose the Fed announces that it is lowering its target interest rate by 25 basis points, or 0.25 percentage point. To do this, the Fed will use open-market operations to

increase thesupply of money by buying bonds from the public.

Suppose that in May the government undertakes the type of policy that is necessary to bring the economy back to the natural level of output in the preceding scenario. In September 2023, consumer confidence increases, leading to an increase in consumer spending. Because of the

lags associated with implementing monetary and fiscal policy, the impact of the government's new policy will likelypush the economy beyond the natural level of output onc e the effects of the policy are fully realized.

The central bank in this economy is called the Fed. Assume that the Fed fixes the quantity of money supplied. Suppose the price level decreases from 150 to 125. After the decrease in the price level, the quantity of money demanded at the initial interest rate of 6% will be

less than the quantity of money supplied by the Fed at this interest rate.

Suppose the governments of two different economies, economy X and economy Y, implement a permanent tax cut of the same size. Investment spending in economy X is more sensitive to changes in the interest rate than investment spending in economy Y. The economies are identical in all other respects. The tax cut will have a larger impact on aggregate demand in the economy with the

lower sensitivity to changes in the interest rate .

The government has the ability to influence the level of output in the short run using

monetary and fiscal policy. There is some disagreement as to whether the government should attempt to stabilize the economy.

real wages fall (since nominal wages are the same, and P is higher) → For example, an increase in the money supply, a ___ variable, will cause the price level, a ___ variable, to

nominal nominal increase but will have no long-run effect on the quantity of goods and services the economy can produce, areal variable.

Additionally, as the price level falls, the impact on the domestic interest rate will cause the

real value of the dollar to fall in foreign exchange markets.

Suppose the following graph shows the aggregate demand curve for this economy. The Fed's policy of targeting a lower interest rate will

reduce the cost of borrowing, causing residential and business investment spending to increase and the quantity of output demanded to increase at each price level.

The number of domestic products purchased by foreigners (exports) will therefore

rise , and the number of foreign products purchased by domestic consumers and firms (imports) willfall

. Net exports will therefore

rise , causing the quantity of domestic output demanded torise .

The change in the interest rate that you found previously will cause residential and business investment spending to

rise , leading to an increase in the quantity of output demanded in the economy.

The increase in government purchases causes incomes to

rise.

The distinction between real variables and nominal variables is known as

the classical dichotomy .