MACRO FINAL
The use of money
***All of the above*** Eliminates the double coincidence of wants, allows for greater specialization, reduces the transaction costs of exchange
Which of the following is a monetary policy tool used by the Federal Reserve Bank?
**All of the Above** Buying $500 million worth of government securities, such as Treasury bills, Decreasing the rate which banks can borrow many from the Federal Reserve, Increasing the reserve requirement from 10 percent to 12.5 percent
What are the gains to be had from simplifying the tax code?
**All of the Above** Increase efficiency of households and firms, Resources from the tax preparation industry freed up for other endeavors, Greater clarity of the decisions made by households and firms.
How does a budget deficit act as an automatic stabilizer and reduce the severity of recession?
**All of the Above** Transfer payments to households increase. Consumers spend more than they would in the absence of social insurance programs, like unemployment. During recessions, tax obligations fall due to falling wages and profits.
The federal government's budget surplus was $263.2 billion in 200 and 128.2 billion in 2001. A decrease in federal government's budget surplus can be the result of
**All of the Above** a decrease in taxes an increase in government purchases a recession
The United States is divided into __ Federal Reserve Districts.
12
One of the board members is appointed to a __ year, renewable term as the chairman
4
The Federal Reserve Bank's Board of Governors consist of __ members appointed by the president of the U.S. to 14 year, non-renewable terms.
7
Distinguish among money, income, and wealth
A person's money is the currency held and the checking account balance, income is the earning and wealth is equal to value of assets minus all debts
What is the "tax wedge"?
A tax wedge is the difference between the pretax and post tax return to an economic activity. For example, a tax on interest income would decrease the post tax return to investment.
Briefly explain why the aggregate expenditure line is upward sloping, while the aggregate demand curve is downward sloping.
Aggregate expenditure is the relationship between spending and income, while aggregate demand is a relationship between output and the price level.
Supposed that at the same time Congress and the president pursue an expansionary fiscal policy, the Federal Reserve pursues an expansionary monetary policy. How might an expansionary monetary policy affect the extent of crowding out in the short run?
An expansionary monetary policy would decrease interest rates and thus reduce the extent of crowding out.
Are federal expenditures higher today than they were in 1960?
As a percentage of GDP, federal expenditures have increased since 1960.
Are federal purchases higher today than they were in 1960?
As a percentage of GDP, federal purchases have decreased since 1960
A Federal Reserve publication discusses an estimate of the tax multiplier that gives it a value of 1.2 after one year and 2.8 after two years. Why might the tax multiplier have a larger value after two years than after one year?
Consumers are more likely to perceive the tax change as permanent and change their spending choices
Which of the following is NOT a reason why the aggregate expenditures fall when the price level increases
Consumers substitute from higher priced goods to lower priced goods
What is meant by crowding out?
Crowding out is a decline in private expenditures as a result of increase in government purchases
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.
Current Income
In what ways does the federal budget serve as an automatic stabilizer for the economy?
During a recession, there is an increase in government expenditures for transfer payments and a decrease in taxes as wages and profits fall. During an expansion, there is a increase in movement expenditures for transfer payments and increase in taxes as wages and profits rise. Both of these occur automatically and both effects help to stabilize aggregate demand.
What is the difference between federal purchases and federal expenditures?
Federal purchases require that the government receives a good or service in return, where as federal expenditures include transfer payments
What is Fiscal Policy
Fiscal policy can be described as changes in government spending and taxes to achieve macroeconomic policy objectives.
Which of the following statements is most accurate regarding fiscal policy and monetary policy?
Fiscal policy included changes in government spending and taxes and is controlled by the federal government. Monetary policy includes changes in the money supply and interest rates and is controlled by the Federal Reserve. Both policies are intended to achieve macroeconomics objectives.
In addition to the Federal Reserve Bank, what other economic actors influence money supply?
Households, firms, and banks
Suppose that the economy is currently at potential GDP, and the federal budget is balanced. If the economy moves into the recession, what will happen to the federal budget?
If the budget is balanced at potential GDP and the economy moves into recession, then there will be a budget deficit as government expenditures increase and tax revenues decrease.
Which of the following statements does not correctly describe the effect of an increase in price on the components of aggregate expenditure?
If the price love increases, government tax receipts fall and consequently consequently government expenditure declines.
Which of the following best described the difference between crowding out in the short run and in the long run?
In the short run, an increase in movement purchases may not fully crowd out private expenditures due to the stimulative effect of an increase in government purchases on aggregate demand. In the long run, most economists believe that a permanent increase in government purchases will result in complete crowding out of price expenditures.
What changes should they make if they decide a contractionary fiscal policy is necessary?
In this case, Congress and the president should enact policies that decrease goverment spending and increase taxes.
If Congress and the president decide an expansionary fiscal policy is necessary, what changes should they make in government spending or taxes?
In this case, Congress and the president should enact policies that increase government spending and decrease taxes.
From the discussion in this chapter, which source of government revenue is likely to increase the most in the future?
Individual Income Taxes
When low income countries begin to experience economic growth, they often do so at rates much higher than current growth rates of industrial nations. Explanation?
Industrial countries have higher rates of growth in physical capital and developing countries are not able to invest in large quantities of capital.
Which of the following is a monetary policy target used by the Fed?
Interest Rate
Some economists argue that because increases in government spending crowd out private spending, increased government spending will reduce the long-run rate of GDP. This is most likely to happen if the private spending being crowded out is :
Investment spending
Who do economists mean by the demand for money?
It is the amount of money- currency and checking account deposits- that individuals hold
Consider the figure to the right. What is the effect on LRAS if tax reductions and tax code simplifications are effective?
It shift from LRAS1 to LRAS3
When price level rises and real GDP falls
Less Investment, Decreased consumption, Falling exports
What are the largest asset and the largest liability of a typical bank?
Loads are the largest asset and deposits are the largest liability of a typical bank
The federal reserve uses two definitions of the money supply,
M1 and M2, because M1 is a narrow definition focusing more on liquidity, whereas M2 is a broader definition of money supply
Suppose you decide to withdraw $100 in currency from your checking account. What is the effect on M1
M1 remains unchanged
Which can be changed more quickly: monetary policy or fiscal policy?
Monetary policy can be changed more quickly than fiscal policy. monetary policy can be change at any of the FOMC meetings and the small number of individuals involved makes it easier to change policy
What is the advantage of holding money?
Money can be used to buy goods, services, or financial assets.
What is the disadvantage of holding money?
Money, in the form of currency or checking account deposits, earns either no interest or a very low rate of interest
Which one of the following is not one of the policy tools the Fed uses to control the money supply
Moral Suasion
After September 11,2001, the federal government increased military spending on wards in Iraq and Afghanistan. Is this increase in spending considered fiscal policy?
No. The increase in defense spending after that date was designed to achieve homeland security objectives.
Which one of the following is not a function of money?
Open market operation
Along the per-worker production function, what happens to real GDP per hour worked as capital per hour worked increases?
Real GDP per hour worked increases at a decreasing rate.
If congress and the president are successful in keeping real GDP at its potential level in 2017, state whether each of the following will be higher, lower or the same as it would have been if they had taken no action
Real GDP will be Higher, Potential real GDP will be the same, The inflation rate will be higher, the Unemployment rate will be lower.
What is meant by supply-side economics?
Supply-side economics refers to the use of taxes to increase incentives to work, save, incest, and start a business in order to increase long-run aggregate supply.
How does technological change affect the per-worker production function?
Technological change shifts the per-worker production function up
Which tool is the most important?
The Fed conducts monetary policy principally through open market operations
Monetary policy is defined as
The actions the Federal Reserve takes to manage the money supply and interest rates.
What is the cyclically adjusted budget deficit or surplus?
The cyclically adjusted budget deficit or surplus is the deficit or surplus in the federal government;s budget if the economy were at potential GDP.
Who is responsible for fiscal policy?
The federal government controls fiscal policy
When the Federal Reserve buys bonds through open market operations,
The money supply will increase
How does the quantity theory provide an explanation about the cause of inflation?
The quantity equation shows that if the money supply grows at a faster rate then real GDP, then there will be inflation
Have poor countries been catching up to rich countries?
There has been catch-up by some poor but industrialized countries.
Why does a $1 increase in government purchases lead to more than a $1 increase in income and spending?
Through the government purchases multiplier, the $1 increase in government spending will lead to an increase in aggregate demand and national income, which will lead to an increase in induced spending.
Why do few economists argue that it would be a good idea to balance the federal budget every year?
To keep a balanced budget during a recession, taxes and would have increase and government expenditures would have to decrease, which would further reduce aggregate demand and depend the recession.
The reason that the aggregate demand curve slopes downward is that when the price level is higher, people cannot afford to buy as many goods and services
True
Is it possible for Congress and the president to carry out an expansionary fiscal policy if the money supply does not increase.
Yes, because fiscal policy and monetary policy are seperate things.
In 2009, Congress and the president enacted "cash for clunkers" legislation that paid people buying new cards ip to 4,500 if they traded in an older, low gas-mileage car. Was this piece of legislation an example fiscal policy?
Yes, because the primary goal of the spending program was to stimulate the national economy.
Suppose that you are a bank manager, and the Federal Reserve raises the required reserve ration from 10 percent to 12 percent. What actions would you need to take?
You would have to reduce loans to make up for the necessary increase in reserves
Suppose you decide to withdraw $100 in cash from your checking account, Which one of the following choices accurately shows the effect of this transition on your bank's balance sheet.
Your bank's balance sheet shows a decrease in reserves by $100 and a decrease in deposits by $100
The difference between aggregate expenditure and aggregate demand is that:
aggregate demand shows the relationship between the price level and the level of aggregate expenditure is a point on the aggregate demand curve at a specific price.
If something is to be considered as money, it has fulfill
all four functions.
If congress and the president want to keep real GDP at its potential level in 2017, they should use _______, which would mean ___________.
an expansionary fiscal policy, increasing government spending or cutting taxes
The economic definition of money is:
any asset that people are generally willing to accept in exchange for goods and services
Excess reserves
are reserves banks keep above the legal requirement
Some spending and taxes increase or decrease with the business cycle. This even often has effect on the economy that is similar to fiscal policy and is called
automatic stabalizers
An initial decrease in a bank's reserves will decrease checkable deposits
by an amount greater than the decrease in reserves
An economy that does not experience increases in technological progress
can experience economic growth by increasing capital, however, this will eventually stagnate and the economy will not continue to grow.
In the long run, increases in government purchases result in
complete crowding out.
The most important role of the Federal Reserve in today's U.S. economy is
controlling the money supply to pursue economic objectives
Globalization entails all of the following except
cultural exchange between nations
As your actions and those of other bank managers reduced the amount of loans made, we would expect that the money supply would end up
decreasing
"I need to not recount that the revenues of the Government as estimated for the next fiscal year show a decrease of about $1,700,000,000 below the fiscal year 1929, and inexorably require a broader basis of taxation and drastic reduction of expenditures in order to balance the budget. Nothing is more necessary at this time than balancing the Budget" Accord to the statement, balance the Budget would require
decreasing government purchases and increasing taxes. Incorrect
Globalization has made it ______ for developing countries to get investment funds and technology
easier
Congress passed legislation to create the Federal Reserve System in 1931 in order to
end the instability created by bank panics by acting as a lender of last resort
The economic growth model predicts that the
even of per capita GDP in poor countries will increase faster than rich countries and the poor nations will catch up with rich nations
Most poor countries experience slow growth because of all the following reasons except
excellent public health and education
The U.S. dollar can best be described as
fiat money
Other high-income countries have had trouble completely closing the gap in real GDP per capita with the United States because the United States has
great flexibility in labor markets and greater efficiency in the financial system
Each year that the federal government runs a deficit, the federal debt
grows
Developing countries have benefited from globalization, because globalization can do all of the following except
impose trade barriers and tariffs on imported goods so as to protect domestic industires
In terms of its effect on the long-run growth rate of real GDP, it is likely to matter more if the additional government spending involves
increased spending on highways and bridges.
The real-world money mulitplier
is smaller than the simple despite multiplier because banks keep excess reserves and households excess cash
The Fed uses policy targets of interest rate and/or money supply because
it can affect the interest rate and the money supply directly and these in turn can affect unemployment, GDP growth and the price level
According to the multiplier effect, an initial increase in government purchases increases real GDP by _____ the initial increase in government purchases
more than
If the government purchases were to decrease by 300 billion or if taxes were increased by 300 billion, the equilibrium level of real GDP would decrease by
more than 300 billion Incorrect
Which one of the following is not a reason why businesses accept paper currency known that, unlike a gold coin, the paper currency is printed on is worth very little?
not valuable
A baseball fan with a Mike Trout baseball card wants to trade it for a Miguel Cabrera baseball card, but everyone the fan knows who has a Cabrera card doesn't want a Trout Card. Economist call this
principle of a double coincidence of wants
Each year that the federal government runs a surplus, the federal debt
shrinks.
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
supply-side economics
When a firm increases output by either replacing existing capital with more productive capital or by reorganizing how much production takes place, that firm is experiencing
technological change
When the Federal Reserve sells Treasury securities in the open market
the buyers of these securities pay for them with checks and bank reserves falls
In the long run, a country will experience an increasing standard of living only if
the country experiences continuing technological change.
The federal funds rate is
the interest rate that banks charge each other for overnight loans
What term describes the relationship between real GDP per hour worked and capital per hour worked, holding the level of technology constant?
the per-worker production function
The central bank of a country controls the money supply, which equals the currency held by
the public plus their checking account balances.
When the Federal Reserve purchases Treasury securities in the open market
the sellers of such securities repost the funs in their banks and bank reserves increase
The quantity theory of money is better able
to explain the inflation rate in the long run