Macro Hw Review for Final Exam

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examples of discretionary fiscal policies

1. the government provides stimulus funds to repair roads and bridges to increase spending in the economy 2. congress provides a tax rebate to encourage additional spending in order to reduce the UE rate 3. the president and congress reduce tax rates to increase the amount of investment spending

ffr=3% target inflation=3% current inflation=2% real gdp=2% below potential gdp What does the federal funds target rate equal?

3.5%

FFR=2% target rate of inflation=3% current inflation rate=5% potential real gdp=14.83 trillion real gdp=14.14 trillion What does the federal funds target rate equal?

5.65%

Consider the demand for U.S. dollars in exchange for British pounds. Which of the following will not increase the foreign currency demand for the dollar​? Part 2

Currency traders who believe that the value of the dollar in the future will be less than its value today.

Suppose that the economy is currently at potential​ GDP, and the federal budget is balanced. If the economy moves into​ 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 best describes the difference between crowding out in the short run and in the long​ run?

In the short​ run, an increase in government 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 private expenditures.

Why might the author be worried that Medicare is on course to​ "bankrupt the​ nation"

Rising Medicare costs are leading to a dramatic increase in the share of the federal budget spent on Social​ Security, Medicare, and​ Medicaid, which means that the federal government will eventually have to either cut benefits or sharply increase taxes.

What is the difference between the federal budget deficit and federal government​ debt?

The federal budget deficit is the​ year-to-year short fall in tax revenues relative to government spending ​ (T < G​ + TR), financed through government bonds. The federal government debt is the accumulation of all past deficits.

If the​ short-run aggregate supply curve​ (SRAS) were a horizontal​ line, what would be the impact on the size of the government purchases and tax multipliersLOADING...​?

The impact of the multiplier would be larger if the SRAS curve is horizontal.

what does a "tight labor market" mean

a labor market with a very low UE rate, usually lower than the natural rate of UE

one of the goals of the federal reserve is price stability, to achieve this goal they should

a low inflation rate ideally between 1 and 3 percent and it needs to be fairly constant

What is the Volcker disinflation?

a significant reduction in the inflation rate between 1979 and 1989, under the leadership of Fed chairman Paul Volcker

revenue the federal government collects from the individual income tax declines during a recession

automatic stabilizer

total the federal government pays out of UE insurance decreases during an expansion

automatic stabilizer

government spending and taxes that increase or decrease without any actions taken by the government are referred to as

automatic stabilizers

The concept of a nonaccelerating inflation rate of unemployment​ (NAIRU) helps us to understand why in the long​ run, the Federal Reserve

can affect the inflation rate but not the UE rate

most economists would argue that inflation is caused by

changes in both aggregate demand and aggregate supply

corporate income tax is increased

contractionary fiscal policy

what is meant by crowding out

crowding out is a decline in private expenditures as a result of increases in government purchases

What does the author mean by​ "fatal financial​ flaws"?

declining birth​ rates, resulting in fewer workers per Medicare​ beneficiary, and insufficient revenues at current rates of payroll taxes to cover rising medical costs and increasing numbers of retired people over time.

congress and the president enact a temporary cut in payroll taxes

discretionary fiscal policy

what is the short-run Phillips curve

downward sloping

individual income tax rate is decreased

expansionary fiscal policy

U.S.households and U.S. firms supply U.S. dollars in exchange for foreign currency

if the interest rate and other conditions in the foreign countries are lucrative for U.S. firms and households to invest dollars.

It is inconsistent to believe that the​ long-run aggregate supply curve is vertical and the​ long-run Phillips curve is downward sloping because

in order for the​ long-run Phillips curve to be downward​ sloping, changes in the price level​ (inflation) would have to affect the unemployment rate in the long​ run, which does not happen with a vertical​ long-run aggregate supply curve.

If the unemployment rate is below the natural​ rate, the inflation rate tends to​ ___________, and​ eventually, the​ short-run Phillips curve will shift​ _______.

increase up

monetary policy target used by the fed

interest rate

why does the fed use policy target rate and/or money supply

it can affect the interest rate and the money supply directly and these in turn can affect UE, GDP, and price level

why are there disagreements over the value of the NAIRU

it is hard to estimate the NAIRU because the natural rate of UE changes over time

what do economist mean by the demand for money?

it is the amount of money-currency and checking account deposits-that individuals hold

why does a failure of the inflation rate to increase despite a tight labor market indicate that the Phillips curve is flattening

it means the inflation rate is becoming less responsive to the UE rate than would otherwise be the case

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

the balance on the financial account is

net capital flows = capital inflows - capital outflows

federal government changes the required gasoline mileage for new cars

not a fiscal policy

federal government increases spending on rebuilding the New Jersey shore following a hurricane

not a fiscal policy

federal reserve sells treasury securities

not a fiscal policy

defense spending is increased

not part of fiscal policy

families are allowed to deduct all their expenses for daycare from their federal income taxes

not part of fiscal policy

federal reserve lowers the target for the federal funds rate

not part of fiscal policy

What actions would Congress and the president need to take to resolve the problems Medicare​ faces?

reduce benefits—limit coverage of services or​ expenses, raise the age for receiving​ benefits, or reduce benefits for future recipients—or increase funding—increase payroll​ taxes, draw on general tax​ revenues, or shift more of the cost to​ higher-income beneficiaries

the fed buys a security from a financial firm, which promise to buy it back from the fed the next day

repurchase agreement

under Volcker the UE rate

rose from 6% to 10% during the period of the Volcker disinflation

Covid-19 pandemic caused the aggregate demand curve to ____ and the aggregate supply curve to ____, resulting in ______ in real GDP. In order for real GDP to return to potential, the appropriate approach is _____ fiscal policy.

shift to the left shift to the left a decrease expansionary

if, in the long run, real GDP returns to potential level, then in the long run

the Phillips curve will be vertical

what is the cyclically adjusted budget deficit or surplus

the deficit or surplus in the federal government's budget if the economy were at potential GDP

What does the Phillips curve exhibit

the relationship between the UE and the inflation rates

why do disagreements over the NAIRU pose a problem for the fed

those disagreements make it difficult for the fed to know what level of UE to target

If the Fed wants to move from a point on the​ short-run Phillips curve representing high unemployment and low inflation to a point representing lower unemployment and higher​ inflation, then it should

use expansionary monetary policies

when is it considered "good policy" for the government to run a budget deficit

when borrowing is used for long-lived capital goods

assuming people have rational expectations then

when the Fed uses monetary​ policy, people quickly realize the impact that will be created by the​ policy, adjust wages and​ prices, and inflation will adjust to the new expectations which means the policy will not affect real GDP


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