Macroeconomics Final Review

Refer to the diagram to the right. Suppose the economy is in a recession and the Fed pursues an expansionary monetary policy. Using the static AD-AS model, this would be depicted as a movement from

A to B

The government purchases multiplier is defined as

Change in equilibrium real GDP/ change in government purchases

Which of the following is considered contractionary fiscal policy?

Congress increases the income tax rate

Which of the following would cause the money demand curve to shift to the left?

a decrease in real GDP

Suppose the government spending multiplier is 2. The federal government cuts spending by $40 billion. What is the change in GDP if the price level is not held constant?

a decrease of less than $80 billion

According to the short-run Phillips curve, which of the following would result in low rates of unemployment?

a higher inflation rate

an increase n the interest rate causes

a movement up along the money demand curve

Which of the following would be considered a fiscal policy action?

a tax cut is designed to stimulate spending during a recession.

An economic expansion tends to cause the federal budget deficit to ___ because tax revenues _____ and government spending on transfer payments____.

Decrease; rise; fall

Expansionary monetary policy refers to the ____ to increase real GDP.

Federal REserve's increasing the money supply and decreasing interest rates

Monetary policy refers to the actions the

Federal Reserve takes to manage the money supply and interest rates to pursue its economic objectives.

In which of the following situations would the Fed conduct contractionary monetary policy

The Fed is concerned that aggregate demand wold continue to exceed the growth in potential GDP.

Contractionary monetary policy causes

aggregate demand to fall and the price level to fall

If the Fed pursues expansionary monetary policy

aggregate demand will rise and the price level will rise

Which of the following is an appropriate discretionary fiscal policy if equilibrium real GDP falls below potential real GDP?

an increase government purchases

If real GDP exceeded potential real GDP and inflation was increasing, which of the following would be an appropriate fiscal policy?

an increase in taxes

In the figure to the right, the movement from point a to point b in the money market would be caused by

an increase in the price level (CH 15 Q 21)

In the figure to the right, the movement from point A to point B i the money market would be caused by

an open market sale of Treasury securities by the Federal Reserve.

The increase in government spending on unemployment insurance payments to workers who lose their jobs during a recession and the decrease in government spending on unemployment insurance payments to workers during an expansion is an example of

automatic stabilizers

The increased in the amount the government collects in taxes when the economy expands and the decrease in the amount the government collects in taxes when the economy goes into a recession is an example of

automatic stabilizers

To combat a recession with discretionary fiscal policy, Congress and the president should

decrease taxes to increase consumer disposable income

An increase in the money supply will

decrease the interest rate

If the economy is falling below 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:

government purchases.

Automatic stabilizers refer to

government spending and taxes that automatically increase or decrease along with the business cycle.

From the 1960s to 2014, transfer payments

have risen from 25 percent to about 48 percent of federal government expenditures.

Crowding out, following an increase in government spending, results from ( the exchange rate is the foreign exchange price of the domestic currency)

higher interest rates and a higher exchange rate

expansionary fiscal policy to prevent real GDP from falling below potential real GDP would cause the inflation rate to be _____ and real GDP to be _____.

higher; higher

During 1970-1997, the U.S. federal government was

in deficit every year

Which of the following would be most likely to induce Congress and the president to conduct contractionary fiscal policy? A significant

increase in inflation

Increases in the price level

increase the quantity of money needed for buying and selling

An increase in the interest rate should _____ the demand for dollars and the value of the dollar, and net exports should _____.

increase, decrease

A recession tends to cause the federal budget deficit to ___ because tax revenues ____ and government spending on transfer payments______.

increase; fall;rise

An increase in real GDP

increases the buying and selling of goods and increases the demand for money as a medium of exchange

Suppose real GDP is $13 trillion, potential real GDP is $13.5 trillion, and Congress and the president plan to use fiscal policy to restore the economy to potential real GDP. Assuming a constant price level, Congress and the president would need to increase government purchases by

less than $500 billion

In the figure to the right, if the economy is at point A, the appropriate monetary policy by the Federal Reserve would be to

lower interest rates

The Federal Reserve's four goals of monetary policy are

price stability, high employment, economic growth, and stability of financial markers and institutions

Crowding out refers to a decline in ______ as a result of an increase in_____.

private expenditures; government purchases

An increase in government spending may expedite recovery from a recession in the short run, but in the long run this policy may

raise interest rates and reduce consumer expenditures on automobiles and new houses make domestic businesses less competitive in international markets as the dollar appreciates in value reduce investment in new capital

Which of the following is true

the money market model is essentially a model of that determines the short term nominal rate of interest

The Federal REserve's two main monetary policy targets are

the money supply and interest rates

Monetary policy refers to the action the Federal Reserve takes to manage

the money supply and interest rates to pursue its economic objectives

If the Fed's policy is contractionary, it will

use open market operations to sell Treasury bills

In the long run, the Phillips curve is a ____ at _______.

vertical line; the natural rate of unemployment

An increase in the sensitivity of private spending (consumption, investment, and net exports) to changes in the interest rate _____ the government purchases multiplier.

will decrease

Refer to the diagram to the right. Suppose the Fed sells Treasury Bills in pursuit of contractionary monetary policy. Using the static AD-As model, this situation would be depicted as a movement from

C to B

Which of the following would be classified as fiscal policy?

The federal government cuts taxes to stimulate the economy.

Historically, the largest U.S. federal budget deficits as a percentage of GDP in the 20th century occurred during

WW1 and WW2

If the tax multiplier is -1.5 and a $200 billion tax increase is implemented, what is the change in GDP, holding all else constant? (you may assume the price level stays constant.)

a $300 billion decrease in GDP

The government purchases multiplier equals the change in ______ divided by the change in _____.

equilibrium real GDP; government purchases

The tax multiplier equals the change in _____ divided by the change in_____.

equilibrium real GDP; taxes

For purposes of monetary policy, the Federal Reserve has targeted the interest rate known as the

federal funds rate

The interest rate that banks charge other banks for overnight loans is the

federal funds rate

Fiscal Policy refers to changes in

federal taxes and purchases that are intended to achieve macroeconomic policy objectives

The federal government debt as a percentage of GDP fell

from 1998-2001

Expansionary fiscal policy involves

increasing government purchases or decreasing taxes

The largest source of federal government revenue in 2014 was

individual income taxes

The three categories of federal government expenditures, in addition to government purchases, are

interset on the nation debt, grants to state and local governments, and transfer payments.

Which of the following situations is one in which the Fed will potentially pursue expansionary monetary policy?

is forecasted to be higher than equilibrium GDP

Contractionary fiscal policy to prevent real GDP from rising above potential real GDP would cause the inflation rate to be___ and real GDP to be _______.

lower; lower

Buying a house during a recession may be a good idea if your job is secure because the Federal Reserve often

lowers interest rates during recessions

If the Fed buys Treasury bills, this will shift the

money supply curve to the right

The crowding out of government spending by private spending will be greater the

more sensitive consumption, investment, and net exports are to changes in the interest rates.

An increase in government purchases of $200 billion will shift the aggregate demand curve to the right by:

more than $200 billion

The money demand curve has a

negative slope because an increase in the interest rate decreases the quantity of money demanded

According to the short- run Phillips curve, the unemployment rate and the inflation rate are

negatively related

Government deficits tend to increase during

periods of war and recession.

Refer to the diagram to the right. The money demand curve would move from Money demand1 to money demand 2 if

real GDP increased. (CH 15 Q8)t

The ability of the Federal Reserve to use monetary policy to affect economic variables such as real GDP ultimately depends upon its ability to affect

real interest rates

If the FEd raises the interest rate, this will____ inflation and _____ real GDP in the short run.

reduce; lower

During recessions, government expenditure automatically

rises because of programs such as unemployment insurance and Medicaid.

The fed can increase the federal funds rate by

selling Treasury bills, which decreases bank reserves.

Expansionary fiscal policy will

shift the aggregate demand curve to the right

Fiscal policy is defined as changes in federal____ and ____ to achieve macroeconomics objectives such as price stability, high rat3es of economic growth, and hight employment.

taxes; expenditures

The curve showing the short-run relationship between the unemployment rate and the inflation rate is called

the Phillips curve

If the federal government's expenditures are less than its tax revenues, then

the budget surplus results

The monetary policy target the Federal Reserve focuses primarily on today is

the interest rate

If the Fed pursues expansionary monetary policy then

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

In the figure to the right, the money demand curve would move from Money demand 1 5o Money demand 2 if

the price level increased (CH 15 Q9)

The federal government debt equals

the total value of U.S. treasury bonds outstanding.

What is the natural rate of unemployment?

the unemployment rate that exists when the economy is at potential GDP

The largest and fastest-frowing category of federal government expenditures is

transfer payments