Macroeconomics (session 4)

If Amanda has an income of $40,000 and disposable income of $30,000, how much does she pay in taxes?

$10,000 Amanda pays $10,000 in taxes. The amount is determined by subtracting disposable income from total income.

How much money can be created (plus the initial deposit) if the money multiplier is 4 and the initial deposit is $4,000?

$16,000 There is $16,000 created. The new money is determined by multiplying the money multiplier by the initial deposit. The equation is: new money = 4 × $4,000 = $16,000.

How many regional Federal Reserve Banks are there?

12 There are in fact 12 regional Federal Reserve Banks.

How many regional Federal Reserve Banks are there in the United States?

12 This is true; there are 12 regional Federal Reserve Banks in the United States.

When were average tariffs on dutiable imports the highest in the United States?

1932 The average tariffs on dutiable imports were highest in 1932, two years after the passage of the Smoot-Hawley Act.

In which of these decades were interest rates the highest?

1980s In the early 1980s, inflation was high, and interest rates reached 15%. Government interest costs on the national debt soared during this period.

In which year was interest on public debt as a percentage of GDP the highest?

1990 1990 was the year interest on public debt as a percentage of GDP was highest.

Assume that Country A produces only two goods, X and Y, and that its production possibilities frontier (PPF) is linear. If the country can produce 2,000 units of X or 40,000 units of Y each year, what is the opportunity cost of producing 1 unit of X?

20 units of Y The opportunity cost of good X is calculated by dividing the production of good Y by the production of good X, or 40,000/2,000 = 20. Therefore, the opportunity cost of producing 1 unit of X is 20 units of Y.

During the Depression, the United States passed the Smoot-Hawley Act, which levied an average tax of _____ on imported goods.

60% The Smoot-Hawley Act levied an average tax of 60% on imported goods. That move deeply hurt industries around the world. Today, the United States has an average tariff on imported goods of roughly 2%.

_____ is a government-set limit on the quantity of imports into a country.

A quota Quotas are often imposed on imported luxury goods such as alcohol and perfume.

Which of these is a liability for a bank? A) deposits made by a firm B) required reserves C) a loan to a firm D) excess reserves

A) deposits made by a firm When a firm deposits money in the bank, that money becomes a liability for the bank. The bank owes the firm money.

Which of these is NOT mandatory spending? Please choose the correct answer from the following choices, and then select the submit answer button. A) education B) interest on the national debt C) Medicare D) Social Security

A) education Education is discretionary spending. The money spent on it is in the part of the budget that works its way through the appropriations process in Congress each year.

Which of these is NOT mandatory spending? Please choose the correct answer from the following choices, and then select the submit answer button. A) national defense B) interest on the national debt C) Social Security D) SNAP

A) national defense The national defense program is discretionary spending. It is in the part of the budget that works its way through the appropriations process in Congress each year

Which of these is one of the three primary tools for conducting monetary policy? A) infrastructure spending B) open market operations C) corporate income tax rate D) individual income tax rate

B) open market operations This is one of the three primary tools; it gives the Fed remarkable power to implement monetary policy.

Which of these will NOT help the government pay for a rising budget deficit? Please choose the correct answer from the following choices, and then select the submit answer button. A) rising private saving B) rising imports C) decreasing investment D) selling assets

B) rising imports Deficits must be financed in some form, whether by the government borrowing or selling assets, or paid for by a combination of rising private savings and falling investment. G − T = S − I + M − X.

Reducing tax rates may result in all of these, EXCEPT Please choose the correct answer from the following choices, and then select the submit answer button. A) increases in aggregate demand because households have more money to spend. B) encourage more people to take risks and start businesses. C) decreases in aggregate supply because market prices are higher. D) a rise in take-home wages rise that may encourage more work effort.

C) decreases in aggregate supply because market prices are higher. Lower taxes are likely to increase aggregate supply.

Which of these is NOT one of the three primary tools for conducting monetary policy? Please choose the correct answer from the following choices, and then select the submit answer button. A) reserve requirements B) discount rate C) open market operations D) corporate income tax rate

D) corporate income tax rate This is a fiscal policy tool.

Which of these is a factor that can limit the benefits of trade? Diminishing returns to specialization occur when resource costs rise due to scarcity. There are no costs associated with transporting goods. There are no communications costs associated with trade. Countries find it easier to specialize in producing one product.

Diminishing returns to specialization occur when resource costs rise due to scarcity. Every transaction involves costs, including transportation, communication, and general costs of doing business. The production possibilities curves are governed by increasing costs and diminishing returns, so they are not linear. This means that as more of one good is produced, its opportunity cost increases (rather than staying constant). Although trading partners will benefit from trades, some individuals and groups within each country may lose. For example, workers in an industry with a comparative disadvantage may lose jobs.

If the money multiplier increases from 4 to 5, what must have happened to the reserve requirement?

It decreased from 25% to 20%. The solutions is: 1/X = 4, X = 0.25 and 1/X = 5, X = 0.2. The reserve requirement has decreased.

What happens to the money multiplier when the reserve requirement increases from 10% to 12%?

It decreases from 10 to 8.3. 1/0.1 = 10; 1/0.12 = 8.33. The money multiplier decreases when the reserve requirement increases.

What happens to the money multiplier when the reserve requirement increases from 10% to 12%?

It decreases. This is true; it decreases when the reserve requirement increases.

If the money multiplier decreases from 10 to 8, what must have happened to the reserve requirement?

It increased from 10% to 12.5%. The solutions is 1/X = 10, X = 0.1; 1/X = 8, X = 0.125. The reserve requirement has increased.

If the money multiplier decreases from 12 to 10, what probably happened to the reserve requirement?

It increased from 8.3% to 10%

What happens to the money multiplier when the reserve requirement decreases from 25% to 20%?

It increases from 4 to 5. 1/0.25 = 4; 1/0.2 = 5. The money multiplier increases when the reserve requirement decreases.

In May 2011, China ordered many of its banks to increase the amount they hold in reserves. It was the fifth increase that year. What would you expect to be true about the money multiplier as a result?

It was decreasing. The money multiplier is determined by dividing 1 by the reserve requirement, so if the requirement is increasing, the multiplier must be decreasing.

Which of these countries has the highest debt as a percentage of GDP?

Japan Japan has a public debt as a percentage of GDP that is greater than 200%

In May 2011, the European Union (EU) announced that it would impose taxes in the range of 4% to 8% on coated paper imported from China, alleging that China was engaging in dumping. To prove its case, the EU had to show that the Chinese were selling paper at a price that was _____ it would be if China was not dumping.

Less than Dumping means that goods are sold at lower (below cost) prices abroad than in their home market. In practice, a reference producer is used and the case for dumping is made if the price is being charged is less than that normal price

_____ is the act of using low prices to force foreign firms out of business and then raising prices in the long run to make up for short-run losses.

Predatory pricing Predatory pricing is the act of using low prices to force foreign firms out of business and then raising prices in the long run to make up for short-run losses. This is a form of dumping, and it violates American trade laws.

In 2018, more than 40% of federal government spending was on

Social Security, Medicare, and Medicaid. Social Security, Medicare, and Medicaid constituted more than 40% of spending in 2015.

Which of the following is an argument AGAINST free trade? Specialization encourages countries to focus on producing goods for which they have a comparative advantage. Trade helps spread technology and the best management practices. Greater trade increases economic growth. Some industries need to be protected for some time in order for them to become competitive with foreign firms.

Some industries need to be protected for some time in order for them to become competitive with foreign firms. Protecting infant industries is an argument against free trade. However, this protection is often difficult to remove once in place and may not help the industry become competitive.

_____ is/are what regional Federal Reserve Banks charge depository institutions for short-term loans to shore up their reserves.

The discount rate The discount rate is the rate regional Federal Reserve Banks charge depository institutions for short-term loans to shore up their reserves.

Which of these is true of the Federal Reserve's Board of Governors?

The governors serve 14-year terms. Each governor in the Federal Reserve serves a 14-year term.

In 1995, President Clinton threatened a 100% tariff on Japanese luxury cars like the Acura Legend and the Infiniti. If those cars were selling for an average of $35,000, what would be the effect of the tariff?

The same cars would sell for about $70,000. A tariff is a tax on imported products. A 100% tariff would double the price of the imported good, which would mean adding another $35,000 to the price, making it now $70,000.

Which of these is a description of an automatic stabilizer of the business cycle? Please choose the correct answer from the following choices, and then select the submit answer button. A) When the economy is in decline, tax receipts increase. B) When the economy is in decline, transfer payments decrease. C) When the economy is booming, tax receipts increase. D) When the economy is booming, transfer payments increase.

When the economy is booming, tax receipts increase. Tax receipts increase when the economy is booming because incomes are rising. This can act as a break on inflation.

Which of the following is an example of an ad valorem tariff? Zimbabwe adds a tax of $50 per diamond imported from Botswana. Zimbabwe taxes the income of the people in the country. Zimbabwe taxes the property that people purchase in the country. Zimbabwe adds a tax of 5% to the value of diamonds imported from Botswana.

Zimbabwe adds a tax of 5% to the value of diamonds imported from Botswana. An ad valorem tariff is a percentage tax on the value of imported products

An absolute advantage occurs when:

a country can produce more of a good than another country using the same amount of resources can. This is absolute advantage.

What is autarky?

a situation when a country does not engage in international trade Autarky is a situation when a country does not engage in international trade.

What is a tariff?

a tax on imported products A tariff is a tax on imported products.

Traditionally, the chair of the Board of Governors has

also served as the chair of the FOMC. This is true; those who serve as the chair of the Board of Governors tend to have also served as the chair of the FOMC.

If the reserve ratio is greater than the reserve requirement, excess reserves

are greater than zero. Excess reserves are greater than zero if banks are holding more money in reserves than is required.

The main reason independent central banks are better at fighting inflation than politically controlled banks is because they

are less likely to be influenced by short-term political pressures that engage in excessive expansionary monetary policy. When the central bank is independent, it will be less likely to be influenced by political pressures.

If the reserve ratio is less than the reserve requirement, excess reserves

are negative. If the reserve ratio is less than the reserve requirement ratio, the bank is not meeting the reserve requirement and must borrow until the reserve ratio equals the reserve requirement.

When a customer deposits money in a bank account, this deposit represents a(n)

asset for the customer. A deposit is something of value the customer owns, so a deposit is an asset for the customer.

If a customer deposits cash in a checking account, the bank's

assets increase. Assets increase when money is deposited.

How do banks create money?

by making loans Banks can create money by accepting deposits and making loans.

Estimates suggest that about 80% of the world's manufactured Christmas decorations are made in China. This is likely an example of:

comparative advantage. Comparative advantage means that one country has a lower opportunity cost of producing a good than another country, and so it is likely that the country will produce more of that good and exchange it for other goods in which it does not have a comparative advantage. China is clearly not producing these goods for its own domestic market

If an economy has moved into an inflationary spiral, which of these fiscal policy actions might be taken?

cutting transfer payments Cutting transfer payments is a contractionary fiscal policy that may reduce inflation.

The _____ lag is the time it takes Congress and the administration to settle on a policy once a problem is recognized.

decision The decision lag is the time it takes Congress and the administration to decide on a policy once a problem is recognized.

President Reagan implemented a policy of supply-side economics, what did this mainly entail?

decreasing marginal tax rates Presidents Kennedy and Reagan decreased marginal tax rates. President Kennedy reduced the top marginal rate from 70% to 50%, and President Reagan reduced the top marginal rate from 50% to 28%

President Reagan implemented a policy of supply-side economics, what did this mainly entail?

decreasing marginal tax rates Presidents Kennedy and Reagan decreased marginal tax rates. President Kennedy reduced the top marginal rate from 70% to 50%, and President Reagan reduced the top marginal rate from 50% to 28%.

Ronald Reagan implemented a policy of supply-side economics. What did this mainly entail?

decreasing marginal taxes The main tool of supply-side economics that President Reagan implemented was decreasing marginal tax rates.

Which function do the Federal Reserve regional banks NOT perform?

determine national monetary policy This is true; regional banks do not determine national monetary policy.

The Fed decides to increase the interest rate at which banks can borrow from a regional Federal Reserve Bank. Which monetary policy tool is it using?

discount rate The discount rate is the interest rate the Federal Reserve charges commercial banks and other depository institutions to borrow reserves from a regional Federal Reserve Bank.

If the reserve ratio is equal to the reserve requirement, excess reserves

equal zero. Excess reserves are equal to zero.

If a country has a comparative advantage in the production of good Y, it will likely:

export Y in exchange for other goods. Comparative advantage means that one country has a lower opportunity cost of producing a good than another country, and so it is likely that the country will produce more of that good and exchange it for other goods in which it does not have a comparative advantage.

If a Chinese firm owns U.S. Treasury bonds, this debt is considered _____ debt.

externally held Externally held debt is public debt held by foreigners.

The advent of containerization resulted in significantly lower shipping costs. It is estimated that 90% of cargo moves around the world in these big "boxes." This has resulted in:

fewer constraints on trade. Every transaction involves costs, including transportation, communication, and general costs of doing business. Containerization has reduced those costs; this is not the same thing as a change in production costs.

Fiber optics has revolutionized communication and helped usher in the information age. Because of the advantages of fiber optics over electrical transmissions via copper cabling, communications costs have plummeted. This has resulted in:

fewer constraints on trade. Every transaction involves costs, including transportation, communication, and general costs of doing business. Fiber optics has reduced some of those costs. This is not the same thing as a change in production costs.

If fiscal policy is used during a recession, which of these actions is likely to be taken?

increasing government spending In a recession, expansionary fiscal policy would be used, and one of the main tools of expansionary fiscal policy is an increase in government spending.

To boost economic activity and employment during a U.S. economic downturn, the government will frequently use expansionary fiscal policy. Such a policy might be composed of:

increasing government spending and transfer payments and reducing taxes.

For decades, the Brazilian government has controlled imports of computers. Brazilian manufacturers argued that this was needed because they did not have the technological capability or marketing ability that would allow them to be successful competitors in the global market. Which argument against free trade is being used here?

infant industry The infant industry argument says that protection is needed for an underdeveloped industry in order for it to become competitive in the world market. Brazil has used this in the past for automobiles as well.

Contractionary fiscal policy is deployed in response to policy makers' concerns about:

inflation.

Discretionary fiscal policy is used to

influence aggregate demand. Discretionary fiscal policy involves adjusting government spending and/or tax policies to move the economy toward full employment by stimulating economic output or mitigating inflation.

Economists at the Bureau of Economic Analysis are busy collecting data for the quarterly growth estimates, which will indicate the health of the economy. The time spent collecting this data and generating reports is the _____ lag.

information The information lag is the time policymakers must wait for economic data to be collected, processed, and reported.

If excess reserves are equal to zero, the reserve ratio

is equal to the reserve requirement. Excess reserves are equal to zero when the reserve ratio is equal to the reserve requirement.

In May 2011, the European Union (EU) announced that it would impose taxes in the range of 4% to 8% on coated paper imported from China, alleging that China was engaging in dumping. To prove its case, the EU had to show that the Chinese were selling paper at a price that was _____ it would be if China was not dumping.

less than Dumping means that goods are sold at lower (below-cost) prices abroad than in their home market. In practice, a reference producer is used, and the case for dumping is made if the price being charged is less than that "normal" price.

If a customer deposits $500 cash in a checking account, the bank's

liabilities increase. Liabilities increase when money is deposited; the bank owes this money to the customer.

The Fed is worried about rising unemployment. Which of these tools would it use if it wanted to lower unemployment?

lower the discount rate Lowering the discount rate would be done if the Fed were trying to increase economic growth.

Annually balancing the budget would

make expansionary fiscal policy impossible. Annually balancing the budget would make expansionary fiscal policy impossible.

Annually balancing the budget would

make it impossible for governments to use past surpluses during recessions. Annually balancing the budget would make it impossible for governments to use past surpluses during recessions.

The spending authorized by permanent law is

mandatory spending. Mandatory spending is authorized by permanent law and not a result of the appropriations process.

If the reserve requirement is greater than the reserve ratio, excess reserves are

negative. If the reserve requirement is greater than the reserve ratio, banks must acquire more reserves until the reserve ratio equals the reserve requirement ratio.

Suppose Congress enacts a new Medicare benefit and finances it by raising payroll taxes such that each year's additional outlay is matched by additional revenue. Would this be considered fiscally sustainable?

no, this is still a pay-as-you go plan, which shifts the burden to future generations The fact that a given (or proposed) fiscal policy's fiscal imbalance is zero does not necessarily mean that it is sustainable; this new Medicare benefit also clearly shifts the burden to future generations. For fiscal policy to be sustainable, the present value of all projected future revenues must equal the present value of projected future spending.

About how long is the information lag?

one to six months The information lag is generally one to six months because most information is made available quarterly, with adjustments being done the following quarters.

Which function do the Federal Reserve regional banks NOT perform?

oversee open market operations The Federal Open Market Committee oversees open market operations.

What is the main strategy of the cyclically balanced budget?

raise taxes and lower spending in times of prosperity The main strategy of the cyclically balanced budget is to raise taxes and lower spending in times of prosperity to pay for deficits incurred during economic contraction.

In September 2010, the National Bureau of Economic Research announced that the recession that began in December 2007 ended in June 2009. This illustrates _____ lag.

recognition Recognition lag is the time it takes for policymakers to confirm that the economy is trending in or out of a recession. Policymakers depend on information sources such as the NBER.

If the Fed purchases government securities from a particular bank, reserves in the banking system _____ and the supply of money _____.

rise; rises When the Fed buys a government security, it pays a bank; therefore, it adds to reserves and puts new money into the financial system.

An increase in spending on private research and development should

shift the long-run aggregate supply curve to the right. Research and development increases long-run productivity of firms.

Which of the following is NOT a way in which governments restrict trade? limiting the amount of foreign currency available to importers banning trade with a country setting a limit on the amount of a good that can be imported subsidizing foreign firms

subsidizing foreign firms If a government is going to subsidize a firm to restrict trade, it will be a higher-cost domestic firm.

The primary tools of fiscal policy are:

taxation and spending.

When we say that the Federal Reserve is independent, it means that

the Fed does not have to rely on Congress for permission to make decisions on monetary policy. The Fed is not subject to legislative or executive branch control.

The central bank of the United States is

the Federal Reserve System. The central bank is often referred to as the Federal Reserve.

What is a deficit?

the amount by which annual government expenditures exceed tax revenues This defines a deficit.

What is a surplus?

the amount by which annual tax revenues exceed government expenditures This is the definition of surplus.

U.S. solar panel manufacturers accuse China of providing illegal subsidies to their solar panel manufacturers in the form of cash grants and low-interest government loans. They say the result is that Chinese solar panels have flooded the market at low prices that they can't compete with. Which argument is being used by Western solar panel manufacturers?

the antidumping argument This argument is used to protect companies from overseas competitors who sell their goods for less than they do in their domestic markets, often below cost.

The amount by which annual government spending exceeds tax revenue is called

the deficit. The amount by which annual government spending exceeds tax revenue is called the deficit.

In the 1980s, Brazil imposed barriers against the import of computers in an effort to protect its underdeveloped computer industry. Which argument against free trade was Brazil using?

the infant industry argument This argument is used to try to protect, for a temporary period, an underdeveloped or undercapitalized industry from foreign competition.

Which argument against free trade would be used in order to protect an underdeveloped or undercapitalized industry from foreign competition? the infant industry argument the national defense argument the antidumping argument the environmental protection argument

the infant industry argument This argument is used to try to protect, for a temporary period, an underdeveloped or undercapitalized industry from foreign competition.

The United States is no longer the world's lowest-cost producer of steel. However, it is likely to continue to produce steel due to:

the national defense argument. The national defense argument says that in time of national crisis or war that the United States must be able to rely on key domestic industries that are heavily utilized during wartime.

The money multiplier is equal to 1 divided by

the reserve requirement. This is the formula for the money multiplier.

What is the implementation lag?

the time required to turn fiscal policy into law and eventually affect the economy This is the implementation lag.

As baby boomers keep retiring in coming years, it is likely that fiscal imbalance will

worsen. The increasing liabilities of the U.S. federal government means that fiscal imbalance will worsen.