Macroeconomics Test 4

Suppose the tax rate on the first $20,000 of income is 0%; 10% on the next $20,000 earned; and 20% on any additional income earned. A person earning $35,000 pays an income tax of

$1,500

Suppose the tax rate on the first $20,000 of income is 0%; 10% on the next $20,000 earned; and 20% on any additional income earned. The average tax rate for a person earning $35,000 is

4.3%

The maximum amount of time that a person can receive welfare payments is _____ during a lifetime

5 years

Bill Clinton's administration experienced a federal budget surplus.

The national debt held by the public decreased.

What demographic change in the United States will cause government spending to increase in the next 50 years?

The population older than 65 will grow

a liquid asset is

an asset that can be used for payments, or can quickly and without loss of value be converted to an asset that can be used for payments

To increase the money supply in the economy, the Fed would

carry out open market purchases and/or lower the discount rate

What is an asset that would be classified as liquid

checkable deposits

What monetary policy philosophy is against tying the hands of the central bank?

discretion

Some economists argue that the Fed should commit to keeping stack M +v with minus on top fixed at a particular value, say 5%. How would this rule require the Fed to respond in the event of a negative spending shock? A negative real shock?

increase M; do nothing

Suppose the reserve ratio is 20% for all banks. If the Fed increases bank reserves by $200, then the money supply will

increase by $1,000

To reduce the money supply in the economy, the Fed would

increase the discount rate

To offset the effect of negative growth in money velocity (v with minus on top), the central bank should:

increase the growth rate of the money supply

Many economists worry about the Federal Reserve overstimulating the economy because such overstimulation will lead to rising

inflation

Debt held outside the U.S. government is called the

national debt held by the public

When the text refers to the current U.S. national debt, it means the

national debt held by the public

The annual difference between federal spending and revenues is called the

national deficit

disinflation

prices fall and are negative

When C falls, the aggregate demand curve

shifts left

The Federal Reserve can influence the economy by shifting

the AD curve

The largest source of revenue for the U.S. federal government is

the individual income tax

If a $500 increase in reserves ultimately leads to a $2,000 increase in the money supply, the reserve ratio is

0.25

The main difference between M1 and M2 is that

M2 includes some less liquid assets in addition to the assets in M1

Whereas ______ covers the elderly, ______ covers the poor and the disabled.

Medicare, Medicaid

What is a limitation of monetary policy in stabilizing the economy

Monetary policy is subject to uncertain lags

A nominal GDP rule says ______ should always grow at a constant rate.

Mv

The largest spending program for the U.S. federal government is

Social Security

The purpose of the FICA taxes is to fund

Social Security payments

What is a reason it might be hard for the Fed to restore aggregate demand in the face of a negative demand shock?

The Fed must operate in real time, when a lot of the data about the state of the economy are unknown

Which is an example of quantitative easing by the Federal Reserve?

The Fed purchases $50,000 worth of long-term government bonds

If the Fed overreacts to a negative spending shock by increasing money growth too much

both real GDP growth and inflation will increase more than the Fed prefers

An increase in money growth will cause the inflation rate to increase in

both the short run and the long run

When the government conducts fiscal policy, it can make up for a decrease in C with

an increase in G

When the government conducts fiscal policy, it makes up for a decrease in C with

an increase in G

What is not included in M1 and M2?

bond mutual funds

One of the Fed's greatest powers is its ability to

boost market confidence

The FICA tax burden is

borne more by the employee even though the employer contributes an equal dollar amount

The alternative minimum tax

is a separate income tax code that began in 1969 to prevent the rich from not paying income taxes

The time between which an economic shock is recognized and when the government passes a plan to carry out a policy response is called the

legislative lag

The time necessary for Congress to propose and pass a fiscal policy plan is called the

legislative lag

the time between which an economic shock is recognized and when the government passes a plan to carry out a policy response is called the

legislative lag

In the absence of any policy intervention, when C falls the result will be

lower inflation and real growth

The tax rate paid on an additional dollar of income is the

marginal tax rate

The Federal Reserve's major tools to control the money supply is are

open market operations, discount rate lending, and paying interest on reserves

he money you pay into Social Security goes to

pay current beneficiaries

The best type of negative shock for the Federal Reserve to respond to is a negative shock to

AD

Suppose you are a married person with one child but your whole family earns less than $20,000 a year. Which of the following will supplement income?

Earned Income Tax Credit

Why did the tax rebate of $78 billion in 2008 have few net stimulus benefits?

consumers used much of the rebate to pay off existing debt

Which of the following limits the effectiveness of fiscal policy

crowding out

What are the four major limits to fiscal policy?

crowing out, a drop in the bucket, a matter of timing, and real shocks

What helps a government fight a recession?

cutting taxes

What would help a government fight a recession?

cutting taxes

In the long run, a negative real shock will cause output growth to

decrease

If the Fed sells $200 million in government bonds, the total money supply will

decrease by more than $200 million

Which asset is most liquid: a home, demand deposits, small-time deposits, or a gold bullion?

demand deposits

In a fractional reserve banking system, banks hold only a fraction of their

deposits as reserves

When C falls, the LRAS curve

does not move

The time necessary for a fiscal policy plan to have an impact is called the

effectiveness lag

The Medicare program offers health-care benefits for the

elderly

In the United States, the marginal tax rate for married couples:

exceeds the average tax rate for most income levels.

When the Fed buys short-term Treasury securities, short-term interest rates

fall

The primary tools of fiscal policy are

government expenditure and taxation.

Fiscal policy can best be defined as the use of

government expenditure, borrowing, and taxation to influence the business cycle

What pertains to crowding out?

government raises taxes by $300 million to finance new spending on highway construction, resulting in a decrease in investment spending by $270 million

If the total liabilities of Bank A are less than its total assets but its short-term liabilities are greater than its short-term assets, Bank A is

illiquid, but solvent

The time necessary for government bureaucracies to carry out a fiscal policy plan is called the

implementation lag

In the long run, a negative real shock will cause the inflation rate to

increase

How would the Fed respond to a fixed rate of M+v at 5% during a negative spending shock? A negative real shock?

increase; do nothing

The intended effect of an expansionary monetary policy is that aggregate demand

increases; raising real GDP growth in the short run, but only inflation rises in the long run

Government spending on "interest on the debt" refers to

interest paid to owners of government debt help by the public

The Medicaid program offers health-care benefits for the

poor and disabled

deflation

prices fall below zero

The Term Auction Facility involves the Federal Reserve

providing reserves to banks through an auction

The time necessary to determine that an economic problem exists is called the

recognition lag

The U.S Social Security tax (FICA) is an example of a

regressive tax

The U.S. Social Security tax (FICA) is an example of a

regressive tax

What are the functions of the Federal Reserve?

serving as the lender of last resort, regulating the U.S. financial system, and regulating the money supply

When a bank has short-term liabilities that are greater than its short-term assets, but overall its assets are greater than its liabilities, the bank is considered

solvent and illiquid

The risk that the failure of one financial institution can lead to the failure of other financial institutions is called

systemic risk

Give an example of quantitative easing by the Federal Reserve

the Fed purchases $50,000 worth of long-term government bonds

What is the overnight lending rate from one bank to another?

the Federal Funds rate

Systematic risk is present when

the failure of one financial institution will bring down other institutions as well

When the Fed buys bonds, it increases that demand for bonds which pushes

up the price of bonds, thus lowering the interest rate