Macroeconomics Test 4 (Ch.15-19) 2021

79. The figure above shows a labor market with an income tax. According to the figure above, if there is no income tax, the equilibrium real wage rate is ________ and the equilibrium hours of labor are ________.

$30; 250 billion

9. If the price level is 100 in one year and rises to 102 the next year, then the inflation rate is

2.0 percent.

39. Discretionary fiscal policy

A fiscal policy action that is initiated by an act of Congress. (Pg. 413)

38. Automatic fiscal policy

A fiscal policy action that is triggered by the state of the economy. (Pg. 413)

86. k-percent rule

A monetary policy rule that makes the quantity of money grow at k percent per year, where k equals the growth rate of potential GDP. (Pg. 453)

85. Inflation targeting

A monetary policy strategy in which the central bank makes a public agreement with the government to achieve an explicit inflation target and to explain how its policy actions will achieve that target. (Pg. 451)

84. Rule-based monetary policy

A monetary policy that is based on a rule for setting the policy instrument. (Pg. 450)

83. Discretionary monetary policy

A monetary policy that is sets a central bank's policy instrument at the level it believes will best achieve its mandated policy goals. (Pg. 450)

80. Financial Stability

A situation in which financial markets and institutions function normally to allocate capital resources and risk. (Pg. 433)

81. Monetary policy instrument

A variable that the Fed can directly control or closely target and that influences the economy in desirable ways. (Pg. 434)

40. Automatic stabilizers

Features of fiscal policy that stabilize real GDP without an explicit action by the government. (Pg. 413)

28. Because money growth is a major component determining the inflation rate, in order to forecast inflation we should forecast actions by the

Fed.

2. Okun's Law

For each percentage point that the unemployment rate is above (below) the natural unemployment rate, real GDP is 2 percent below (above) potential GDP. (Pg. 385)

91. In the long run, the real interest rate is determined by

Saving supply and investment demand.

35. Transfer payments

Social Security benefits, Medicare and Medicaid benefits, unemployment benefits, and other cash benefits. (Pg. 407)

33. Budget balance

Tax revenues minus outlays. (Pg. 406)

41. Induced taxes

Taxes that vary with real GDP (Pg. 413)

34. National debt

The amount of government debt outstanding-debt that has arisen from past budget deficits. (Pg. 407)

43. Cyclical surplus or deficit

The budget balance that arises because tax revenues and outlays are not at their full-employment levels. (Pg. 414)

42. Structural surplus or deficit

The budget balance that would occur if the economy were at full employment. (Pg. 414)

37. Generational imbalance

The division of the fiscal imbalance between the current and future generations. (Pg. 411)

44. Government expenditure multiplier

The effect of a change in government expenditure on goods and services on aggregate demand. (Pg. 415)

45. Tax multiplier

The effect of a change in taxes on aggregate demand. (Pg. 415)

46. Transfer payments multiplier

The effect of a change in transfer payments on aggregate demand (Pg. 415)

47. Balanced budget multiplier

The effect on aggregate demand of a simultaneous change in government expenditure and taxes that leaves the budget balance unchanged. (Pg. 415)

48. Supply-side effects

The effects of fiscal policy on potential GDP and the economic growth rate. (Pg. 420)

6. Rational Expectation

The forecast that results from the use of all the relevant data and economic science. (Pg. 397)

49. Tax wedge

The gap created by a tac between what a buyer pays and what a seller receives. In the labor market, it is the gap between the before-tax wage rate and the after-tax wage rate. (Pg. 421)

4. expected inflation rate

The inflation rate that people forecast and use to set the money wage rate and other money prices. (Pg. 391)

7. The short-run Phillips curve is a curve that shows the relationship, other things being constant, between ______ and ______.

The inflation rate, the unemployment rate.

82. Federal funds rate

The interest rate at which banks can borrow and lend reserves in the federal funds market. (Pg. 434)

36. Fiscal imbalance

The present value of the government's commitments to pay future benefits minus the present value of its future tax revenues. (Pg. 410)

5. natural rate hypothesis

The proposition that when the inflation rate changes, the unemployment rate changes temporarily and eventually returns to the natural unemployment rate. (Pg. 392)

1. Short-run Phillips curve

The relationship between inflation and the unemployment rate when the natural unemployment rate and the expected inflation rate remain constant. (Pg. 384)

3. Long Run Phillips Curve

The relationship between inflation and unemployment when the economy is at full employment. The long-run Phillips curve is a vertical line at the natural unemployment rate. (Pg. 390)

32. Fiscal policy

The use of the federal budget to achieve the macroeconomic objectives of high an sustained economic growth and full employment. (Pg. 406)

21. When an economy experiences a recession there is

a downward movement along the short-run Phillips curve.

27. A rational expectation of the inflation rate is

a forecast based on the forecasted actions of the Fed and other relevant determinant factors.

20. An increase in aggregate demand results in

a lower unemployment rate and a higher price level.

75. A decrease in taxes should be applied in a situation with

a recessionary gap.

92. A fall in the federal funds rate leads to

a rise in the price level.

54. Discretionary fiscal policy is a fiscal policy action, such as

a tax cut, initiated by an act of Congress.

26. A country reports that its inflation rate and unemployment rate have both increased. These changes could be the result of

an upward shift of the short-run Phillips curve.

10. The long-run Phillips curve shows the relationship between the inflation rate and the unemployment rate when the economy is

at full employment

19. Comparing the aggregate supply curve and the short-run Phillips curve, we see that they

both exist because money wage rate is fixed in the short run.

93. When the Fed _____, the U.S. foreign exchange rte falls.

buys government securities

100. In an open market purchase, the Fed ________ government securities, which ________ bank reserves and ________ the federal funds rate.

buys; increases; lowers

60. The use of the federal budget to achieve macroeconomic objectives of full employment and sustainable economic growth is

called fiscal policy.

57. Government expenditure ______ change potential GDP and taxes ______ change potential GDP

can; can

68. Automatic stabilizers include

changes in induced taxes and changes in needs-tested spending.

71. If the economy is in an equilibrium with real GDP less than potential GDP, a fiscal stimulus could move the economy toward potential GDP by simultaneously ________ taxes and ________ government expenditures on goods and services.

cutting; increasing

31. The long-run Phillips curve represents the relationship between the inflation rate and the unemployment rate when there is no ________ unemployment.

cyclical

73. When an economy faces an inflationary gap, an appropriate fiscal policy is to

decrease government expenditure.

56. Which of the following is an example of a fiscal stimulus?

decrease in taxes

58. An income tax hike

decreases potential GDP.

67. Need-based spending ________ during an expansion and ________ during a recession, which leads to larger budget deficits during the ________ phase of the business cycle.

decreases; increases; recession

17. The short-run Phillips curve is

downward sloping.

23. On the long-run Phillips curve, the unemployment rate

equals the natural unemployment rate, but the inflation rate can be any value.

12. The inflation rate that is used to set the money wage rate and other money price is the

expected inflation rate.

90. The figure above shows the market for bank reserves in Futureland. If the Bank of Futureland undertakes an open market purchase of government securities that changes the quantity of reserves by $25 billion, then the federal funds rate will

fall to 4 percent a year.

88. The interest rate banks charge each other on loans of reserves is called the

federal funds rate.

14. A major factor in determining the rational expectation of inflation is

forecasts of the Fed's monetary policy.

62. When the government's outlays exceed its tax revenues, the national debt

grows to finance the budget deficit.

87. Which of the following is a monetary policy goal? i. keeping the inflation rate low ii. attaining maximum employment iii. keeping the long-term interest rate at a moderate level

i, ii, and iii

61. Transfer payments include i.social security benefits ii.medicare and medicaid benefits iii.unemployment benefits

i, ii, and iii.

59. President Reagan often stated he preferred supply side policies, Which of the following federal government policies would be considered supply side? i. Decrease the quantity of money. ii. Lower taxes. iii. Lower the interest rate.

ii only

53. A cyclical deficit is the budget deficit that occurs when i. actual output is at potential output. ii.the economy is at full-employment output. iii. tax revenues and outlays are not at their full-employment levels.

iii only.

52. Needs-tested spending

includes transfer payments such as food stamps and unemployment benefits.

95. During the Great Depression, real GDP decreased, unemployment soared, and the inflation rate was negative. Which would have been the appropriate federal government policy combination to improve economic performance?

increase government expenditure, decrease taxes, increase the quantity of money

65. Which of the following is an example of an automatic fiscal policy action?

increased unemployment benefit payments resulting from higher unemployment

66. Needs-tested spending

increases as unemployment increases.

55. If government expenditure on goods and services increase by $10 billion, then aggregate demand

increases by $10 billion multiplied by the government expenditure multiplier.

70. If government expenditure on goods and services increase by $100 billion, then aggregate demand

increases by more than $100 billion.

96. An increase in the supply of bank loans ______ the supply of loanable funds so the real interest rate ______ and investment _______.

increases; falls; increases

76. The supply-side effects show that a tax cut on labor income ________ the supply of labor and ________ employment.

increases; increases

16. Moving along a short-run Phillips curve, a reduction in the unemployment rate is achieved by

increasing the inflation rate.

30. Moving along a short-run Phillips curve, a reduction in the unemployment rate is achieved by

increasing the inflation rate.

69. Discretionary fiscal policy is defined as fiscal policy

initiated by an act of Congress.

8. In the short run, if the economy is at full employment, then the quantity of real GDP

is equal to potential GDP, and the unemployment rate is equal to the natural unemployment rate.

97. The Federal Reserve monetary policy goals of maximum employment means

keeping the unemployment rate close to the natural unemployment rate.

72. Discretionary fiscal policy is handicapped by

law-making time lags, estimation of potential GDP, and economic forecasting.

50. When tax revenues _____ outlays is negative, then the government has a budget _______.

minus; deficit

63. If we look at the federal government budget over the past 40 years we see that

most years the budget has been in deficit.

24. Comparing the short-run Phillips curve and the long-run Phillips curve, we see that there is

only a short-run tradeoff between inflation and unemployment but not a long-run tradeoff.

64. Automatic stabilizers are defined as

policy that stabilizes without the need for action by the government.

99. Maximum employment and moderate long-term interest rates are best achieved with

price stability.

74. In order to reduce inflationary pressure on the economy, what fiscal policy can the government use?

raise taxes

78. The figure above shows a nation's aggregate demand curve, aggregate supply curve, and potential GDP. In the figure above, the ________ gap is one trillion dollars. To close the gap, the government can ________ government expenditure and/or ________ taxes.

recessionary; increase; decrease

77. The figure above shows a nation's aggregate demand curve, aggregate supply curve, and potential GDP. In the figure above, the ________ gap is one trillion dollars. To close the gap, the government can change expenditure by ________ one trillion dollars.

recessionary; less than

25. When the expected inflation rate ________, the short-run Phillips curve ________.

rises; shifts upward

11. When the natural unemployment rate increases, the short-run Phillips curve _____ and the long-run Phillips curve _____.

shifts rightward, shifts rightward

15. If the Fed tries to lower the unemployment rate so it is lower than the natural unemployment rate, in the long run the SRPC _____ and the LRPC _____.

shifts upward; does not change

29. If the Fed tries to lower the unemployment rate so it is lower than the natural unemployment rate, in the long run the SRPC ________ and the LRPC ________.

shifts upward; does not change

18. Along a short-run Phillips curve, the

short-run cost of lower unemployment is higher inflation.

51. Induced taxes are defined as taxes

that vary with real GDP

98. Control of monetary policy rests with

the Federal Reserve.

94. One problem with the ripple effect from the Fed's monetary policy is

the fact that the monetary policy transmission process is long and drawn out.

89. Which of the following is the Fed's monetary policy instrument?

the federal funds rate

22. The long-run Phillips curve is a vertical line because

there is no relationship between the natural unemployment rate and the inflation rate.

13. When people use all the relevant data and principles of economics to forecast inflation, they are making

what is called a "rational expectation."